Housing: Something we all need, yet many can’t afford. Property is an area of investment that it is a little different to stocks and shares. No matter how the economy performs – regardless whether we are in a recession or not – housing will always be required. From an investors point of view, this is equivalent to choosing a stock in a bluechip company which is almost guaranteed to pay dividends; regardless of the stock price and performance. Typically speaking, if a company performs poorly over a quarter, the share price will fall and dividends will be reduced (if they are paid at all). Conversely, if house prices fall, rents (dividends) will still be paid.
It is for the above reason that a lot of investors regard the value of property so high. According to a recent article on the BBC, mortgage lending is on the rise again – therefore, is it not a no-brainer that we should all try and get a piece of the action? Maybe….
Long term Plan
This is the first thing that I would consider before jumping on the property ladder. You will need to ensure that the property you are looking to purchase is suitable to last a given time (> 5 years) so that it makes financial sense to invest. There is not point buying a one-bedroom flat with your partner when you plan to start a family immediately. Estate agent fees, movers, storage, property tax etc. all add up substantially!
This is undoubtedly the most important aspect when making a decision to buy. Don’t make the mistake of thinking that ‘I can afford what the banks offer me’. This is definitely not always the case. Interest rates are at an all time low, but are certain to increase over the duration of a mortgage. I strongly believe that one of the best things to do is have a play with the mortgages calculator at eMortgageCalculator.co.uk and work out all the different possibilities on repayment. Create different scenarios for yourself and calculate the affordability based on different interest rate rises.
The last thing you want is a mortgage that you can only just afford and for something terrible to happen; the base rate increases and your repayments increase, you lose your job or something worse.
Before we took out our mortgage we made up the following table:
We currently have a fixed rate for another 2 years on our current 25 year repayment plan and I fully understand that at the end of that period, our payments are going to go up. Chances are that the base rate will have risen slightly by 2015 which would lead to an increase in our interest rate and monthly payments.
Everyone needs an exit plan when they take out any sort of debt. For business loans, the exit plan is that the business (hopefully) starts to make enough money to repay the loan, for a mortgage, this may involve simply repaying it or selling the house.
As trivial as it may sound, unfortunately a LOT of us don’t have an exit plan and will never be able to repay our mortgages. Banks allowed homeowners to switch to ‘Interest-Only Mortgages’ when times got hard and never chased them to switch back. The result: over 4 million people in the UK will never be able to pay off the house that they are living in.
Young or Old, I urge you to work out your plan. Don’t leave it for another day; use a calculator or a spread sheet or even a pen and paper. Work out exactly when you intend to pay off your mortgage and how you plan to do so.
I thought I might as well share my plan:
Some people prefer to switch to a more aggressive repayment option – perhaps a 20 year instead of a 25, or even a 15 year arrangement. Personally, I would rather stick with the 25 and make overpayments. Overpayments are essentially irregular, option, addition payments towards your mortgage debt. Some providers have limitations to how much you can repay early and the method in which you can do this (lump sums Vs regular payments). Different providers also recalculate the interest owed at different times; for example some do it monthly, some do it 6-monthly and others do it annually. Why is this important? The last thing you want to do is pay down a large lump sum just after the interest has been recalculated for a whole year!
In my opinion, overpayments are a much better idea simply because you are not obligated to pay any extra. When times are hard and things break, you can skip the additional payment that month; it all comes down to discipline.
Got Any Thoughts on Buying Vs Renting?