Psychology of Home Owning

Harry_Powell

JonnyBravo wrote: »

Whilst I take on board your points about extra costs which need to be accounted for, I just can't make the sums for lets say 50(?) years of renting any cheaper than 25 or even 30 years paying a mortgage.
How do you work out renting is cheaper?

(oh and no I don't view renting as "dead money" etc.... each scenario is different etc)

Sorry JB, I must have missed your post while replying to Chuck. I think most people understand the point I was making regarding comparable costs rent vs OO, at least during the lifetime of a mortgage (typically 30+ years if you move about a bit), but then state "well I'm mortgage free and effectively rent free, while you're still paying your rent".

What I'd argue is that the OO is now sitting on his/her 100% equity, which could be anything upto £500k for even 'normal' people, and apart from providing a roof over their head, that huge investment is simply not working for them. It's tied up and only available if they downsize (which incurrs more expense) or die and leave it to family members.

If someone rented and invested the equivalent of mortgage repayments, building maintenance, building insurance, mortgage redemption, valuation and arrangement fees, estate agent costs, stamp duty costs, conveyancing costs, etc. etc. into an ISA and invested in a decent spread of funds, they could be sitting on as large amount of money as the OO, but instead of it being in bricks and mortar it's held within a tax free environment where some of the investment income is then used to pay their rent and the rest can either be re-invested or spent on other items such as food or heating.

Someone with £500k in an ISA has more financial opportunities than someone with £500k in a house. The OO just gets his 'rent' paid from that £500k holding. The renter could get his rent, heating, lighting, food, council tax and other items paid for out of the £500k holding.

Your example of "50 years of renting compared with 25/30 years of paying a mortgage" misses the real comparison which is 50 years of renting vs 25/30 years of paying a mortgage and 25/20 years of sitting on unaccessible equity.

the_ash_and_the_oak

Harry_Powell wrote: »

Sorry JB, I must have missed your post while replying to Chuck. I think most people understand the point I was making regarding comparable costs rent vs OO, at least during the lifetime of a mortgage (typically 30+ years if you move about a bit), but then state "well I'm mortgage free and effectively rent free, while you're still paying your rent".

What I'd argue is that the OO is now sitting on his/her 100% equity, which could be anything upto £500k for even 'normal' people, and apart from providing a roof over their head, that huge investment is simply not working for them. It's tied up and only available if they downsize (which incurrs more expense) or die and leave it to family members.

If someone rented and invested the equivalent of mortgage repayments, building maintenance, building insurance, mortgage redemption, valuation and arrangement fees, estate agent costs, stamp duty costs, conveyancing costs, etc. etc. into an ISA and invested in a decent spread of funds, they could be sitting on as large amount of money as the OO, but instead of it being in bricks and mortar it's held within a tax free environment where some of the investment income is then used to pay their rent and the rest can either be re-invested or spent on other items such as food or heating.

Someone with £500k in an ISA has more financial opportunities than someone with £500k in a house. The OO just gets his 'rent' paid from that £500k holding. The renter could get his rent, heating, lighting, food, council tax and other items paid for out of the £500k holding.

Anyone making the decision to STR is effectively doing this (one of the things that puzzles me about discussion of STR as a concept is it only seems to be discussed in terms of selling then buying back in - rather than as a decision in itself - as my gparents have effectively done - to take the money back out of the house and make use of it in a different way). They were mortgage-free but now they pay rent!

silvercar

the_ash_and_the_oak wrote: »

Anyone making the decision to STR is effectively doing this (one of the things that puzzles me about discussion of STR as a concept is it only seems to be discussed in terms of selling then buying back in - rather than as a decision in itself - as my gparents have effectively done - to take the money back out of the house and make use of it in a different way). They were mortgage-free but now they pay rent!

But we hope your grandparents live to be 100, which could be a lot of years renting.

