Mortage/house price situation

[Jim Nasium]

I asked this question on a few property forums and the best response I got was get the house valued.

I was hoping to get some thoughts on my situation regarding a mortgage, I know at the end of the day the decision is mine but I don't really know much about property, could do with hearing some opinions.

My girlfriend and her sister bought a house in East London (UK, not SA) at the beginning of 2007 with an interest only mortgage. Now her sister wants to sell and my girlfriend has asked me to buy her sister out with her.

I have some reservations regarding this. The way I see it, an interest only mortgage is a bet that prices will go up, and with the amount of interest you have to pay the value of your house needs to go up a fair amount to make it worth it. Also I feel that house prices are falling (or at least have hit a ceiling), and that to assume they will drop another 5 - 10% would be quite conservative by some experts views.

Lets say for example (and this is my best case scenario) house prices drop 10%, but as we all know in the long run property prices in London will go up so in lets say in ten years the credit crunch is over, consumer confidence is up, mortgages are easy to get again, the house is has hit break-even and even another added 10% in value. So in 10 years we have made 10% on the value of our house (25K), we are 40 years old and don't own a single brick of any house anywhere. I seems to me that we would be better off renting, which I think would make us at least £400 better off a month, save that money and in a few years we would have a healthy deposit to buy at a low in th market. In fact in five years we would have almost saved 25k, not including interest. I know rents are going up, but the gf said she and her sister are paying £1,300 a month interest, I am sure we can still find a flat to rent for £800 - £900 a month in London.

I know it seems like I have made my mind up already, but am I being pessimistic? I know the London property market might be a lot more resilient than the rest of the UK. I am very nervous about putting my hard earned money into a deposit when it could be wiped out in a matter of months, and instead of a profit I am stuck with negative equity and am paying £650 a month for the pleasure.

Any thought/suggestion would be greatly appreciated, before I suggest to my girlfriend she sell along with her sister I want to be sure I have my facts straight and I am not talking nonsense, everything I know I have read in the papers so some thoughts from people who are actively involved in property would be invaluable. She is going take some convincing, for some strange reason she thinks the Olympics (which are happening nowhere near) are going to push prices up which I don't see happening unless everybody who comes to watch decides to buy a house as well.

Thanks

 

[Trader333]

In my view making the assumption that the Olympics will make prices rise is a gamble and a very expensive one if you are wrong. Paying £1300 a month for an interest only mortgage is also very expensive. You should also consider that relationships do break up and if you are tied to a property then this will make things much worse especially if prices are in decline.

If I were you then I agree that renting in the short term is a good option. If prices continue to fall well you will have saved some money for a future deposit and saved on the asking price of buying a property. To put yourself into a major commitment when you are not ready or not comfortable with it is asking for problems later on.

This is just how I would see it and I don't know all the circumstances behind your situation.


Paul

 

[Jim Nasium]

I think you hit the nail on the head. Thanks.

 

[abottoml]

It seems to me that home ownership in the long-term is clearly the way to go, but as with all other markets, timing your short-term entry point is critical. For me, I'm sitting on the sidelines hoping for a swing low in the UK property market over the next 2-3 years.

For a daily dose of property pessimism, put this site into your news reader:

News Blog - HousePriceCrash.co.uk

 

[breadman]

jim,
What price did they pay. Is the house worth more of less now, who's valuation would you go with.If I were buying now i would try and get as much off as i could but the sister will try and get as much as she can. Arguments and resentment could last for ages.
If I were you I would have nothing to do with it let them sell it or do whatever they want. Then rent for a few years you will get a house/flat cheaper than todays prices.

 

[Jim Nasium]

Thanks for the replies added that link to my google reader.

They paid 250K. I don't even know how much it's worth now, everytime I read a headline in the paper saying prices had in/decreased I would do a mental adjustment but lost track now.

The value of the house is not even relevant really, even if there was no crash in house prices my personal view is that house prices will not got up substantially for some time, I was saying this ages ago with my very limited knowledge of the market that current prices are not based on fundamentals but rather on the greater fool theory, and therefor an interest only mortgage can only in end in misery.

Gf's sister is an estate agent so she will definately try to get the best price possible, which I guess I should pitch to the gf as a reason she should sell along with her sister, let her do all the work.

Great I just needed to hear that what I was thinking wasn't some crazy scenario I cooked up in my head, I am more convinced than ever now that renting is the way forward, just have to some how bring it up in conversation. Will let you know how it goes.

 

[breadman]

Jim,
Is the gf sister worried about her job is that why she wants to get out.
If you want to see one of the reasons I think houses are over priced go on the Nationwide Building Society web site and type in house prices index,click on the May press release. You will be able to see a chart going back 50 years which shows the real house price figure and the trend price. Every time the real house price figure goes way above the trend price it comes back to trend price or below. That's a 20% fall. You can show this to the girlfriend.