The following guest post on the reasons to buy a house instead of renting is by Tejvan Pettinger from The Mortgage Guide UK.
The UK has one of the highest property owning rates in the world. No matter how many boom and busts we have, the British like the idea of buying their own house.
Part of the attraction is not just financial, but the sentiment of owning your own house, not worrying about having dodgy landlords, and being able to paint your walls whatever colour you want.
Owning a house does bring more responsibility. But unless we are frequently moving around the country, most people would buy if given the opportunity.
Yet, for first time buyers, the ratio of house prices to earnings means that it is very difficult to buy – unless you can borrow from The Bank of Mum and Dad or be helped by the UK State.
Is it really worth the effort, or are we better off renting? Does our sentimental attraction to buying our own castle make sense?
Let’s first consider the advantage of buying a property.
The end is in sight
A mortgage may last for 25 or 30 years. But there will eventually be an end to the mortgage payments, which means the hope of being able to live rent-free for your remaining years.
In this way, paying off a mortgage is similar to saving for a pension. If market rent is £800 a month, then finally paying off your mortgage will be the equivalent of saving that cost of renting.
With rising life expectancy, people are living longer. Therefore the benefit of paying off your mortgage is increasing, too . The old saying that ‘rent is dead money’ is true.
Of course, it depends how old you are, and how long you imagine you may live.
If you are 40-years old, getting a 30-year mortgage may not seem to give much benefit. But, if you live to 90 years, that would still be 20 years of rent free accommodation.
Rents also rise with inflation; often in the UK they rise faster than inflation.
What about fluctuating interest rates?
Interest rates are currently exceptionally low. The most likely scenario is for rates to increase to 5% in the medium to long term, though it is not a foregone conclusion – Japan has had zero rates for over a decade.
Clearly, affordability is being helped by these record low rates. When buying however you need to budget for rates of 5%, and bear in mind that rates have risen to over 10% in living memory.
You can experiment with a mortgage repayment calculator to see how the costs would vary with higher rates.
It may seem the prospect of base rates jumping from 0.25% to 5% would dramatically increase cost of mortgages, but many lenders have not passed on the full base rate cuts onto consumers. If base rates rise to 5%, the actual mortgage payment you pay is unlikely to go up as much.
As a rule of thumb, look at the cost of the longest fixed rate mortgage and not the variable mortgages.
Housing as investment
There are two types of house buyers. One type buys a house to live in rather than rent. The other type invests in property – usually via buy-to-let – hoping for an equity gain.
The first type, the average householder, is less affected by fluctuations in house prices. The key thing is the cost of mortgage payments and the other bills.
In contrast, the buy-to-let investor is much more concerned with gaining equity in addition to income. And that requires rising prices.
Forecasting UK house prices is a tricky business. The professionals often get it wrong, and some have actually given up trying to make house price predictions.
- On the one hand, house price to earnings ratios are very high compared to previous decades and also compared to other countries.
- On the other hand, the UK has a shortage of housing that is unlikely to be solved anytime soon. This shortage of housing compared to the number of households means property could continue to be attractive for the medium to long term.
Conclusion
It is worth looking at your local area, and considering how much you pay to rent versus how much would mortgage payments cost (assuming a good fixed rate mortgage).
In my own experience of living in Oxford in 2005, I tried very hard to buy. The reason was that renting was very expensive – around £800 a month plus bills. So I though why not pay £800 a month on a mortgage?
I borrowed from my parents and got a dodgy 2005 style self-certification mortgage. It was the best thing I ever did.
I couldn’t face prospect of paying £800 a month rent (that will continue to rise with inflation, if not more) when I retire, whereas mortgage payments will become a smaller percentage of income.
If I was an investor, considering whether to buy a second home, I would be much more circumspect. Equities or the bond market may offer a better rate of return.
Note: I have republished this post from the archives because the core reasons to buy a house versus renting haven’t changed, even as various parameters have arguably become more stretched. Be aware that some of the older reader comments might now be dated, however. On the other hand, that does provide interesting context to this timeless back-and-forth! 🙂
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The problem in the UK seems to be a combination of culture and population density. I live in Portugal where the standard tenancy agreement is 5 years (though you can get out whenever you want with 2/4 months notice depending). As a tenant, this makes doing painting and decorating or other basic modifications to the house feasible as it’s your home for as long as you want (within reason). The UK renting culture seems to be all about protecting the landlord and little about providing a home for the tenant – and that drives people wanting something they can customise and make their home, ie buying!
