To buy or not to buy

Whether 'tis nobler in the mind to suffer the slings and arrows of outrageous house price growth . . .

Anne Hathaway's cottage

To buy – or not to buy (and rent) that is the question!

Buying a property is one of the biggest financial decisions we will ever make.

So it’s worth taking a good hard look at the question.
Of course, the advice that friends and family give you, is very likely to be coloured by their own experiences . . . good or bad.

So it won’t necessarily be the most ‘balanced’ guidance you could find.

Oh, that image by the way is Anne Hathaway’s cottage.
I’m not suggesting we can all afford to buy a place like that – it just fitted nicely with the quote. (Anne was Shakespeare’s wife)

So, is RENT really money down the drain?

Well, a lot of people might tell you that it is – and if you get a bad landlord – it very well could be.

And a lot of ‘older’ folk will tell you to “buy a home of your own – and get onto that property ladder, as soon as you can”

‘Look’, they’ll say, ‘you really don’t want to rent your home. That’s just like pouring money down the drain’

But, as ever with questions of money, that’s not the full story. So let’s look at this more closely.

If (or when) you buy a home of your own, the first thing you’ll notice are the horrendous ‘up front’ costs of purchase.

And then, when you come to sell up and move on – as most people do several times in their life – you’ll be hit by another set of fees.

In between times, you’ll have to pay to insure and maintain your home – and some of those bills can cause huge financial strain if you’re not prepared for them in some way – either with savings or insurance.

Think what it’d cost to replace a boiler – or the roof!

So, in a nutshell . . .  if your property doesn’t rise in value – by quite a lot – between the time you buy and sell it – there’ll be money down the drain for you (in terms of fees and possibly taxes) with this route also.

But here’s the thing . . .

With home purchase there’s an even bigger bucket of money that you’ll wash down the drain.

And that’s loan interest.

Think about it. If, like most people, you buy a property with a large mortgage loan, then you’re going to pay a lot of interest to a lender.

And what’s that if it’s not money down the drain ?  going straight into the hands of the banks 😉

Here’s an example:

You take out a £200,000 mortgage over 25 years @ an average interest rate of 5%*

* Now I know that 5% p.a. interest is a bit higher than current ‘best buys’  …. but please bear in mind that current interest rates are at 300-year lows.

And it would be silly to assume that they’ll stay down at these levels for ever right?

BOE Interest rates since 1694

(This chart doesn’t include recent small increases in rates taking our base rate to 0.75% p.a. – still a long way below historic norms) 

That said, if interest rates do stay low for much longer it probably means we’re headed into a serious recession. And in that case house prices may well crash in any event – as people lose their jobs.

Yes, I know that’s a miserable thought but it’s the reality of our economy right now – and just being cheerful won’t change the direction of market prices!

Anyway, back to our example with that £200,000 mortgage . . .

How much do you think you’ll repay in total?

Go on, have a guessideas

Okay, well, you’ll end up repaying £351,000 in all !

Which is more than £150,000 in interest to your lender.

Or to put it another way, it’s equivalent to c. £500 per month – on average – in interest payments alone over the term of your mortage.

So we could say that …

even when you buy your own home, you’re still going to pay rent.

It’s just that this rent is called mortgage interest 😉 and allows you to live in ‘your’ house.

The ‘conventional wisdom’ is that it’s okay to pay a fat load of interest to a bank – in order to borrow to buy a home.

But that’s based on an assumption that the home will rise enough in value for us to profit.

So, the question for you is whether house prices will rise significantly from THIS point in time?

Of course no one knows the answer to that question but we do know (as the standard investment warning says) that . . .

Past performance is no guide to future returns . . . 

. . . and the value of houses can go down as well as up!

So the value of your home might go up or …

… it might remain steady or crash – over the term you own it.

And this is tricky to get your head around – especially if you’re under 45 and don’t remember much about the last big UK property price crash in the early 1990s.

You see we have to go back – all the way to the 1990s to see what a real UK property price crash looks like.

We really didn’t suffer one of those during the 2008/09 financial crisis – that was just just a short term ‘wobble’ …

So, (along with Australians) we’re in a very different situation now to the likes of the USA, Ireland and Spain – who did experience very nasty house price crashes in 2008-09.

Their bubbles burst properly – albeit that their prices have since bubbled up again now as a result of interest rates being held down so low for so long.

The bursting of our bubble is yet to come.

And for more clues on current UK property values – see here.

So, you need to take a view on which way you think house prices will go over the period in which you’re going to own one.

And have a good think about this – in a balanced way – with the facts to hand.

Try to think how you might you feel – if prices fell by 20% or 30% or more over the next few years.

Getting into ‘negative equity’ (where your mortgage debt is a lot more than the value of your home) really doesn’t feel so good.

It may not be the end of the world, even if you have to move on to a new location with work etc – as you may well be able to rent out your old property to service the loan until the price recovers.

But that’s hard work, there are a lot of responsibilities and costs for landlords these days – so you probably don’t want to become a ‘reluctant’ one.

And either way, I can promise you, taking a big hit on the the value of your biggest asset – does feel like money down the drain when it happens.

The only way is up

Of course, a lot of ‘house owners’ are forever ‘bullish’ about the prospects for house prices.

And I understand that – no one wants to think about their house price crashing in value.

You just need to be aware that their guidance is very unlikely to be objective … any more than the guidance of someone who prefers to rent 😉

“The only way is up” was a great dance song that came out at the height of our last BIG house price boom.

And it really is worth being aware that we’re now in another, even bigger, one.

And let me be clear . . .

I am not advising you on any financial matters here – especially whether to rent or buy your own home.

Or to sell one if you have one.

This Insight is just about helping our (generally younger friends and family) to get clear on the costs and risks of buying.

I think that the positive noise about house purchase needs to be balanced out – especially at this point in the property cycle.

So, please take good care out there

Paul

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