Is it even worth buying a starter flat? (London)

[hangrypony]

With no real equity gains to be had with purchasing a flat, does it make sense to try and do the whole “housing ladder” thing in London anymore?

Rents are often a fair bit cheaper than mortgages & service charges in Inner London. So might it be better just to rent somewhere reasonable and go straight for the “forever” home? I e go for a three bed flat or house rather than a 1 bed for 3-4 years then a bigger place

The ladder is a fallacy of the past, all it did was drive up house prices (out pricing the next generation) and now hit the ceiling so is not a realistic possibility.

I would avoid buying flats (especially in London) as the market for flats is stagnating and crashing.

It depends on your budget (deposit vs mortgage AND income), age, plans etc. Mumsnet is very against flats as they’re most often leasehold (share of freehold isn’t always better imo) and it’s true they aren’t going to make you $$$ anymore. However, we personally more than doubled our equity through mortgage payments so they’re financially more secure than renting and sometimes location is important esp if you have an urban centre based career/you’re young.

We bought a 2 bed flat in London as ftbs and sold after 10 years, with only a slight gain (probably zero gain after inflation). However we were able to clear the mortgage within those ten years, so we had that lump sum and also another lump sum from stock investments (which made a significant gain, but over a longer period) to put towards the next property (house in zone 2). So it's true we didn't climb the ladder as such, and we've only owned 2 homes. We plan to stay in our current house for 20+ years, until the dcs are finished with school.

The flat was leasehold but it wasn't problematic. We paid a service charge of around £2.5k a year which increased annually but not as significantly as some horror stories I've read. They took care of the communal areas and it included buildings insurance and maintenance, and we spend more than that on those things for our house now.

We wouldn't have wanted to rent until we bought our house. We had a dc during the time we lived in the flat and wanted the security of being homeowners, as we wouldn't want to be asked to leave at short notice. Financially it makes sense not to rely on housing equity gains but diversify and invest in the stock market, but that is taxable outside of ISAs and has an element of risk. I agree it makes little sense to buy a flat just for 3 years, with the costs involved and the stress of moving.

Even with no real equity gains, surely its better to be increasing your equity by paying a mortgage, rather than flushing that cash down the toilet on rent?

You have to pay to live somewhere.
As long as it’s not costing you money, Or if you’re very disciplined and you would invest the difference

As opposed to flushing cash in interest payments to the bank and house maintenance / service charge?

Yes. Obviously there are other expenses as you mention. However with a mortgage a large proportion of what you pay each month goes towards increasing your equity. If paying rent then 100% get flushed down the toilet with nothing to show for it at the end of the day.

Although, as per the OP, renting is quite a bit cheaper than paying a mortgage for a flat so she (or he) may well be better off saving the difference and saving two lots of SDLT. If house prices fall in the meantime, even better.

I would go for a 2 bed share of freehold flat in a good school catchment area. We bought when rates were 2% and we could ensure a fixed mortgage for 5 years which bought us time to increase our earnings and also stability for maternity leave. Also allows you to plan re schools though obviously catchments can change.

You’ve obviously done the numbers but I’m very surprised that your rent is lower than mortgage payments, my understanding from speaking to friends is that rent in London has absolutely skyrocketed so if you can get a mortgage that’s usually the better option as you build equity, even if you have expenses and the capital gains aren’t huge.

Just be conscious that the proportion of equity being repaid isn’t as large in the first few years. Eg with a 300k mortgage at 4.5%, you’ll pay about 20k a year, but in the first year the equity part will be less than 7k. Over the first 3 years you’ll end up paying 60k, which will be 40k interest and 20k equity. By the end of the mortgage it will be almost all equity and no interest, but you’ll never get to that point if you’re only intending to keep it for a few years.

I’m just pointing it out as I remember being disappointed in how little we had repaid when I got our first few mortgage statements. It can still make financial sense, but make sure you do your sums properly. You can use this to play around with scenarios:

https://www.moneysavingexpert.com/mortgages/mortgage-rate-calculator/

Rent has gone up but it’s still lower than mortgage payments would be with a 10% deposit, just not by as much as previously.

Personally I’d always buy if I were planning to stay for a decent length of time. Even with mortgage payments being higher it’s likely that the amount of equity you pay off each year will outweigh that (there are calculators online that let you check this). If you’re only going to be there a couple of years then possibly renting works out better given the costs of moving.