Of course this is compounded by the population density which drives prices of all property up and makes it entirely feasible to use property as a (lucrative) investment.
Good article. Also another factor in buying, it’s a nice inheritance to your children.
This should be read with caution.
If the question is should one buy a house before retirement, I agree the answer is usually yes (particularly since pension credit does not take into account the value of one’s home); but to suggest that for younger readers in particular they should be rushing out to obtain huge mortgages is very doubtful.
Interest rates on mortgages are dead money too, as are fees to the bank. Furthermore, those in the property business always forget to factor in the substantial costs of depreciation and insurance (always met by the home owner). Home owners I know are often complaining that the costs of replacing windows, dealing with dodgy boilers, new kitchen fittings, repainting the house, crumbling masonry etc. frequently add up to several thousand a year. In other words, the difference between the cost of renting and buying is much less than most people assume.
Taking out a large mortgage always has inherent risks; the costs of failing to repay on time can be significant beyond losing one’s home. We assume that UK house prices and rents will rise at least in line with inflation, but any predictions are really guesswork. Given the state of the economy and the fact that in real terms most working people are getting relatively poorer, the possibility of negative equity in the near future should not be discounted. And the old myth that we suffer from a housing shortage that must inevitably drive up prices should be challenged. If this relationship was causal we would have seen rents rise in line with house prices; and the chronic oversupply of stock in Northern England should have caused price falls over the past decade.
( http://www.moneyweek.com/investments/property/what-housing-shortage ). The most significant factor on the market will usually be the availability and cost of mortgages.
In short, young investors would be better advised not to rush into buying, and should consider building up their capital through investments first before taking out an enormous mortgage. Then when they are ready to settle down, they will enjoy a much smaller mortgage, and be in a better position to pay it off quickly should interest rates explode.
I’m with Faustus – that’s what I’m doing, renting while investing to try and buy a house outright (or with a small mortgage) in a few years time.
The main thing is, I couldn’t face prospect of paying £800 a month rent (that will continue to rise with inflation, if not more)
thats a great quote
I agree with Faustus, if you end up taking a relatively unfavourable mortgage rate (most of them!) you are effectively paying “rent” to the bank. At present my focus is to build up enough capital for a favourable mortgage or buy outright. Even then, I’m in no rush at all and am not part of the stereotypically British desperation to buy somewhere quickly.
> I borrowed from my parents and got a dodgy 2005 style
> self-certification mortgage. It was the best thing I ever did.
You will only know that for a fact when you discharge the last payment on the mortgage 🙂 If you haven’t paid it it off yet, then you may experience a world of hurt from negative equity in the coming years. Buying a house in 1988 was the biggest personal finance cock-up of my whole life – churning my portfolio in the dot-com boom and bust couldn’t hold a candle to the money I lost on that first house.
@All – Thanks for the comments guys! A few years ago I would have agreed with the more negative ones here 100%, to the extent of possibly not even running Tevjan’s piece. But now I am more circumspect about trying to time house buying.
In London at least property has looked expensive since at least 2003, by any measure. People were warning it was overpriced in 2000. I have the London Property Guide 2000/01 — once a London housebuyers Bible before the Internet killed it off — and it says that prices are definitely too elevated and a crash is inevitable, so be careful what and where you buy… in 2000/1. Prices are up over 60% since then.
If I’d bought a little flat right out college as I tried to (alas, no bank of Mum and Dad was forthcoming) I’d have only around a decade or so to pay off what would now be a laughably small mortgage. Okay, the mid-90s were a uniquely cheap time to buy on a House Price to Earnings measure, but not particularly on an affordability measure.
As it is I’m in my late 30s with a portfolio big enough to buy a flat in London outright, yet I am staying out. I feel it’s best to play my hand to the end, and I’m stubborn and do other silly things like trade shares. I’d be *far* more cautious about warning people about high prices than even five years ago, even though I personally am betting on a second slump.
The irony is I urged a ton of friends to buy from about 1997-2002, for the reasons outlined in this post. They’ve all done very well. I myself was greedy, and wanted a great deal. Ho hum.
> As it is I’m in my late 30s with a portfolio big enough to buy a flat in London outright, yet I am staying out.
You’re sorted 🙂 You have the choice and the wedge – which speaks volumes for your approach. I tip my hat to you, sir!
