I've been researching mortgages for weeks and only just realised this.

SneakySpectator

The principle amount you borrow remains the same through the length of the mortgage and doesn't increase with inflation... Rent will always increase with inflation. 

Yes I'm subject to interest rate fluctuations but since 1992 the interest rates have remained below 6% and assuming we don't have another covid situation on our hands and interest rates don't go back to the 10% - 12% figures seen in the 70's and 80's. It means my mortgage payments (rent) decreases in real terms over time, as my salary increases. 

I don't have a high flying job but on average my salary increases by about 6% per year, but the mortgage I'm looking at is 3.99% fixed for 5 years, then after the 5 years I'll remortgage for another fixed term.

But when renting, you are virtually guaranteed to have ever increasing rent costs and you're building no equity in your home at all... It feels like wasted money.

Assume you get a 5 year fixed 4% interest rate mortgage, well my salary will increase *roughly* by 6% each year, that's an increase of 33.82% (compounded) increase in salary but my mortgage is still the same in pounds.

I feel like I've just had a light bulb moment... Here I am renting social housing which goes up 5% per year instead of just getting a mortgage, paying less and building equity... !!!!!! am I doing 🤔

Hoenir

SneakySpectator said:

Yes I'm subject to interest rate fluctuations but since 1992 the interest rates have remained below 6% 

News to me, Bank of England Base Rate was 7.5% in 1998 for example. 

DullGreyGuy

SneakySpectator said:

The principle amount you borrow remains the same through the length of the mortgage and doesn't increase with inflation... Rent will always increase with inflation. 

Yes I'm subject to interest rate fluctuations but since 1992 the interest rates have remained below 6% and assuming we don't have another covid situation on our hands and interest rates don't go back to the 10% - 12% figures seen in the 70's and 80's. It means my mortgage payments (rent) decreases in real terms over time, as my salary increases. 

I don't have a high flying job but on average my salary increases by about 6% per year, but the mortgage I'm looking at is 3.99% fixed for 5 years, then after the 5 years I'll remortgage for another fixed term.

But when renting, you are virtually guaranteed to have ever increasing rent costs and you're building no equity in your home at all... It feels like wasted money.

Assume you get a 5 year fixed 4% interest rate mortgage, well my salary will increase *roughly* by 6% each year, that's an increase of 33.82% (compounded) increase in salary but my mortgage is still the same in pounds.

I feel like I've just had a light bulb moment... Here I am renting social housing which goes up 5% per year instead of just getting a mortgage, paying less and building equity... !!!!!! am I doing 🤔

That depends. 

Mortgage is only one component of the cost of owning a property as you will also be taking on maintenance, service charges (if leasehold), insurance, fixtures & fittings (which may or may not be covered in rented) etc. Living in central London moving from rented to mortgage increased the monthly cost when comparing rent to mortgage alone plus we have a £3k service charge and have to pay to replace the roof etc. 

Certainly the general idea is renting is "dead money" and ownership is better, but it's more complex. Our neighbour paid £750,000 for their home a few years ago, they are trying to sell now and have it on the market for £675,000 and have had no offers. So in addition to the £75k in property value loss, there was also the £27k or so of Stamp duty, plus legal and removal costs. No idea what their mortgage is but they are down £100k even before that whereas you can just hand in your notice and walk away from your rental.

SneakySpectator

DullGreyGuy said:

SneakySpectator said:

The principle amount you borrow remains the same through the length of the mortgage and doesn't increase with inflation... Rent will always increase with inflation. 

Yes I'm subject to interest rate fluctuations but since 1992 the interest rates have remained below 6% and assuming we don't have another covid situation on our hands and interest rates don't go back to the 10% - 12% figures seen in the 70's and 80's. It means my mortgage payments (rent) decreases in real terms over time, as my salary increases. 

I don't have a high flying job but on average my salary increases by about 6% per year, but the mortgage I'm looking at is 3.99% fixed for 5 years, then after the 5 years I'll remortgage for another fixed term.

But when renting, you are virtually guaranteed to have ever increasing rent costs and you're building no equity in your home at all... It feels like wasted money.

Assume you get a 5 year fixed 4% interest rate mortgage, well my salary will increase *roughly* by 6% each year, that's an increase of 33.82% (compounded) increase in salary but my mortgage is still the same in pounds.

I feel like I've just had a light bulb moment... Here I am renting social housing which goes up 5% per year instead of just getting a mortgage, paying less and building equity... !!!!!! am I doing 🤔

That depends. 

