Why would anyone buy in London right now?

[PlumSawce]

As a first time buyer.

DD has been running the figures for buying a flat.

She pays a market rent of £1,600 a month. No running costs other than the usual things like council tax, water, heating etc.

If she were to buy the flat it would cost about £450k. She and her girlfriend have the 10% deposit (£45k) saved up. So a mortgage of £405k. She was offered 5.4% interest.

So that’s a monthly payment of £2,700. In the first year that’s £29,555 total. Of which £1,800 is paying the interest and £900 is the capital.

So she’d be paying £200 a more in month than her rent just on interest.

But there’s more! The service charge (share of freehold) on buildings around her is roughly £400 a month. So her total payment would be £3,100 a month, of which £2,200 is not going towards the principal.

Yes when people are exclaiming about the costs of renting I think they haven’t worked out what it would cost to buy the same place on current mortgage rates.
My son is in a 2 bed flat paying 1450. Flat would sell for about £325k. Just the interest on that amount at 5.5% is more than the rent let alone the other costs of being a homeowner.

To actually answer the question though. People like the security of having their own place and renting sucks as it’s insecure and you can’t decorate etc. plus people with money want to put it somewhere.
My daughter’s boyfriend is looking for a London flat for these reasons. He has money from parents and a good salary and he just wants his own place.

My DC share a flat in London. Last year the landlord announced a 25% rent increase and couldn't understand why they had to move out. Every year they go through something similar and have the stress of trying to find a new place when there's a shortage, plus pay moving costs.

They're buying because they want stability and security

We are FTBs and are buying a flat in zone 1. The sums work for us because we have a 30% deposit as we've saved for nearly 10 years, and a better mortgage rate through our broker. 10% is quite a low deposit for London.

But that’s relatively modest rent versus an expensive flat. Although in her situation I would also be waiting for rates to come down further and focus on saving more to take advantage of a better LTV. But it’s an unusual time where for the first time in years FTB have the luxury of doing that without prices running away from them.

It’s up to your daughter & her girlfriend when they buy their first property isn’t it?
People tend to buy because it makes them feel more secure, if they want security more than the freedom to be able to move easily. And so they can decorate & furnish it how they want as opposed to having to live with someone else’s choices, plus many LLs seem like they don’t want to spend money on making the properties as nice as they could be because they are driven by profit.

Often it’s an emotional choice to buy somewhere together as a couple rather than a purely financial choice. Though I would also be tempted in their position to save for a bit longer if they can to get a bigger deposit together, especially as fixed rate mortgage deals are likely to go a bit lower over the next year.

London leasehold flats are a scam.

How much do they both earn? If they can get a mortgage for £405k then it must be at least £50k pa each! They’d be better to save more for a larger deposit which they should be able to do if they earn that much each.

A lot in London are leasehold share of freehold and very long like over 900 years - they aren’t a scam they are normal. Not to mention, most people can barely afford a flat there (£450k not unusual for London) let alone a house so they don’t have much choice.

Yup and even my leasehold flat is in a development where they have bought the freehold (just my unit didn't participate). But service charges same for everyone and we can also be director of residents management company.

Lots of flats like that in london.

Average deposit in London is in excess of £100k. Also you don't know how much rent would go up by and you can fix mortgage for five years. The gap between owning and renting may narrow as interest rates fall so if they are on variable or short term fixed could be quids in so there is risk in that approach..but also risk in renting.

That is cheap rent for london. My flat would rent for £2k.

It is valued around £425k and service charges £150 per month (freehold owned by residents).

Maybe she has a nice landlord? But rent could jump

Over time the interest/ capital split changes so the interest part falls, and unless interest rates go up next time they fix they’ll be paying the same (more likely lower) as the years go on. (Ok so the service charge probably goes up).

Meanwhile rent goes up (and up and up) with inflation.

My service charges hasn't gone up in 5 years. They are planning to raise it by 5% to replenish sink fund but yeah still not like rent at all.

DD is looking to buy. She is in her third flat in five years. Renting is so insecure. Each time she has been issued with a section 22 because the landlords wanted to raise rents exponentially. Each time she has had to stretch her budget and get a flat without actually seeing it, it's impossible to wait to see them, and move within a month. She currently pays £2.2k per month with a friend on a 2 bedroom. The friend can no longer afford it, and the break is coming up.

She has a high deposit saved with a LISA, and bonuses, but will have to spend £450 ish to get anything suitable. It's very worrying for us as parents for her to get such a huge mortgage on her own. It's crazy money.

But if you assume interest rates are constant for simplicity: When you buy your mortgage costs stay the same whilst rents go up by the interest rate every year. So there is a crossover.

Leasehold is fine for me, I will definitely be dead 💀 in 120 years

Yes it is worrying as a parent I agree @KnittedCardi

I also have a daughter who bought a flat in London recently (well, 2022) using her LISA and realising it only stretched even at the 450k maximum to a 1 bed flat. It does seem like crazy money but my daughter is so proud of her little flat and loves it to bits.

Agree with PP, it’s not that the mortgage is expensive, it’s that their rent is comparatively cheap assuming this is a desirable area of London.

Hold tight and save some more towards a deposit.