If I’d started at 29 and nailed my personal finances like you have and saved/invested then I would have had the choice around 40 just like you. However, I had no idea of PF and no conception that this sort of thing would be possible, or how to go about it, so I followed the stereotypical middle class track – the only difference was that I was single and bought on one salary, where most people use two.
Buying a crummy low-end house as early as you can afford to service a mortgage isn’t the only way to buy a house in Britain. Your way is only for those with a degree of discipline and personal finance savvy, but then isn’t that what Monevator is all about? I would like to see an article celebrating your option, the road not usually travelled 🙂
In the modern insecure workplace, there’s a lot to be said for saving up first. People used to do that in the 1960s too – I am sure my Dad needed a deposit of about 25% on his first house, even though his mortgage on that house was for about £500 ISTR.
Timing is all, but time is a healer. We bought our first house in 1985, so had the benefit of a decent price uplift by 1988 when we bought our second. Moving again in 1995 and taking a big loss seemed grim at the time, but 16 years of payments have transformed that.
I guess you can afford to wait 2-3 years to see what happens with the possibility of rising equities too, but maybe not much longer.
You need a little bit of luck too. I bought a house in 2002 and sold it five years later, just before the economy fell off the cliff at a whopping profit (not in London). The house was not sold, however (as it was not bought in the first place) with an eye entirely on profits. I wanted somewhere to live and was unwilling to dish out money every month in rent (which I saw as waste at the time). I sold the house when I changed my job and moved to another area. The profit + the money I had saved saved towards deposit went into buying another property. The mortgage on this house is now negligible. Because of my positive experience in buying and selling houses (which, I accept, owed a lot to luck) I used to think that buying property (or properties) was preferable to investing in equities (which I viewed as more risky). The property crash of 2008 which I managed to avoid by the skin of my teeth made me realise that I was just lucky. (The family that bought the house from me put it on the market within months, and it remained unsold for several months, forcing that family to slash down the asking price; whereas I managed to sell it within weeks.) I am toying with the idea of buying another house, but am wary. Equities, as you say, probably offer a better return.
@ermine – Thanks — and I’ve done it the hard way, too, no City boy bonuses here! — but my jury is still out. House price appreciation will do a lot of heavy lifting for you. Saving and compounding through a decade that sees two bear markets is tough, though I’ve shown it can be done… although I did have a bit of luck, taking money out in late 2007 after leaving my start-up for world travel that never happened, the ploughing it back in through 2008 and early 2009.
@alan – I agree about luck, but as just mentioned it cuts both ways… As for equities versus property, who knows. You’d certainly expect shares to do better after the last decade, but they’re not at bargain basement levels after the last 18 month rally.
@Salis – Wise words.
I’d not buy now at todays prices… but then I was fortunate and bought many moons ago for the price of a decent car… Hard to recalibrate after that…!
Your saving seems prodigious…but did you ever spill the beans on your earnings? Not to reduce the achievement but financial services can earn you enough for a London flat in a year.
@OldPro – A fair question. I think I’ve only ever alluded to it being in media, and it’s certainly not at the high-earning spectrum of even that field! As for City bonuses, they’re a long way away from where I’m sat.
I’ve done lots of different things over the years, too, from staff to freelance to start-up to management to consultant. It recently changed again, which I’ll update you all about soon.
Anyway, embarrassingly for a site about money, I’ve never earned more than £50K per annum in a year, and most years about £10K less. Obviously that is good compared to most people in the UK, but I live in London, too, remember, with its proper-high-earners and horrific costs.
Besides not buying a flat, not pursuing a slightly more lucrative career is probably my second biggest money mistake.
I have had a very nice lifestyle though, and still have all my hair (and only a few greys!)
Monevator, but how can you afford not to buy in London? How much rent are you paying now? How much rent will you be paying in 10,20, 30 years time? Where is the end in sight for you? Will you have to work (assuing you are able to work at 60/70/80 etc) till you drop just to pay rent? Perhaps you will cash in your investments and move to a cheaper part of the country? I dont know. I ask because you have written more than a few times that you view London as the place to be.
This is an old post and not many will read it anymore, I suppose. Also, I don’t know how relevant an Indian perspective on this would be, but let me try to put things down.
1. Usually there’s loads of “administrative” fees that go with registering the house, etc. This is not covered as part of the bank loan here. It’s usually 10% of the cost of the house/apartment that one has to shell out of own pocket. And there’s no way you can “recover” this cost from the next sucker you’re trying to offload the house!