IME (and this may be area specific) new build flats are often a better prospect for rental- more likely to lose value and high service charges. A period conversion can be better to buy.

I also think that buying can feel better psychologically- as if you’ve made a start and are not just treading water. But
obviously that’s down to the individual.

I think about 50% of people I know just went straight to a family home.

Of those that bought a flat (and assuming you keep for ~5 years), most have had issues and regretted it tbh. Getting the value they originally paid back, cladding issues, service charge issues, taking a long time to sell etc etc

The ladder comcept only works if interest is quite low, your salaries are growing steadily and the valie of your first home increases at the same rate as the value of the eventual next-step home.

I wouldn't buy a newbuild starter flat with any expectation of its value increasing. Stick to renting and buy your 3-bed when you can.

We bought a flat in zone 2 circa 7 years ago, Service charge went up 400% - no one would buy it. we eventually sold it at a £30k loss - after years of stress/angst. Many other people we know in same boat or unable to sell at all - we were worse off than if we had just rented in the end. Dont buy a flat unless its freehold.

I think for a flat new builds can be an issue, but if you get something like a factory conversion they are better as they are already historical buildings. With regards to people who currently have flats regretting it, I think a lot of that is to do with cladding issues and being trapped until the repairs are made - lots of flats don’t even have dangerous cladding but have been caught up in the over-zealous certification requirements. That is quite a specific time limited issue that’s just been horrendous for people in the last 7 years, but if you found a flat building that was past that (ie works complete) or completely not impacted then I think it changes things. Basically flats in UK have had some incredibly bad press lately but if you remove cladding from the equation a lot of that does go away.

A lot of flats are still overpriced but also lots of landlords are looking to sell, so you might find a bargain which would make a paying a mortgage more cost effective than renting. If you let agents in the area know you can move quickly and have an agreement in principle, you might just snap up something really good.

There aren't flats that are freehold, just share of freehold or where residents manage fhe development.

I agree, flats in London have been a poor investment for a while and the money saved by renting could be used for a deposit on a better property in a few years

If you have done the sums and you feel that you can wait bypass the flat stage and you are happy renting and can always find a flat to rent then yes wait and buy a bigger place further down the line. Good luck!

I agree with "do the sums", but there are other factors to take into consideration, too. Mainly commuting - if you're renting in zone 1, your travel costs could end up being zero, whereas if you've bought a 3-bed in zone 5, travel could end up being a big outlay, depending on your circs. Entertainment is often cheaper in the centre of town because there's so much going on.

Schools are another big thing to research ahead of time, if you're at the stage of planning to have DC in the near future.

My grandson and his partner bought a small but attractive flat in West Dulwich. The road is lovely.and it is the top part of a Victorian house. He aims to keep it for up to two to three years and then they aim to sell and buy a house with a garden. The price he paid would cover that.Obviously this is when they have children and marry. Meanwhile they can get into work in London with ease and no car is needed. They love to be active and really enjoy life. My grandson works in the financial sector and has always planned his career and future The price of this flat is ridiculous but my dd and SIL went with then on their search for a home and said this was the best they could find. My SIL is a builder and he thought it was a good buy. The area is lovely and green and attractive.

I would lean towards buying because that's how I am BUT having had a total shitshow buying and selling a couple of times, I am less and less sure that it's worth buying for a shortish period of time. I've watched some of my friends take years to sell flats etc, even if they're not in cladding horror.

I’d buy out of London and commute in. You get on the property ladder earlier and at least keep pace with house prices. Yes you have to spend money on commuting but it’s much less money down the drain than rent would be.

Wouldn't it possibly be very expensive to size up anyway and require many years esp if you have a child. I don't get how people upsize while paying 2k childcare or even with free hours it isn't cheap..it takes 4 years for baby to go to primary school. 1 year for gestation. Presumably after draining savings for deposit, most couples would wait 2 years or more to save up and then time to ttc... that is a good 8 years.

For us it was 6 years (fertility issues) after buying before I am due to give birth and we can't move until we are sure that we aren't going to the state primary school as we are in catchment. And even then our options are limited as I am also in catchment for the excellent local state school and want to keep my options open though I suppose I could find another catchment or things could change by secondary.

But still 10 years in the flat minimum .