Mortgage is only one component of the cost of owning a property as you will also be taking on maintenance, service charges (if leasehold), insurance, fixtures & fittings (which may or may not be covered in rented) etc. Living in central London moving from rented to mortgage increased the monthly cost when comparing rent to mortgage alone plus we have a £3k service charge and have to pay to replace the roof etc. 

Certainly the general idea is renting is "dead money" and ownership is better, but it's more complex. Our neighbour paid £750,000 for their home a few years ago, they are trying to sell now and have it on the market for £675,000 and have had no offers. So in addition to the £75k in property value loss, there was also the £27k or so of Stamp duty, plus legal and removal costs. No idea what their mortgage is but they are down £100k even before that whereas you can just hand in your notice and walk away from your rental.

Sure that is true but I think the more extreme the price, the less the demand = slower more negotiated deals. The place I'm looking at is only a £130k flat, had a look and it's in decent condition, needs bit of love and decorating but will of course get a home buyers survey thing done first. 

Also the flat is located close to a university so is very popular among the buy to let folk so 20+ years down the line when I come to resell it it probably won't be too hard and there's a near constant supply of easy tenants coming into the area wanting student accommodation type flat. 

But even if it does lose money, let's say for some unknown reason I'm only able to sell it for £100k in 25 years (very unlikely but let's just assume). That's still £100k more than I'd have  if I were renting with no mortgage. 

Lastly regarding repairs, it's a very low maintained flat. Windows were installed in 2015, energy rating B, kitchen units are fine, bathroom is fine, boiler will probably need replacing in a couple years though as it's 10 years old so need to watch out for that. 

But other than than it really is just a basic 1 bedroom student style flat, no frills, nothing fancy, council tax band A. The mortgage + ground rent and service charges is a total of £558 per month, my current rent is £455 per month so £103 a month more per month but like I said my mortgage isn't increasing by 5% per year like my rent is... 

DullGreyGuy

Is that a repayment mortgage or interest only?

What happens if interest rates spike to 15%+ as they did in the late 70s?

It's a leasehold flat so what happens if the building suddenly needs major works? Plenty of stories of blocks having massive bills per unit, especially with ex-council where your rights to challenge costs are lower. 


In principle I ultimately agree, buying is likely to make more economic sense than renting outside of London but its not foolproof and there are plenty who stretched themselves to buy and they lost out in the long run. 

Extreme price? Pricing is relative, you may think thats extreme its about average for a good size 3 bed flat or small 2 bed house around here. By comparison the new build block of flats down the road are asking £700k for a studio or £2.5m for a 3 bed flat with poor view, the good view ones are POA

SneakySpectator

DullGreyGuy said:

Is that a repayment mortgage or interest only?

What happens if interest rates spike to 15%+ as they did in the late 70s?

It's a leasehold flat so what happens if the building suddenly needs major works? Plenty of stories of blocks having massive bills per unit, especially with ex-council where your rights to challenge costs are lower. 


In principle I ultimately agree, buying is likely to make more economic sense than renting outside of London but its not foolproof and there are plenty who stretched themselves to buy and they lost out in the long run. 

Extreme price? Pricing is relative, you may think thats extreme its about average for a good size 3 bed flat or small 2 bed house around here. By comparison the new build block of flats down the road are asking £700k for a studio or £2.5m for a 3 bed flat with poor view, the good view ones are POA

It's repayment.

Interest rates could spike but since it hasn't happened since the 70's, it's not impossible of course but probably not likely. There's a risk associated with investing in the stock market and with getting a mortgage but I don't think it makes sense not to do something because there's a small chance that a bad thing will happen. 

As for the flats, they were built in 2005 so not ancient, only 3 stories tall. I did a buildings insurance quote and was quoted £16 a month, I forget the exact details of it now but basically if the flat / block gets destroyed the insurance company will pay for me to be housed for up to 2 years, among other stuff. 

Again extreme things can happen, but extreme things tend to be unlikely so when it comes to probability, I err on the expected outcome, not the unexpected outcome.

housebuyer143

I agree and have always tried to explain this to people (but probably not well enough). Your loan is easier to pay off in most cases 15 years later because of what you said - wage inflation. 

I always remember my first house in 2010, minimum wage was like £6.50 - my full time job I took home £998 a month and my half of the mortgage was £230. Almost 1/4 of my wage. 
15 years later the we have a similar sized loan, minimum wage is £12.50 an hour? And my half of my mortgage payments are £240, now only 1/8th my wage.  This is solely because of wage inflation and I feel it will be easier again in another 10 years to pay it. 

