Reminder: buying a house is a financial decision

pickle

frugal_dougal wrote:

That's impossible to guage. If you delay buying for 5 years then you will be 5 years older when your mortgage is finally paid, and if you are say 60 by this time you will be really wishing you had that rental money back again.

I'm afraid it's a fact that the longer you leave buying a house the harder it gets.

Not necessarily. I'm old enough to remember when the crash came last time around in the early 90s. In my country of origin the impact was not as severe but i believe that the UK suffered terribly and many people lost a lot of money which took them years to recover from. Delaying by 5 years could save you a lot of money and heartache. Sure, in the mid 90s it would have been a great time to buy but now it could be disastrous. If i had bought in the last year i'd be in negative equity already.

Woby_Tide

why would you be selling your house so soon though, it's only negative equity if you sell, as the topic states it's a financial decision, making it based on short term gains is the wrong way to look at it

dippy

It's true that it's not a good idea to leave it too late. However, people don't need to feel pressured to buy in these conditions.

Looking at the cost of renting versus servicing the interest on an interest only mortgage is a good place to start when deciding what to do. We have anecdotal evidence that in a few places rents are less than interest and I guess it's more widespread than this considering the increased reposession from BTL landlords and the big dip in BTL lending from the Council of Mortgage Lenders during the last few months.

It costs marginally more to pay the interest on an IO mortgage than to rent. Now, we can easily add maintenance costs of the property into the equation. No ground rent for flats, no new roof, no new boiler, no new white goods to replace when you're renting. Which means the cost of buying, maintaining the property and servicing the interest (BMS) is even more.

It means that renting is actually saving you money over BMS. The difference between the cost of BMS and renting means that more money is going towards a bigger deposit in the future instead of going into the bank's pockets or the pockets of tradesmen, dixons, etc. At the start then, more money is going towards your cash fund (future equity in your future house) than would be going towards your repayment in a repayment mortgage and thus your equity. If you just believe "renting is dead money", that's not very true. The landlord is actually helping you towards payments into your "virtual mortgage". That's where the negative cashflow of new landlords comes in.

The only advantage of a repayment mortgage is that the interest reduces over time whereas rents may stay static, go up, or even down. However, you're earning interest on your cash. So, it's not good in the long run but it takes quite a few years before the meager repayments you're making at the start of a repayment mortgage starts to make a dent into your debt and in the meanwhile, the interest you're earning on your cash fund (no interest on your equity in your mortgage, thank you very much) mitigates this advantage.

The last remaining point is the huge debt that you've just undertaken to buy a house and that you hope will pay off when you have to sell the house, maybe for upgrades. Here, it's pure speculation. If you believe you can easily borrow hundreds of thousands of pounds to sell X years into the future to make a profit, then I applaud you. At the end of the day, people should not feel pressured to buy and undertake such huge debts right now. Just wait and see.

dippy

Woby_Tide wrote:

why would you be selling your house so soon though, it's only negative equity if you sell, as the topic states it's a financial decision, making it based on short term gains is the wrong way to look at it

Equity means the remainder of the value left in your house (your asset) after you've taken off your debt. The moment the market value of your house is below the price you've paid minus what you've repaid, you're in negative equity. You have to decide whether you want to stay at the current place until the market recovers or you want to cut your losses and sell. While in negative equity, you can only get unsecured loans which have higher interest rates than secured loans on your positive equity for example.

I believe that if people are in negative equity, they've just got to sit tight. But for people who have got positive equity, they're seeing their investment go down in value. They can convert that diminishing equity (what I call "pretend" money) into hard cold cash, withdrawing cash from the market, and leave it for the poor fools who are going to overinflate the market in the future to put money back in. It's a zero-sum game in the end. Go into the stock market and ask investors who've bought low not to sell in a market that's risen and is now falling.

frugal_dougal_3

pickle wrote:

Not necessarily. I'm old enough to remember when the crash came last time around in the early 90s. In my country of origin the impact was not as severe but i believe that the UK suffered terribly and many people lost a lot of money which took them years to recover from.

And those of us who held out are doing very nicely now, thank you.

dippy

frugal_dougal wrote:

And those of us who held out are doing very nicely now, thank you.

And people who sold at or near the peak of the last crash and bought when prices stopped falling are even better off.

frugal_dougal_3

Then we come back to the short term/long term debate again, and personally I don't think it was necessary to get out of the market altogether to make a good profit.

I don't dispute that it's possible to make a quick killing if you are prepared for the disruption, but for most people there are many reasons why their house is a "home" and not just a pile of bricks. If they are happy then the monetary value of their house is of no significance.
Also if you have negative equity but don't want to move it does not matter.

If you ask around you will find many people who bought houses in the early 1970's for between £3k and £6k that could easily now sell for £250k or more. This timescale obviously straddling the poor years between 1989 - 1993 (ish).