2. Granted, there’s a interesting case made for exhorbitant rents, but what the monthly repayment on a mortgage? In India (regardless of the location…location…), renting is about 1/3rd the price of a monthly mortgage installment for a similar dwelling. So, it is very stupid to go for a no-down-payment loan, while you could be socking away 2/3rds of a “potential” mortgage interest towards down-payment for a few years.
3. There’s also the concept of fixed/floating interest rates here, and somehow the bankers manage to con(vince) you to sign for “floating” with the carrot that interest rates will fall and your rate will follow that trend instead of a “fixed rate”. When the rates do fall however, the bank will not lower it automatically. It is your “responsibility” to go to the bank and pay them another round of “admin fees” to bring it (sort of) on par with prevailing rates. The experience is enough to kill your faith in humanity….thrice! In a nutshell, either way you choose, the system is set up to bleed you dry.
4. There used to be a provision earlier, that you can chose to pay the money back earlier than the 20-25 year period. Lots of IT boom and saved per-diems and Rupee vs. others conversions later, banks now penalise early repayment since late 2007 (peak-IT boom). It is just eye-watering to see the money leave the account month after month, and watch your rate of interest climb up every two months… Usury must be experienced before it can be commented upon!
In summary,
1. “house prices will always go up” is a myth. QED Hong Kong, USA…
2. “Timing the stock market/property bubble” to rake in the money? Who do we think we are kidding, Mr. Hitler?
3. Nothing beats the old logic of saving up for a chunk of your property’s value before committing to the mortgage……..Ever!. My father didn’t have a PhD, but he got that one figured right! And I didn’t!
4. This “Home ownership” dream is way too overrated around the world (Somewhere I read that “Debt incumbent homeowners don’t go on strike”! Ha!) So much for owning and living the dream! Yes, there’s a case for buying your home by the time you retire (my father did exactly that), but signing away the rest of your life starting in the early 20s for a “no-down-payment” mortgage is just silly.
That’s my view.
—
@Claire – Well, if it wasn’t for the leverage that getting a mortgage gives you, I’d be very happy not to buy at present… Essentially I see little chance of London property say doubling over the next 10 years (absent extreme inflation) whereas I think shares probably will, all things being equal, and may indeed do better.
The worse *worse* case scenario would be to never buy, and to pay rent in old age out of dividend income from the portfolio, when the tax disadvantages of such a route wouldn’t be so onerous (all things being equal).
As it stands the income from my portfolio would cover my current rent, assuming I rejigged it a little to raise the income (I don’t for tax reasons – over half my portfolio is still un-sheltered, although for the nice reason that it’s kept growing).
Finally, while I could buy a London flat outright, it’s not perhaps the one I’d want now (it would have done me fine in my 20s) – another reason why I’m not 100% convinced this saving to buy route is to be too vigorously applauded.
Investing has been very kind to me over the past 18 months, and my net worth has more than doubled. You notice I don’t write posts bragging about this (ahem, well, okay, maybe I allude to it slyly) because (a) I think it was partly luck, on the back of that amazing equity rally and (b) I already worry I’m being too greedy, and hanging on in case the next 18 months are vaguely similar.
Anyway, the net result is I’d rather see where London prices are with vaguely normal interest rates, before committing. If my portfolio doubled again though in a few years, I’d probably re-assess.
I’m loathe to sell out of fair value equities for overpriced property, that’s it in a nutshell.
> Finally, while I could buy a London flat outright, it’s not perhaps
> the one I’d want now (it would have done me fine in my 20s)
> another reason why I’m not 100% convinced this saving
> to buy route is to be too vigorously applauded.
I ought to clarify. Saving to buy is still very valid in this scenario. Your tastes and your life may have moved on, but you still have a decent amount to pay upfront for that other property that you are now eyeing (not in full, but sizeable chunk still, no?). As a famous chain would exhort “Every little helps!”(TM) 😉
@Surio – I agree it’s better than the alternative of neither saving *or* buying with debt many years earlier. 😉
Actually with the extra information here I don’t just tip my hat to you, I take it off and throw it high in the air, you have made far more of your financial opportunities than I have made of similar-ish ones.
Your blog is interesting and inspires because you walk the talk and the results speak for themselves. I am awestruck by the achievement. And somewhat regretful of the amount of my income that I turned into overpriced property, though a fair amount was also turned into beer, boys’ toys and having a good time so I don’t regret too much 😉 But nevertheless a master of the art are to be saluted!
