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!
Affordability
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.
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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.
Exit Plan
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.
My Thoughts
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?
In my case the figures come down firmly in the “Buy” rather than “Rent” – My interest only payment is a mere £230 per month, to rent (which is the equivalent to an IO mortgage – as with this vehicle you are essentially “renting” from the Bank) would be £980 per month.
My plan for this year is to let out two rooms in my home for a time – making my interest payments essentially cashflow neutral.
Of course I am aggressively overpaying my mortgage – but only because I am now debt free and have an Offset Mortgage product which means I have immediate access to any overpayments in case of an emergency. At the moment, with interest rates being so low, the best place for my money (and to give me liquidity) is to stash it again the mortgage capital – when the numbers change I may change my strategy of course.
You have got to know your numbers – otherwise you could get burned.
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We’re big believers in overpayments vs. shorter terms on the mortgage. I think it makes a lot of sense to pay your 30 year mortgage like 15 instead of getting a 15 year and risking losing a job or having a financial crisis and not being able to pay the mortgage. Like you said, it’s important to check the terms of the mortgage first and to specifically write on the check that you’re paying principle only.
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Glad to have you on board 😀 – Just so long as we have the discipline to actually make the overpayments! 🙂
I have a 30 years mortgage on my uk property because the bank wouldn’t take income outside my salary for the affordability study. 4 years in, I am happy to have a very low repayment and the option to make overpayments when I please.
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Sounds like you got a great deal there! When you sell a few of your plots, you can pay it off completely! 😀
At 2.29% I think I’d rather buy another property and expand my empire! Little house in Thailand, and the sun will never set over my properties 🙂
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I’m a little different to the mainstream. Only time will tell if I was contrarian or a fool.
You touched on Affordability. This IMHO is what the vast majority of punters consider when buying a house. Simply can I afford the repayments and not am I over paying for this.
Myself I’m looking at Value. My metrics tell me UK property is wildly over valued and so for now I choose to rent. One of the big differences between the two is interest rates. Interest rates are at all time lows and the government/Bank of England is doing everything they can to force rates down and hold them down. QE has had an impact but is starting to lose effect but the FLS seems to be taking over where QE left off. The question is how long will interest rates stay at these record lows.
Meanwhile my wealth is all tucked up in a non-emotional mechanical tax efficient diversified portfolio which doesn’t include UK residential real estate.
You make a good point on Value… UK property has been overvalued for years and years… and it it likely to increase a lot further (especially the London area). I agree with you that the interest rates are sure to rise soon (probably the next couple of years) but the increase will be slow. I plan to fully pay off my house by the time they return to anywhere near pre-recession figures. We all need to live and for now paying my mortgage makes much better financial sense than renting… by a long way! My wealth is definitely also tucked up in non-property funds/stocks… It will be a long time before I buy another property and become a landlord 😉
Great thoughts. I also think liquidity is often overlooked. You can’t peel off a portion of your home to sell when you get into financial trouble later. It eats a lot of capital that isn’t easily accessed.
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Very good point sir! Do you have a house yet?
You can if you choose an offset product – as then you have instant access to every penny you pay off your capital. Best of both worlds then.
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Great post! it’s nice to hear other people’s thought on buying/renting
Thanks Hogga!! 🙂
I both took a long loan term, but also a ‘long’ payment window. Even though I get paid weekly, I decided to keep my mortgage at monthly repayments, but still pay into it weekly. This must impact my interest calculations! And nevermind the set payments, for the last year I’ve planned to ‘fully’ overpay (I can only overpay $5000 pa).
My strategy is to get as many properties as I can and rent them out. Money’s cheap at the moment and rent is expensive!!
True that! Just be careful not to get in over your head! Money won’t always be this cheap…