Mr.Generous

Inflation erodes the value of debt. The mortgage you take out at 3 times your annual sallary might only be twice your salary after say 8 years of normal inflation, so yes, you are right. The early years are the tough ones with a mortgage, it gets easier over time provided you work and get rises. Buying a house is for many the best financial decision they ever made. Paying into a pension is often a close second. 

SneakySpectator

housebuyer143 said:

I agree and have always tried to explain this to people (but probably not well enough). Your loan is easier to pay off in most cases 15 years later because of what you said - wage inflation. 

I always remember my first house in 2010, minimum wage was like £6.50 - my full time job I took home £998 a month and my half of the mortgage was £230. Almost 1/4 of my wage. 
15 years later the we have a similar sized loan, minimum wage is £12.50 an hour? And my half of my mortgage payments are £240, now only 1/8th my wage.  This is solely because of wage inflation and I feel it will be easier again in another 10 years to pay it. 

Exactly! I think I already mentioned I don't have a high flying job filled with bonuses, promotion opportunities and commission, but I do generally about a 5% - 6% average wage increase per year, sometimes 7%.

Tucosalamanca

SneakySpectator said:

DullGreyGuy said:

Is that a repayment mortgage or interest only?

What happens if interest rates spike to 15%+ as they did in the late 70s?

It's a leasehold flat so what happens if the building suddenly needs major works? Plenty of stories of blocks having massive bills per unit, especially with ex-council where your rights to challenge costs are lower. 


In principle I ultimately agree, buying is likely to make more economic sense than renting outside of London but its not foolproof and there are plenty who stretched themselves to buy and they lost out in the long run. 

Extreme price? Pricing is relative, you may think thats extreme its about average for a good size 3 bed flat or small 2 bed house around here. By comparison the new build block of flats down the road are asking £700k for a studio or £2.5m for a 3 bed flat with poor view, the good view ones are POA

It's repayment.

Interest rates could spike but since it hasn't happened since the 70's, it's not impossible of course but probably not likely. There's a risk associated with investing in the stock market and with getting a mortgage but I don't think it makes sense not to do something because there's a small chance that a bad thing will happen. 

As for the flats, they were built in 2005 so not ancient, only 3 stories tall. I did a buildings insurance quote and was quoted £16 a month, I forget the exact details of it now but basically if the flat / block gets destroyed the insurance company will pay for me to be housed for up to 2 years, among other stuff. 

Again extreme things can happen, but extreme things tend to be unlikely so when it comes to probability, I err on the expected outcome, not the unexpected outcome.

You need to look at late eighties to early nineties, interest rates absolutely spiked (Black Wednesday as one example).
Rates dipped below 8% in 1988 but were approaching 15% in 1989
Bank Rate history and data | Bank of England Database

I purchased my first property in 1993, the housing market was a pile of ashes by that point.
1990 - 1994 was horrendous. Looking back it was the opportunity of a lifetime, discounted homes everywhere, you could buy for pennies (relatively speaking).

Great for me and people who could afford to trade up, not so great for the tens of thousands of people who were having homes repossessed.

AI view
In 1992, house repossessions in the UK reached a peak of 75,000 due to the economic downturn of the early 1990s. This period saw a significant number of homeowners lose their properties, with over 400,000 losing their homes over the decade. The high number of repossessions, particularly in 1992, had a substantial impact on the political landscape, contributing to the Conservative party's struggles with perceptions of economic competence. 

silvercar

Mr.Generous said:

Inflation erodes the value of debt. The mortgage you take out at 3 times your annual sallary might only be twice your salary after say 8 years of normal inflation, so yes, you are right. The early years are the tough ones with a mortgage, it gets easier over time provided you work and get rises. Buying a house is for many the best financial decision they ever made. Paying into a pension is often a close second. 

Totally agree with all of this. 

When young you max out the mortgage you can get, in order to get onto the ladder. Plus moving is a hassle and expensive, so you want to minimise the number of moves you need to make. 

Inflation and wage increases erode debt value, add to that house price inflation and it’s definitely the way to go. The aim is to be mortgage free by the time you retire. Both for the security of not being forced to move in your later years and not having rent or a mortgage to pay in retirement.

To those that point out the risk of interest rates in double figures, that would be a problem for rents as much as for mortgages. The amount of people in this country who wouldn’t be able to cope, would mean that the government would have to do something. 

I’m in my early 60s, we will clear the mortgage within a couple of years. Had we still been renting, even though we’ve done very well in income terms, we would only be able to afford to rent a house that is half the size of our current home. That would drop in retirement to renting the first flat we ever bought.