@Ermine – Thanks. I was lucky in various ways, or at least judicious. For instance, my media career while not exactly super-high earning did allow enormous opportunities for swanky travel and partying in my 20s. At one stage I had a bag permanently packed ready to go to the US, since I went out there so often. Work and social life collided; Relatively speaking I barely bought a drink for myself between about 1997 and 2005!
And I made a lot of friends – it wasn’t the forced joviality of the traveling car salesmen in a Holiday Inn, far from it, although not as good as one’s true and trusted buddies. Even my girlfriend was in the same industry (and most of the same parties!) for about four years.
I also lived with a very generous friend for a couple of years who charged me a pittance for rent, which really helped get the ball rolling. I was able to save a lot of money – I suppose the achievement was that I did, but it really comes naturally to me. Some combination of genes and upbringing I suppose.
And as I say the last 18 months have really improved the picture… it wouldn’t have looked so rosy in early 2009.
All those caveats aside, thanks very much indeed.
This article was probably written in a different era in the early ninties.
To say the banks won’t pass on any rate increases if they rise to 5% to naive with the majority of mortgages linked to the base rate + % spread.
Saying Landlord money is dead money is also naive. Is paying for your electric “dead money” ? Is buying food dead money ? Accomodation should be seen as a commodity. It just happens to be in short supply at the moment.
Is paying 3% mortgage on a currently depriciating asset dead money ?
There’s no open “quote” for property. At the end of the day it’s when you know what the other person is prepared to pay for your property do you know it’s true worth.
@pinto – I don’t think Tevjan is naive to say a rise from 0.5% to 5% in base rates would not see an equal, 4.5%, rise in mortgage rates (which was what he said – he didn’t say they won’t pass on ‘any’ rate increase, as you imply). With base rates at say 5%, I’d expect SVR mortgages of 6-8%, depending on teasers etc. Obviously that’s still far above today’s trackers though.
Agree with your later comments, up to a point. If I consume a loaf of bread, it’s gone. If I consume having a roof over my head, then over the long term I’ve been rewarded if I’ve also owned that roof – we wouldn’t have a rental sector and landlords if it didn’t! Disentangling these two different elements is non-trivial.
Thanks for sharing your thoughts.
I wish you well. Dont get me wrong, I rent myself at the moment with no plans to buy. I sold up. But I downsized to a MUCH cheaper part of the country, its a far cry from London. Im not really comfortable renting long term, ideally I’d rather buy because lets say I rent for the next 10 years thats x£ @ 10 years = a lot of “lost money” down the drain. Sure my passive income pays the rent at the moment and may still do so years down the line, but there will come a point when rents have risen to the point that rent eats all of my passive income and I now have to dig into capital to pay rent. At that point I may not be able to work.
Where does it end with renting? Thats my point, it doesnt.
@Claire – Your point is well taken. On a related note, I’m actually working on an inflation post where I cite having a house and ideally a decent mortgage as a nice hedge against inflation. I do feel vulnerable being out of kilter with the masses, who after all vote!
Thanks for your thoughts.
I have chosen not to buy at the moment as I am living in London, I also think that I am better off renting. I live in a £750k apartment on the river. If I was to pay for mortgage interest, at 5% this would be approx. £37500 if you add the £7500 maintenance fee for the apartment, I would be paying £45k!! If I was to pay the full rent, which I don’t because I share the apartment with a couple of other people, I would only pay £27k. This is a saving of £18k!!! Why oh why would I want to buy?!? I can live in a far better home if I rent, and save £18k over buying the same place.
@The Investor
“The worse *worse* case scenario would be to never buy, and to pay rent in old age out of dividend income from the portfolio, when the tax disadvantages of such a route wouldn’t be so onerous (all things being equal).”
Could you elaborate on this, please? If your dividend paying shares were all in ISAs, would it not be so bad? Or do you mean there are tax advantages to owning a house in retirement? Thanks
I live in docklands in a one bedroom property and paying rent of £419/month inclusive service charge. I intend to save and buy a house but what I do not understand is: why do people say that they have bought a house when they are still paying for the house within 25 to 30 years of your their life. What will happen if they could not keep up with the mortgage? Will the bank not take the property back from them? Thus, will it not be right to say that the property that buyers claim is theirs belongs to the banks until the amount is fully paid?
