Whether you own your home or have a property investment portfolio, the last thing you want to happen is a property market crash. With falling house prices, many owners who bought at the peak of the market could be left with a property that is worth a lot less than they paid for it (negative equity). Whether the property is a residential home or a rental property, negative equity can cause a number of problems, especially when the mortgage needs to be refinanced. This risk is mitigated if the owners bought the property with a large deposit, but the reality is that buyers who find themselves with negative equity can suffer financial ruin.
So how can buyers avoid the pitfalls of an unstable market? There are a number of ways they can avoid problems and ensure that their property is as protected as possible:
Research the area in detail
No matter where you intend to buy, or whether you intend to live in your home or rent it out, it is essential that you carry out detailed research on the property market in the place you hope to buy. You should visit the area, look online at available properties and understand the transport links and amenities that are available for residents. When you walk around the area, think about the atmosphere of the place: is it a desirable place to live? Does it have a broad appeal for other buyers? Does it feel safe at night? Are the roads busy with commuter traffic during the day? All of these factors are important to consider when you are buying a home or an investment, but they are even more important when you are looking ahead to the day when you might need to sell the property. For example, family homes with access to amenities in the catchment area of a very good school are much more likely to retain their value than a mid-terrace house near an industrial estate on the edge of town.
Use property websites such as home.co.uk and the UK Land Registry to find out the average house price or rental income for the type of property you hope to buy in your chosen location. Make sure that you look for properties that are offered at or below the average market value. You can find properties like this at property auctions, or you can contact local estate agents to see whether there are ‘motivated sellers’ (i.e. people who need to sell quickly and might consider selling at a discount) in the area. Remember that every pound you save takes you further away from negative equity should house prices fall.
Finally, find out the proportion of rental vs. residential property in the street or area where you would like to buy. A high proportion of rental homes could mean that property values fall quickly when investors seek to liquidate their assets in a downturn.
Look for properties where you can add value
When house hunting, look for structurally sound properties where you can add value. Consider homes with dated interiors, or where wiring or central heating needs updating. Bring a local builder or surveyor with you to one of the property viewings and ask them which renovations would add value and how much they will cost. You should avoid properties where renovations will be complex and costly, but consider more basic options, such as relocating a ground floor bathroom upstairs, changing a badly designed room layout or updating the kitchen. You can submit a lower offer to take into account the costs of essential maintenance. Also, find out low long the property has been on the market: if it has been on sale for several months the current owners may be willing to accept a lower offer in order to move quickly. Remember that all your changes should add value to the property, and be aware that renovations that add value in a rental property can be different to those which add value to a family home.
Check out the property in detail
Once you have selected a property that you would like to buy, make sure that you view it more than once, during the day and at night. Find out about potential neighbours and think carefully whether you should proceed if you find out about any problems. Also make sure that you get an appropriate survey for the size, age and type of property. Less conventional properties will need a more extensive (and expensive!) survey. Don’t skimp on a few hundred pounds at this stage, as unknown faults with the house could cost you thousands of pounds to fix, or make your property difficult to insure or sell in the future. Also make sure that your solicitor carries out all the necessary legal checks before you exchange contracts. You don’t want any nasty surprises, such as boundary disputes or plans for a new bypass that could reduce the resale value of your property. At the same time, be aware that plans to improve amenities or transport links could increase the value of your home.
Get the best mortgage deal
Whether you are buying your own home or arranging a Buy to Let mortgage, try to get the best mortgage deal that you can. The best deals, with the lowest interest rates, are available to buyers with a 30-40% deposit. So if you are in a position to do so, put down a large deposit. Even if prices fall, your deposit may protect you from negative equity (even if you lose some of you initial investment) and will also reduce your monthly mortgage payments, making your financial situation more secure.
Consider getting a long-term fixed rate mortgage while interest rates are low, so that if interest rates rise your mortgage repayments remain at the same level for the period of the loan agreement. This could save you thousands of pounds in interest payments and give you time to plan for increased outgoings when you have to refinance your mortgage. Use a mortgage broker or independent financial advisor to help you find the best deal for your financial situation, and calculate how much of an increase you can afford if interest rates do rise.
Don’t buy too cheaply
At a time where UK house prices are high it may be tempting to buy a cheap house in a more run-down area simply to own your own home or start a property portfolio. However, think carefully about whether anyone else will want to buy the property if prices falls. Sometimes properties are cheap for a reason, such as poor access to transport, schools, amenities or because there are high levels of crime in the area. Bear in mind that former council houses can be particularly vulnerable because they are commonly constructed from unconventional materials such as concrete, meaning that some lenders may be unwilling to offer a mortgage. All of these factors may mean that these your home loses value most quickly when the market falls. If these properties are the only options available to you, consider whether you wouldn’t be better off renting a nicer property in a better area and continuing to save, or putting savings into bonds or a high interest savings account.