Rent is the real Financial Millstone.....

HAMISH_MCTAVISH

I've noticed that our resident bear population are fond of using the term "millstone" to describe a mortgage.

Examples:

Doctor_Gloom wrote: »

unable to buy their own home. Or only being able to do so with a financial millstone around their necks.

Pssst wrote: »

May i ask if you have a millstone, sorry, mortgage?

abaxas wrote: »

The millstone of a mortgage

Now, over the course of an adult lifetime, a typical person would need to house themselves for around 60 years.

The average rent is round £700 per month, and so the cost for 60 years (not adjusted for inflation) of rent is around £504,000.

Whereas the cost to buy the average house is around 160K, plus another 120K or so in interest, for a total of £280,000 in expenditure. But as you end up owning the asset, the true lifetime housing cost is just £120,000.

So even the most shortsighted of bears should realise that at over 4 times the lifetime housing cost compared to buying, rent is the true "financial millstone" around the neck of the young today.

Generali

A number of years ago, The Economist looked at what had been the best and worst investments over time. The best by quite a long way was to buy your own home. The worst by some distance was BTL!

Procrastinator333

However delaying the point of purchase in times of stagnation or falling prices can be hugely profitable. By saving that deposit you gain access to lower interest rates more quickly. By waiting for that first purchase, you can potentially skip 1 or 2 rungs on the ladder therefore avoiding all of the costs of buying / selling on those steps. For me, now is the time to wait, save and build that deposit.

But long term, can't disagree. I dont think I have ever seen any kind of worked example that can really justify lifetime renting - unless perhaps the person in question is always moving for work.

The other factor that makes home ownership pay over the long term is taxation. If you had £200k in the bank and were debating between buying and renting. You pay tax on your interest income, but get no tax relief on your mortgage interest. That makes a big difference.

HAMISH_MCTAVISH

Generali wrote: »

AThe worst by some distance was BTL!

Although I'm not personally a fan of BTL, I still can't see how having someone else buy you an asset, or even part of an asset, is ever a bad investment in the long term.

Even if you subsidise the costs by 10% or so, you still end up with an asset you've paid just 10% of the value for.

THE_GHOULISH_CODPIECE

I've said it before and I'll say it again, rent is dead money. Why pay off your landlords mortgage when you could pay off your own. That ghoulist website HPC has been going now for 8 years with many of the resident ghouls having posted on there since then. Since they have they have paid off almost 1/3 of their landlords mortgage. What a waste of money. However it's understandable as the HPC ghouls have never been known for their intelligence nor financial nuance which is why the majority are on the dole.

dkmax_2

Procrastinator333 wrote: »

However delaying the point of purchase in times of stagnation or falling prices can be hugely profitable. By saving that deposit you gain access to lower interest rates more quickly. By waiting for that first purchase, you can potentially skip 1 or 2 rungs on the ladder therefore avoiding all of the costs of buying / selling on those steps. For me, now is the time to wait, save and build that deposit.

Everyone needs to assess their own circumstances. Remember that while you are waiting, you are probably paying rent. You are also running the risk that base rates could increase while you sit it out and erase any LTV advantage. Small interest rate rises over the lifetime of the loan can be more influential than fluctuations in the initial price. In other words, you can wait for that 20% fall but you may end up paying more over the lifetime of the loan.

Even though I'm very bearish, I can still see buying a house now as making sense in certain circumstances.

Kohoutek

HAMISH_MCTAVISH wrote: »

Now, over the course of an adult lifetime, a typical person would need to house themselves for around 60 years.

The average rent is round £700 per month, and so the cost for 60 years (not adjusted for inflation) of rent is around £504,000.

Whereas the cost to buy the average house is around 160K, plus another 120K or so in interest, for a total of £280,000 in expenditure. But as you end up owning the asset, the true lifetime housing cost is just £120,000.

So even the most shortsighted of bears should realise that at over 4 times the lifetime housing cost compared to buying, rent is the true "financial millstone" around the neck of the young today.

I'm sure you're right in the very long term, but that's a very oversimplified model – you don't include stamp duty, conveyancing related fees (most people will move house several times in their lifetime) or how rent would be slightly offset from interest from savings (that would be your deposit if you weren't renting). Also, if you're basing your mortgage interest figure on current interest rates, that may not be a very good guide for the next 25 years.

Certain types of repairs, buildings insurance and service charges are also inclusive within the rent you pay to a landlord, which obviously aren't inclusive within mortgage payments if you own your own property.

Couple of questions:

Are you saying buying is the right decision if you're on an interest only mortgage too?

Do you include owners occupiers with long leases when you say "end up owning the asset" or just freeholds? Even a 99 lease is still a wasting asset.

dkmax_2

THE_GHOULISH_CODPIECE wrote: »

I've said it before and I'll say it again, rent is dead money.

Mortgage interest is also dead money so that argument doesn't get anyone very far.

If you can time it properly, there is no reason why you cannot minimise your total outlay with a combination of a rental period with a mortgage period. The bears just think that they need to wait a little longer but they do carry risk. Likewise the bullish owners carry a risk of negative equity if they need to move. Each circumstance needs analysis and perhaps the benefit of hindsight.

Lakelady_2

Freedom - thats the price of not owning your own home. My daughter 22 has no intention of buying. There`s alot more to owning that just paying the mortgage.

Procrastinator333

dkmax wrote: »

Everyone needs to assess their own circumstances.

I don't think bull or bear would disagree with this.

dkmax wrote: »

Remember that while you are waiting, you are probably paying rent.

Really? I never would have thought of that. Or perhaps that is a fundamental part of waiting to accumulate a higher deposit. Until you are up to something like 20%, you suffer penal interest rates. For me, the interest on the property we are in (not including capital repayment) would be in excess of the rent we pay.

dkmax wrote: »

You are also running the risk that base rates could increase while you sit it out and erase any LTV advantage.

So I'm assuming you area suggesting I should look at fixed mortgages (otherwise any rise impacts me as much whether I buy today or in a year or 2). Fixed rates have even greater penal interest rates. Plus if rates do rise, that is only going to act as downward pressure on house prices. It would suit me financially to see rates back at 5-6%. Though I don't think it is going to happen.

dkmax wrote: »

Small interest rate rises over the lifetime of the loan can be more influential than fluctuations in the initial price.

Yes, but unless you take 5 or 10 year fix, you will still be exposed.

dkmax wrote: »

In other words, you can wait for that 20% fall but you may end up paying more over the lifetime of the loan.

Not quite sure where I said I was waiting for 20% falls. And again, unless you are suggesting people take the long term fixes, they are still exposed.

dkmax wrote: »

Even though I'm very bearish, I can still see buying a house now as making sense in certain circumstances.

I would not describe myself as very bearish. I think we will have a gradual decline for something like 6-24 months alongside reasonably high inflation. But I think the majority of the decline will be in real terms only. If rents are very high in your area, or if you have a high LTV deposit ready to go, then I think it is much more borderline. Perhaps you buy, perhaps not. Like you said at the start - everyone needs to consider their own targets, local rents, ltv situation etc etc.

Generali

HAMISH_MCTAVISH wrote: »

Although I'm not personally a fan of BTL, I still can't see how having someone else buy you an asset, or even part of an asset, is ever a bad investment in the long term.

Even if you subsidise the costs by 10% or so, you still end up with an asset you've paid just 10% of the value for.

They didn't include their methodology and it may be due to periods of controlled rents for example.

My guess is it's down to the costs of ownership (kitchens and bathrooms don't just fix themselves), the potential problems of bad tenants and that most of the time mortgage rates aren't 3 or 4%!