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News: Frothy temptations in the housing market

Homebuyers are being tempted into taking out mortgages which they may not be able to sustain, warns a money education charity. 

Calling the housing market ‘frothy’, the charity Credit Action warns that in their eagerness to buy properties, people may be committing to more than they can afford.

According to the charity, conditions in the housing market are starting to mirror those of the early 90s when thousands of people had their homes repossessed. For example:

  • steeply rising house prices
  • first time buyers struggling to get a foot on the ladder
  • a rise in interest only mortgages (as happened with endowment mortgages)
  • a raft of new product launches including mortgages allowing consumers to borrow five times their salary, “buying with friends” options and ones which can be passed on to the next generation.

Keith Tondeur, Credit Action’s national director said: “The UK housing market has been frothy for quite a while and while this can be good for the consumer - lots of opportunities for buying and selling, lenders thinking up inventive new ways to lend money - it can also be a sign of over-heating.”

“Last week the IMF warned that house prices in the UK are too high while we are already seeing rises in the number of house repossessions and mortgage defaulting. Property looks like a very attractive investment in the UK but not if the investment is more than you can realistically afford.”  

Acknowledging that mortgages can be a minefield, Credit Action recommends:

  • committing no more than a third of take-home pay in mortgage payments
  • treating interest only mortgages as strictly short-term, either to get through a temporary financial crisis or as the first step on to the housing ladder with a view to moving to full repayment asap
  • recognising the downside of “innovative” mortgages. For example if you buy with four friends what happens when one or two people want out? Do you really want to commit to a lifetime mortgage?
  • getting advice from an independent mortgage broker, preferably one which will not charge a fee

 

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