@michael — Well, people have ownership rights to the house, and that house is pledged as security to the bank, as I understand it. But I totally agree with your underlying point, not least because if the house falls down you still owe the bank! Perhaps it would make more sense if we spoke about our ‘housing equity’ but it would be a bit cumbersome.
p.s. That’s a great deal you’ve got, I wouldn’t move if I were you! 🙂
A few points I’m mulling over to analyse the best time to step on the ladder:
‘Dead money rent’ is an overhead for everyone. The equivalent in house ownership is mortgage interest plus asset depreciation i.e. maintenance.
The main benefit of home ownership (from a financial perspective) is ‘Lock-In’. The cost of rent is locked in and eliminated over the period of the mortgage.
With a government agenda of high inflation and low interest rates to inflate away record levels of public debt, public policy is actively discouraging low risk investments and savings and promoting debt.
The Government Buy to Let scheme may inflate a new property bubble but todays property prices look good over the long term.
As one of the fastest growing countries in the EU, demand for property will remain high for years if not decades. The supply side will not catch up with demand with the current government policies and any future supply side reforms will take years for the impact to be felt.
Current climate: If you can afford to buy and maintain payments with potential interest rates of 5-6% then do so now. Personally I have no confidence in what equities will do when QE is reversed.
If interest rates rise then it is likely that inflation or GDP are also rising which I take to be good factors for home ownership – debt inflated away or salary growth.
Will there be anymore property related post’s in the near future? I am still a little in the dark with regards to analysing the cost of a mortgage, would love a little help in monevator layman terms. I am trying to be as smart as I can with my money, I have a passive portfolio that I add to each month as well as cash holdings for a typical London flat with a 90% LTV mortgage, I’ve not yet maxed out my earning capabilities, however I am working on that (finishing my Cima and will either do the CFA or a Masters in Real estate). I guess what I’m asking is… how do you determine when you can afford a mortgage and how do you determine whether it’s a good investment or not?
Grand
I don’t like renting because you cant screw holes in the walls etc.
@all — I’ve been debating with myself the pros and cons of buying (again! 😉 ) and was going to write a post, but realized that this five-year old article has a timeless quality that is more useful than a snapshot today. So I republished it, and will republish the other side of the argument (reasons to rent) tomorrow.
Some of the comments make for poignant reading, given what happened to house prices next, especially in the South East, and also how long interest rates have remained low.
However I think that adds to the educational value. Certainly for me a reminder how hard it is to be right about even the ‘obvious’ when it comes to macro-economic factors like house prices and interest rates! 🙂
I posted here 2 years ago – I’m still amassing a deposit for a 2 bed on my own in zone 4 of London 🙂 every 3 months that deposit amount has shifted. It’s startling just how crazy London prices are especially when the cost of a mid spec flat to construct is about £250 – £350 psf…..
This article is most definitely timeless.
I posted about 2 years ago too, bought a house 6 months after my comment, house revalued recently has made 16% in 18 months. A bit ridiculous tbh and probably a bit lucky, though i believe you make your own luck!
I could not have bought without moving out of the southeast first though.
It all depends on how long you think house prices will keep going up. The UK hasn’t allowed enough homes to be built in the right places for forty years.
There is reasonable evidence that our artificial shortage of homes has now caused more damage to the economy than anything since the Black Death: https://www.londonyimby.org/blog/2016/12/10/the-uks-hidden-handcuffs
What can’t last forever, must stop at some point!
@Paul 😀
Buying makes sense when youre in a high-rent market, which is true for most big cities and suburbs near big cities. At the moment it coincides with a very low interest rate on a mortgage.
The criterium with both buying and renting is to live below your means.
My husband and I decided to buy when the mortgage on the house we had in mind was lower than what we could afford. We took about 2/3 of what the bank was offering us, given our combined income. Even after the credit crisis, banks continue to offer 5x your yearly income. That is simply not wise.
One does what one must to survive, but if it’s not about survival, the best choice is to avoid straining your monthly outgoings. The three catagories are: housing, utilities/monthly bils and food. If you choose to live under your means for each of those, you don’t have to worry and buying is better than renting.
If you can’t make those all work for you, you may be better off renting, but only if you can find a way to rent for a reasonable price considering your income.
Because of living below our means, we have been able to overpay our mortgage each year by about €2500, which will cumilatively let us pay off the mortgage in 5 years less than the allotted 30 years (mandated by the bank) and each year our anuity payment goes down, so instead of rent going up, our monthly burden on the mortgage goes down every year.
This is good economics. Then, and only then is it a sensible thing to buy.
