The November 2008 drop in the Bank of England Base rate to 3% comes as very welcome news to anyone with who has existing base rate tracker mortgages. On a mortgage of £100,000 you will be saving £125 per month in interest payments. This is great news for investors and homeowners alike who may have been starting to feel the effects of the credit crunch which has now had an impact on most people in the UK.
I was surprised to see such a big cut in the base rate of 1.5% in one month. I thought the cuts would be steady, but I guess this may be due to pressure from the Government put on the, totally independent, Bank of England. Many people are predicting further interest rate cuts in December but I would not be surprised if the Bank of England wait until the new year, to fully asses the impact of the November rate reduction. Then again, nothing would surprise me now.
A few other considerations for investors are as follows:
With the improved cash flow for many home owners I think we will see a reduction in the number of motivated sellers who need to sell their homes quickly. With lower monthly interest payments, sellers with a property on the market may be prepared to hang on longer to see if they can get a better price. Having said this, there will always be motivated sellers who need to sell quickly.
The point where the market bottoms out and starts to go up again may be sooner now that interest rates are lower. It will become even more affordable for first time buyers to get on the property ladder and once they do, prices will start to recover and the amateur investors will also jump back into the market keen to take advantage of the much lower purchase prices. The availability of mortgages is still an issue and we need the LIBOR rate to drop, to see the effect on new mortgages being offered. This has started to happen as we have seen a number of lenders come out with good low mortgage rates last week. The best Buy to Let mortgage that I saw was a 4.69% fixed rate with a rent multiplier of 125%. If you can’t make you deal stack up on those figures, guest what…it is not a very good deal!
There are currently 95% Loan to Value (LTV) residential mortgages available although I doubt many first time buyers know that due to the doom and gloom image presented by the media. The maximum LTV for most Buy to let mortgages is still generally 75% and will probably be so while prices are still failing, but I imagine will return to 85% when the market starts to go up.
Will the house prices go up again? Yes of course they will. It is a simple matter of supply and demand. At the moment we have a short term over supply as there are not enough buyers in the market but this will change. We live on an island, a very popular island, with an increasing population and changing social demographic trends which means that we will not have enough accommodation for everyone. Long term demand will outstrip supply and prices will have to go up.
My guess (and that is all it is) is that it may take 2 to 3 years form prices to bottom out and come back to what they were, and then another 7 to 9 years beyond that for prices to double again. By the way, if you don’t think prices will go up again you should not be buying property as it is the long term capital growth that really makes you rich, although you should only be buying property now that makes a cash flow now.