So it really depends on your attitude. Is it a house or is it a home?

jezza1O1

Interesting point raised at the top of the thread before things plummeted into the usual line from the 'haves', unusual for a home owner to consider the plight of the young generation of 'have nots' - so thanks for your thought moneymatt.

My trouble arises over the word 'decision' in the opening title. You all make it sound like FTBs are sitting at home thinking about whether to go for it or not. Id like to suggest that we simply have no choice. What was the recent figure thrown around by the press, 9 out of 10 towns too expensive for FTBs?

Me and my partner are both grads with good paying jobs and buying a house isnt a matter of choice, it's just an impossibility. We prob save about £1500 a month between us but prices just keep outstripping our deposit...

Dont believe me? A quick check of the Reuters website throws up the top 2 headlines on just this subject:

Mortgage approvals plunge to six-year low
25 FEB 2005 15:05 BST
LONDON (Reuters) - Loan approvals for home purchases plummeted to their lowest level in six years in January pointing to a cooling housing market in coming months, the British Bankers' Association says.

First-time buyer drought could slow market
25 FEB 2005 15:12 BST
LONDON (Reuters) - Fewer first-time buyers entering the market spells trouble for the liquidity of the housing market as a whole, the Council of Mortgage Lenders said on Friday.


The reality is that there is a generation who dont have the luxury of making such a choice between buying and renting. Dead money? Well Im getting a roof over my head for my rental fee so it's not a complete waste of cash lol! And as said above, I get to live in a luxury flat in the area of London I enjoy living in. Why would I want to convince a bank to lend me 5 times our combined salary to buy a 1 bed studio previously occupied by crack dealers...

Prices have got to come down if society believes that people have a right to own homes. It is my belief, that like in many European countries, home ownership will be a thing of the past and property will be controlled by an older generation of people who got lucky simply by buying a family home at a fair price - something that I will never experience.

frugal_dougal_3

But jezza101 you DO have a choice and you are exercising it.

You choose to live in London in a luxury flat.

The £1500 you are saving would easily pay the mortgage on a house in another city or in the provinces.

Nobody has everything unless their name is Beckham, so go on enjoying your life we don't all want the same thing.

moneymatt_2

The reason I started this thread is that it concerns me that some people don't fully understand the financial side of housing. That's not meant to be patronising - I've only gained knowledge from working in financial services. But without that knowledge, it's easy for people to be conned by people with a vested interest or just misled by well-intentioned, but not necessarily accurate, advice like 'renting is dead money'. I'm not saying that it's a mistake to buy right now (though that's my own opinion), but certainly I think anyone needs to fully understand what they're doing before taking the risk.

Re the 'renting is dead money' argument, here's another (hopefully clearer way of thinking about it):

Let's say you have £1000 a month to spend on housing. Option 1: You could rent and pay, say, £600 month. That £600 could be thought of as 'dead money' as it isn't buying you anything. The other £400 you put in the bank earning 5%. In 5 years, you'll have savings of 27k.

Alternatively, Option 2: you could buy and pay £900 month on the mortgage, with the other £100 being spent on maintenance, white goods, insurance, etc. But in the first 5 years, around £650 of the £900 payment is interest on the loan. That money isn't paying off the amount you borrowed, hence it isn't buying you anything, hence it's 'dead money'.

In 5 years time (and of course these are just illustrative figures / timescales - I'm not saying that that's when prices will reach their lowest), if you've taken option 1, you'll have 27k to put on a deposit on a house that is now lower in price. If you've taken option 2, you'll have paid off £14k of the loan. But if prices have fallen, some or all (or possibly more) of that could have been lost by the falling value.

If you've taken option 1 you can now put down a big deposit on a house with a more realistic value. That means that your mortgage payments will be a lot lower or, even better, you can pay the same amount but shorten the term of the mortgage to save thousands in interest (and also negate the fact that you've waited a few years to buy). Because houses (at any time) involve large amounts of money by most people's standards and because mortgages are often over a long term, the effects of paying over the odds can be massive. £20k extra at 6% over 25 years will actually cost you almost 40k due to the interest.

Housing isn't just a financial decision - of course, there are lifestyle and emotional aspects too. I thought about selling my house and renting for a while to make some profit. But I don't really want the hassle and I have some emotional attachment to it. However, like it or not, there is a financial side. You might not want to make a quick buck, but you certainly don't want to lose it either.

I had intended this post to be more neutral - i.e. these are the issues but make your own decision. However, I've not really hidden my own viewpoint too well! But what I would say is, if you're still thinking of buying, do some research. At least then, you can make an informed decision. There are a couple of useful tools for doing the Option1 vs Option2 comparison above with your own figures:

http://www.fool.co.uk/school/calculators/savingscalculator.asp?mode=one&monthly=400&year=5&lump=0&rate=5&submit=calculate

and the mortgage schedule at:

http://www.paragon-mortgages.co.uk/mortgagetools.nsf/freedownloads