22 - A house - 50/50 what to do..

knightsy

Hi all,

I have the opportunity to purchase a house jointly with my cousin. (We get on very well)

I'm 22 and can see the positives of getting on the ladder, and not lining a landlords pocket but am concerned on being tied down too young? We could get a 3 bedroomed place and rent the extra room to a friend for about £200 a month.

If in a couple years time I had a panic and decided I wanted to travel the world and sell would it have been worth while money wise or am I better just renting because of all the fees involved in buying and the mortgage?

Even if we get a good deal I guess I am risking house prices dropping 10% compared to now in two years time?

david29dpo

No one can answer your question but most, including me, think prices will still drop to something like 3 times the average income plus 10%. in the FTBs market.

Procrastinator333

IMO opinion i think that is a bad idea -

1) Many people talk about renting being wasted money, but don't forget for every £1 you borrow, you will pay £2.5 ish in interest - why is interest not seen as wasted money too?

2) Work out the costs of buying and selling. Assume it is under stamp duty threshold for now, you will still pay maybe £3k in fees on buying it and then another £5-6k on selling it. So now you need prices to rise just to break even!

3) while nobody knows what will happen it is certainly possible that prices are another 10%-20% lower in 2 years. Would you even be able to sell the house then? Remember you have to pay back the difference between the sale price and mortgage price or the bank won't let you sell the house.

WillowCat

I think the chances of the house being worth more in 3 years time than it is now is minimal.

Even a 'cheap' house is expensive in terms of solicitors fees, estate agency fees, valuations, mortgage agreements etc. Are you looking at a house which will be in the stamp duty bracket?

In a strongly rising market there's scope for doing what you're suggesting - especially if the purchasors agree on an exit strategy in advance.

In your case, what would happen if, for example, you do want to go travelling, but you'd have to force your cousin to sell at the same time, perhaps you both lose your deposit AND have to fund the selling fees and perhaps a mortgage shortfall? What if your cousin prefers to 'ride it out'?

Sorry, but if you have concerns now it's better not to do it. Put your money in the landlords pocket - you'll not be liable for more than the monthly rent. If you put your money in the banks/solicitors/estate agents pocket then you're setting yourself up to be potentially liable for more than the monthly mortgage payment.

princeofpounds

There are two aspects to your question - financial and lifestyle.

The latter we cannot really answer for you as it depends on individual circumstances, but the likelihood is at your age you will want the mobility at some point - for instance, should you get a new job or lose an old one, find a partner, have a child, get wanderlust or whatever. It is quite a burden in some ways as well as a freedom in others.

Houses are a particular burden when you need to constantly be servicing mortgages in particular. So I would suggest that you consider carefully that you will feel relatively free only when you are either renting or you have very little outstanding debt on the house.

You also need to consider that a variable rate mortgage also prevents you being mentally free, as you will be hostage to interest rate conditions you have to constantly watch.

Finally there is the question of maintenance. This can be a pain at times yet quiet for long periods. This can be largely contracted out for a cost but you will still have to monitor the activities of your agents from time to time and be available to make decisions.

As for financial, if you repeat lines about ladders and landlords pocket's you need to think a little harder about how markets works. Yes, rent is dead money. But so is interest paid on a mortgage - you are basically renting the part you don't own from the bank. Although one can be cheaper than the other at a given time it does not mean it will stay that way for many years.

Also, there is no guarantee that property will be a ladder for some time. That requires continually increasing house prices and inflation to eat up the real value of the principal of the mortgage whilst having manageable interest payments. For instance, our parent's generation got pretty rich on property largely because they bought it before a couple of periods of high inflation. Although interest rates were higher (and so they like to say they had to struggle!), the reality is that if you can manage the first couple of year's payments at 5-10+% inflation rates then servicing the mortgage quickly becomes very very easy. At low inflation rates the real financial stress of the first couple of years payments stays higher for much longer, even a decade. Most people are unfortunately pretty ignorant of concepts like nominal vs real pricing and the real cost of debt so debates are rarely informed on this issue.

Add to this the fact that property is currently falling in value and looks likely to lose some more (who knows how much?). This is particularly dangerous in property because of a concept called gearing. If you put down a 10% deposit, and the house falls in value by 15%, you haven't lost 10% of your money, you have lost *150%*. Borrowing amplifies the returns and losses available on equity in real estate, for a cost. This is the core of the concept of a property ladder and the buy to let business model and it works in both directions. Again, many people are pretty ignorant of this.

Having said that, there is likely to be a point sometime in the not too distant future where buying will make a lot of sense. Central banks are likely to keep interest rates artificially low for sime time, and you might be able to lock in a good interest rate for some period of time. Property prices will continue to fall but will eventually bottom (and they rarely do this quickly so you won't have to rush). And artificially low interest rates may lead to a period of high inflation... Something of a replica of the favourable conditions our parent's generation have enjoyed at a couple of points in the past. There is no guarantee this will happen, or that it will happen simultaneously though, but it's a potential scenario. The other is continued deflation, which is pretty nightmarish for people borrowing to own assets!

So although I have counselled you to think hard about the possible pitfalls, the point I am making is that despite the risks it is not always the wrong decision to buy. The key is to understand the risks, and only take on those you are willing and able to handle.