Harry_Powell

the_ash_and_the_oak wrote: »

Anyone making the decision to STR is effectively doing this (one of the things that puzzles me about discussion of STR as a concept is it only seems to be discussed in terms of selling then buying back in - rather than as a decision in itself - as my gparents have effectively done - to take the money back out of the house and make use of it in a different way). They were mortgage-free but now they pay rent!

Actually TAATO, you're the one who got me thinking about this when you mentioned your parents in an earlier thread. My initial stance was the same as most people 'rent free in retirement as an OO', but changed my mind when I saw your posts.

I've subsequently seen loads of posts on the pensions board from people inquiring into equity release schemes to subsidize their pensions. After all those years of paying down the mortgage and becoming rent free, they've realised that they actually can't use any of that money and end up effectively getting another mortgage.

The only thing that puts me off, and the reason I'm buying my own home is that we do not have any real security of tenure in this country. If we could rent for life, such as many do from their local authorities, and be allowed to change our decor as we please, then I'd seriously consider renting for good. We've had such a bad time with forced moves from rented accomodation that I just couldn't imagine facing that as a doddery pensioner.

Harry_Powell

silvercar wrote: »

But we hope your grandparents live to be 100, which could be a lot of years renting.

or lots of years sitting on equity they can't access... and stuck in a house that may no longer suit their needs if they have failing health (i.e. a traditional house when they need a bungalow, a bungalow when they need wardened accomodation).

Their equity may be enough to not only provide a roof over their heads, but also pay their utility and council tax bills.

cake21

JonnyBravo wrote: »

Whilst I take on board your points about extra costs which need to be accounted for, I just can't make the sums for lets say 50(?) years of renting any cheaper than 25 or even 30 years paying a mortgage.
How do you work out renting is cheaper?

(oh and no I don't view renting as "dead money" etc.... each scenario is different etc)

As you say each scenario is different...in my case I am a lodger near where I work and this rent is payable irrespective of whether I own property elsewhere. If I hadn't bought my house I would simply stay in the house that I lodge in at weekends as well, so *all* the OO related-costs are additional/unnecessary.

I appreciate that's an extreme example, but may be applicable to the first few years for a few other FTBs?

cake21

Harry_Powell wrote: »

The only thing that puts me off, and the reason I'm buying my own home is that we do not have any real security of tenure in this country. If we could rent for life, such as many do from their local authorities, and be allowed to change our decor as we please, then I'd seriously consider renting for good. We've had such a bad time with forced moves from rented accomodation that I just couldn't imagine facing that as a doddery pensioner.

Completely agree. I'd even do without being able to change the decor, but I have no sense of style anyway

HAMISH_MCTAVISH

Harry_Powell wrote: »

Sorry JB, I must have missed your post while replying to Chuck. I think most people understand the point I was making regarding comparable costs rent vs OO, at least during the lifetime of a mortgage (typically 30+ years if you move about a bit), but then state "well I'm mortgage free and effectively rent free, while you're still paying your rent".

What I'd argue is that the OO is now sitting on his/her 100% equity, which could be anything upto £500k for even 'normal' people, and apart from providing a roof over their head, that huge investment is simply not working for them. It's tied up and only available if they downsize (which incurrs more expense) or die and leave it to family members.

If someone rented and invested the equivalent of mortgage repayments, building maintenance, building insurance, mortgage redemption, valuation and arrangement fees, estate agent costs, stamp duty costs, conveyancing costs, etc. etc. into an ISA and invested in a decent spread of funds, they could be sitting on as large amount of money as the OO, but instead of it being in bricks and mortar it's held within a tax free environment where some of the investment income is then used to pay their rent and the rest can either be re-invested or spent on other items such as food or heating.

Someone with £500k in an ISA has more financial opportunities than someone with £500k in a house. The OO just gets his 'rent' paid from that £500k holding. The renter could get his rent, heating, lighting, food, council tax and other items paid for out of the £500k holding.