I came to investing late 49 yrs old but i bought and got my house paid off years ago so ive been mortgage free for a few years now, great move. wish id started investing earlier though but at least i did the house thing right. In my area my house would be about £600 a month to rent so its equvilent to having a £180,000 portfolio to pay for rent. I think TI has done it the other way round , big portofolio first. As ive no dependants apart from nephews i may go into equity release as the last card to play in retirement, another benefit of property ownership.
When I started my first real job in London ~’98, a couple of my peers bought homes and I even remember thinking this is definitely the time to buy, but I was still paying off debt (from having just been unemployed a short while after leaving Varsity) and didn’t have 2 cents to rub together. If I remember correctly, there was an insane small window in time soon after where my then boss’s house in Kew doubled in price over a few months; so it was crueler than making a mistake in that I even knew what I should have done but still couldn’t.
When I had a wife and so could afford to buy later (on combined salary only with house prices having raced off in the interim) we fixed the mortgage at ~5% for 5 years, in 2006. I didn’t know what I was doing, having never done anything like it before, but my logic at the time was that mortgage rates were at their lowest for decades. So as the shiny suit from the bank said while showing me the printout of all the pretty graphs ”Obviously they can only go up from here if anything changes” They proceeded to fall until today.
So whenever I think an investment situation is clear these days, I remember that. It was just inconceivable back then that the central bank rate could be more-or-less zero, when I still had nightmares in my head from my parents were paying ~17% interest on their mortgage in ’89. You just never know what can happen next, all you can do is be prepared to best manage whatever is thrown at you.
Regarding the many comments about saving a large deposit to buy. This is a true story, a friend of mine and his girlfriend in the late 1990s knew the house they wanted to buy it was in road of similar properties. They decided that they didn’t want a 95% mortgage the norm at the time, instead they decided to save 25% of the price and have a 75@% mortgage. They lived with their parents for 6 years and saved the 25% deposit. However when they decided to buy one of the houses they had increased in value by the amount they had saved they went ahead and bought the house. The put down their deposit and took out a mortgage for the rest. The mortgage was exactly for the same amount of money the house was selling for 6 years earlier (in effect a 100% mortgage of the earlier selling price). Clearly it would have been better to have bought the house with a 95% mortgage six years earlier.
It’s an interesting article. I personally have been on both sides of the fence. I bought a house in Spain where I thought I had settled as an expat working in banking back in 2006- just before the bottom dropped out of the market. And it was no small house with no small mortgage. I bought again in 2013 and saw the house increase in value by 50% in the following year (since then it’s continued to rise).
The key point I’ve learned is that property is not a lot of fun when it’s not a liquid asset, and property can get very local (non fungible) and very illiquid very quickly. At that point, if you’re not in the right place/right space, it can be a very depressing prospect, otherwise, I guess you can ride it out. Thankfully, I earned good money throughout the crash and Euribor dropped to the floor. This meant my life choices were not too restricted: as it happened, I met someone, was able to move back to London, get married etc. Without those saving graces, I could have got really stuck which would have been unthinkable. Even still, the stress was unbearable at times, and I genuinely thought at times that there was a good chance of bankruptcy.
I bought my second house cash (at least I had the cash, but chose to take a 20% mortgage to remain liquid) after 6 years of saving hard and living like a monk.
Sadly, i think the property market encourages people to take vast risks, and heavily punishes a few of those that do while handsomely rewarding the majority. In hindsight, I’d say rent and invest to build up a comfortable cushion so that you don’t take the kind of liquidity risk that could seriously affect your options in life. However, it is easy advice to give and difficult to follow, particularly when your peers are making capital gains a multiple of your annual income.
My daughter has just taken a 10 year fix for 2.49% to purchase a house, the typical property (house) in this area rents for around 4% to 5% of its value. IE it is cheaper to buy then rent, in this area (south of England) , price rises have been roughly inflation, on an economic basis buying is attractive and the cost of buying is set at today’s level, this is a sensible course of action.
The London situation is very different from the rest of the country and are London properties in a bubble ? Who knows ?
Speaking as someone who has had to decorate a house from bare plaster after we got rid of the charming 70s decor left to us by the previous owners, the old canard about being able to decorate is greatly overrated!
