When it comes to buying a home, many see it as a solid investment, anticipating that property values will inevitably rise over time. This long-standing belief in the upward trajectory of house prices motivates countless individuals to jump onto the property ladder. However, while the focus is often on potential price increases, the cost of financing these purchases—primarily through mortgages—can sometimes be overlooked.
The Hidden Cost of Mortgages
For most homebuyers, purchasing a property outright with cash remains a pipe dream, necessitating the need for a mortgage. This commitment often spans several decades, with a significant portion of monthly repayments going towards interest rather than the principal amount. It’s easy to track gains in property value at the time of sale, but many homeowners pay less attention to the total cost incurred by their mortgage in the interim.
Recent increases in mortgage rates over the past two years have tipped the scales, where the total repaid can potentially surpass any gains from house price increases during the same period. Despite this, buying a property can still be a favorable option compared to dealing with escalating rental costs.
Thanks to new research from the personal finance comparison site Finder, we now have insights into just how much property values need to increase to offset these mortgage costs. The analysis considers the scenario of purchasing the average UK home with a 25% down payment on a 30-year mortgage, maintaining an average interest rate of 4.25% over the period (including typical remortgaging fees).
Crunching the Numbers
According to Finder, the average home in the UK currently stands at a price of £281,913. Purchasing this property under the terms described would mean a total expenditure of £445,000 on both the property and the mortgage combined over 30 years. To break even on this investment, the property’s value would need to soar by 58%, representing a monetary increase of over £163,000.
On a brighter note, historical data shows that over the last three decades, the average house price in the UK surged by a whopping 416%. If such trends were to continue, a house bought today for £281,913 could be worth around £1,454,981 by 2054.
Current and Future Mortgage Rates
Currently, the most popular mortgage choice is the two-year fixed-rate, with the average rate for buyers making a 25% down payment sitting at 4.97%. Should this rate persist over the next 30 years, total repayment would rise to £477,900—an increase of over £32,600 compared to the initial estimate.
Even more daunting is the prospect of an average two-year fixed rate of 5.81% across all deposit sizes, which would escalate the total payment to £517,705 over 30 years. For house prices to align with these higher mortgage costs, they would need to appreciate by about 84%.
Uncertain Future for House Prices
Projecting the increase in house prices over the next 30 years can be challenging. While the past three decades saw an average annual increase of 5.63% (considering compounding), the near-term outlook is more subdued. According to property experts at Savills and Knight Frank, UK house prices are expected to rise by 17.9% to 20.5% over the next five years. JLL paints an even grimmer picture, predicting only a 14% increase by 2028.
Beyond Financial Calculations
While the financial aspects of buying a home are critical, for many, it represents more than just an investment. Homeownership is often equated with independence, security, and success, and is generally preferred over renting, which offers less stability and can be subject to rising costs.
However, prospective buyers should be mindful of the full spectrum of costs associated with buying a home, which extends beyond mortgage payments to include legal fees, surveyor costs, and potentially hefty estate agent and stamp duty charges on future purchases.
Liz Edwards from Finder advises caution, noting that while climbing the housing ladder has historically been a sound investment, past trends do not guarantee future performance. The market could experience significant downturns, as seen between 1989 and 1997 when prices slumped for nearly eight years.
In conclusion, while buying a home can indeed be a rewarding investment, it is essential to approach this significant financial commitment with a comprehensive understanding of all associated costs—not just the purchase price.