Not too long ago I was talking to a colleague about first-time buyers and she mentioned that technically she has been a first-time buyer, twice.
Back in 2007 she had bought a flat in London, with her then boyfriend (later husband) months before the property crash. The flat was a Victorian conversion, with a garden and lots of light and being in her twenties she felt very grown-up to be on the property ladder. She had been ‘sold’ an interest only mortgage because due to the size of her deposit, that was all that was offered to her by the bank and financial advisor – and so she said yes.
However within weeks, the market crashed and close to £50,000 was wiped off the value of the property – placing them into negative equity. But, being young and carefree they kept paying the mortgage and enjoying life.
It wasn’t until after they were married and had a baby did the reality of their situation really hit. Friends said, “Of course you can have a baby in a one-bed flat, they don’t take up very much space, you’ll be able to sell the flat and move on easily.”
However with a flat still in negative equity and a growing baby, everything suddenly felt very hard work. They tried to sell but in 2011 the market was still depressed and all the offers they received were well below the amount the couple needed. In the end they changed their mortgage to allow them to let the property out, moved into rented accommodation themselves and covered the additional outgoings (agents fees etc.) until selling it a year later and breaking even.
Now why am I telling you this tale? Because as a life lesson it’s an important one first-time buyers should know. To coin a phrase – “If something looks too good to be true, it probably is…”
Of the two property crashes (or significant slowdowns) that I have experienced each was preceded by lenders offering 115% LTV (1988) and 125% LTV (2006/7) – both scenarios effectively building negative equity into the property, which was technically supposed to shrink as property values rose, but never did.
Just because you can afford the monthly repayments, it doesn’t mean you can actually afford to live in the property – financially or emotionally. Life changes rapidly and forward planning is the key. Thankfully much has changed in the last ten years as lending criteria has been tightened to avoid situations like this, but still, buyers need to be aware.
If you asked this couple today what their advice would be – the kind they wished their mother had told them – it would be, never buy a one bed flat if you’re planning on a family, and never use an interest only product, especially if you have no other savings – as the safety net a hard saved/gifted deposit gives you is invaluable.
Yes you can get rich by playing the property market, but you have to be in the right place, at the right time, with the odds in your favour – a once in a blue moon scenario which escapes most of us; and something which should never be relied upon.
Now, what advice do wish you’d been told before buying your first home? Or what advice would you pass onto the next generation of home movers? Join our conversation, fill in our survey and pass it on to save the pain…