Your example of "50 years of renting compared with 25/30 years of paying a mortgage" misses the real comparison which is 50 years of renting vs 30 years of paying a mortgage and 15/20 years of sitting on unaccessible equity.

I see where you're coming from with this but the reality falls far short of your idea.

The fact is that rent, for most people, in most parts of the country, is between 80% and 90% of the cost of a full repayment mortgage.

So if you rent, you can only save between 10% and 20% of the costs of the monthly mortgage payment to invest. As the average rent is around £800, call it between 80 and 160 a month. Add another grand a year for money not spent on maintenance, and another 500 for insurance.

So call it somewhere around 3K or 4K a year. Plus a deposit, let's say another 30K to be generous.

So, investing your 30K deposit today, in reasonably low risk, safe funds generating a 4% return, and adding 3K a year to it for 25 years, would give you back roughly 210K.

How much do you think a house will cost in 25 years? Or rent?

If inflation in rents and house prices matches the last 25 years..... You're absolutely screwed with such a small sum.

Even if prices only triple in nominal, not real, terms over the next 25 years, then you'd have to pay £26,000 a year in rent, on a £475,000 average house. So your 210K wouldn't get you very far at all...... About 8 years rent at that point, only leaving you with another £300,000 or so to find to cover rent until you die...

Genius plan.:rolleyes:

Harry_Powell

HAMISH_MCTAVISH wrote: »

I see where you're coming from with this but the reality falls far short of your idea.

The fact is that rent, for most people, in most parts of the country, is between 80% and 90% of the cost of a full repayment mortgage.

So if you rent, you can only save between 10% and 20% of the costs of the monthly mortgage payment to invest. As the average rent is around £800, call it between 80 and 160 a month. Add another grand a year for money not spent on maintenance, and another 500 for insurance.

So call it somewhere around 3K or 4K a year. Plus a deposit, let's say another 30K to be generous.

So, investing your 30K deposit today, in reasonably low risk, safe funds generating a 4% return, and adding 3K a year to it for 25 years, would give you back roughly 210K.

How much do you think a house will cost in 25 years? Or rent?

If inflation in rents and house prices matches the last 25 years..... You're absolutely screwed with such a small sum.

Even if prices only triple in nominal, not real, terms over the next 25 years, then you'd have to pay £26,000 a year in rent, on a £475,000 average house. So your 210K wouldn't get you very far at all...... About 8 years rent at that point, only leaving you with another £300,000 or so to find to cover rent until you die...

Genius plan.:rolleyes:

You didn't add in the cost of refinancing your mortgage (valuation fees, arrangement fees, 'administration' fees and possible redemption fees), or do you imagine that you'd have the same mortgage product for the whole 30odd years term?

You didn't add in the costs of selling, then buying, then selling, then buying as people move up the housing ladder, or do you imagine that you'd have the same FTB 2 bed apartment for the whole of your life?

Why can I only invest in 'low risk' products giving 4% (I could get better than that in a cash ISA until just recently, in fact I think my current account was paying more than that before the credit crunch!). You can also invest your money in a diversified portfolio of both low, medium and high risk bonds and equities, even a property fund if you like. History has shown that the stock market beats all other investments long-term, including property. In the last 6 months we've seen, what, 25% or more increase in stock market funds? What increase have we seen in property values in the same time?

Before you do the mocking :rolleyes: bit, I'd suggest you engage brain before keyboard....

lostinrates

Harry_Powell wrote: »

A

The only thing that puts me off, and the reason I'm buying my own home is that we do not have any real security of tenure in this country. If we could rent for life, such as many do from their local authorities, and be allowed to change our decor as we please, then I'd seriously consider renting for good. We've had such a bad time with forced moves from rented accomodation that I just couldn't imagine facing that as a doddery pensioner.

Agreed: of working age and in less active old age this would be a concern: but in early/mid retirement I'd see it as oppertunity: if I didn't have animals etc I think a great retirement would be six month rentals in different places: ironically, six month lets are less easy to find in many other places!