We have ended up with fairly neutral shades, so I can’t help buy wonder why it is considered such an improvement on hanging the odd poster/painting in a rented property and then tidying up with some fine filler and a magnolia tester pot before moving out 😉
Rambling aside, being able to exercise your own taste isn’t cheap if any sort of contractor is needed when you’re ‘improving’ your new home. For example, we will have spent roughly £650 on a tiny bedroom by the time it’s finished (plasterer, joiner to hang new door, new door, plumber to replace ancient radiator, new radiator, carpet, paint, window coverings). Throw in a few items of flatpack furniture and a sofa bed and that’s £800 for a shoe box room, even with shopping around, using trade (bulk) materials, trips to Ikea for bargainous bits etc.
At least in a rented property, we’d only have to consider the trip to Ikea!
I thought it worth mentioning as the buy/rent decision is so often painted as a binary choice, whereas most people will probably make similar choices to ours, leading to significant extra spend in any home older than 10-15 years old.
One aspect to the financial considerations which I haven’t seen discussed is the effect of crystalising the cost:
When you buy, you fix the ‘rentable value’ of the house at that price, ok interest rates can vary (and thus you need to account for being able to afford much higher rates than at present), but assuming inflation keeps ticking over and your wage will more or less keep up with inflation (without requiring promotions etc.), then over a typical 25-30 year mortgage term your spending power will out-grow the cost.
By contrast, rents grow at least in line with inflation, in reality often outstripping it. In addition, increases in interest rates will likely push your landlord to increase your rents by just as much their mortgage payment has. Thus if you rent your home over the same period, the proportion of your income which you spend on the roof over your head will remain the same.
In summary, all else being equal (wages, inflation, interest rates) the home buyer will be better off in a few decades time due to the inexorable force of inflation.
p.s. Ok, I admit there is the exception of the long-predicted Great House Price Crash. All I will say is, as a non-home owner, I’ve been waiting for at least 8 years since the crash and all we’ve seen is the situation get worse. I’m not holding my breath.
It seems like the biggest and best reason to buy a house (from a financial perspective) is that house prices can go up, and you can get very cheap leverage.
But this also seems like the biggest and best reason not to buy!
I think this is perhaps a debate where simple mathematics can only go so far. Some will prefer the security and feeling of ownership that comes with having your own house, while others are happy to potentially lose a bit of money over the course of a lifetime if it gives them the freedom and flexibility to move around provided by renting.
One thing I’m still yet to get my head around construct of the “property ladder”. I am still none the wiser as to why owning a first property would put someone in a better position to own their second. Especially when you spend so much on fees, commission, stamp duty (potentially, on the buying end) each time you switch property. Perhaps someone can explain this for me?
@RumTumF1 — I’d say the concept of the property ladder is now a relic of a previous era of high inflation. 🙂
When inflation was high, house prices were increasing but so were wages. The net result was that if you bought a small starter home with a big mortgage, in a few years you’d be earning a lot more, your house would be worth more, and inflation would have eroded away much of the ‘real’ value of your mortgage. You were thus better-placed than somebody who had enjoyed the salary increases but hadn’t also got the boost from their property going up in value, and hence wasn’t moving up the ‘ladder’.
Today the increasing earnings part of the piece isn’t there, and nor is the inflation whittling away the real value of mortgage debt. The house price increase part is there of course, but all that has effectively done is move the ‘rungs’ further apart, which seems unsustainable.
(Keep in mind I’ve long been bear-ish — and wrong — about house prices for this and other reasons though!)
I am not saying the ‘ladder’ concept was some good and natural state of how things should be with property, incidentally. I am open-minded as to that, but I could very easily argue it was another one-off / one-time anomaly that helped make so many of the baby boomer generation rich.
Just jumping into this site, loving the UK slant. I’ve got a couple of BTL properties and a residential. The combined return on (leveraged) cash has been pretty amazing. Back of envelope – 5% rise in value on 30% deposit is still 16.6% return, add in say 5% rent and you’re doing pretty well. Double that rise because you’re in London and in a couple of years (months if you redevelop) you can end up with a cashflowing property and your original deposit in your pocket. Obviously S24, increased rental stress tests and changes to PPR relief has changed the landscape massively.
The BTL money train may have slowed down but owning a residential IMO is still a great idea if at all possible. Hardcore landlords will end up passing any upkeep costs onto their tenants anyway.
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The part of the article that appealed to me the most is the idea that by owning my own home, I won’t have to worry about having landlords and that I can repaint, redecorate, and remodel to my heart’s content. That’s actually the reason why I really wanted to buy a home since I was in college. I love redecorating, and if I’m renting, I have to ask for permission before I touch anything. Thanks for the article. It’s actually quite encouraging.