Re: House prices & Banks

Don't forget that paying interest is just as much of a waste as paying rent. In one case you rent the house, in the other you "rent" the money. Your choice is between two different kinds of waste, one of which lets you build up equity as a side effect.

Indeed.

You've forgotten loan interest. Over 5 years you will have paid £36k into your mortgage account, and although you haven't given enough information for us to deduce how much of that is interest and how much capital, let's say as little as £24k is interest.

So if you're saying renting wastes £30k and owning wastes £24k, then owning only wastes £6k less than renting, not £30k less. Meanwhile you've saved up £12k in terms of loan reduction, but to do so you'll have spent £6k more than when renting, and so you're "up" £6k, but down by however much the house has lost in value. If that's £30k, you're actually "down" to the tune of £24k, aren't you?

Well, if it's a £100k house and it drops by 6%, you will actually be even Stevens.

Unless you have a very long term fixed rate, the fixed term deal has no strong significance in the overall scheme of things. But it will at least give you the opportunity to reduce the debt faster to start with.

Do they still take out indemnity insurance on high LTV mortgages? If so there is little risk to the lender as the insurance company pays out any deficit on reposession.

Mark

wrote

I don't think you usually need to pay indemnity if the LTV is 85% or less (possibly even 90%?), do you??

: As it is so obvious that house prices are about to fall drastically, then : why are mortgage lenders still allowing 80%, 90% & more mortgages?

There have been some signs of tightening up on deposits both here and in the US.

FoFP

That ignores the possibility that you'll *need* to move (and therefore sell, or rent at a rate below the monthly mortgage repayment value) whilst in negative equity in order to stay in (your chosen field of) employment. This is very much an individual risk and it's impossible to say whether buying or renting is best for an individual without considering this.

If you're happy that you'll be able to stay put no matter what happens to your job and the value of your home, then buying is probably the best thing for you. Some of us aren't that lucky!

Best Regards, Alex.

An answer might be found in the relative importance of the security of the asset vs. the security of the repayments.

They're making a long term bet on their ability to profit from those with good payment records, against the losses incurred by those who can't make the repayments and, in the worst case for all concerned, those having to be repossessed.

Daytona

Indeed, by purchasing with debt, you will have chosen to take on a geared capital risk during a period of above trend property growth.

Your call.....

Daytona

Just an afterthought. That you're thinking of buying the property you're currently renting lends an extra and potentially fascinating dimension to your query. Who was the first to declare i.e. did the landlord extend a first option to you or was it already being marketed to coincide with perhaps the end of your shorthold/rollover or was his decision to sell precipitated by yours to leave? What about the nature of your relationship to him/her? i.e. is he or are you persuaded that he's 'doing you a favour'? How about the inconvenience to you to up and go if he sells it elsewhere? i.e. is the imminent termination of your tenancy a lever? Are there similar (preferably almost identical) properties being sold locally that could leave you confident of the asking price - notwithstanding all that is currently mooted about the market? (If it's London which has already seen sharp falls then you're certainly in a better buyer's position than you would have been last may!)

It probably goes without saying that if he'd offered you the property at a figure which would've resulted in mortgage repayments equal to or lower than your rent that you'd have bitten his hand off - whether in the current market that would have been wise is also moot but obviously less so. But as the asking price seemingly renders you only very slightly worse off (at the moment!!!!!) but makes you the owner then the temptation to buy must be quite strong. As has been suggested in most posts here it could be fools gold.

Unless you know this to be a bargain (relatively) it would be better for you to buy where you're in a position to compete on level ground. If there are indeed similar properties around I'd be surprised if your threat to leave and buy elsewhere didn't precipitate a significant reduction in the asking price though, as I say, it does depend very much on the area, his possible loss of face, your relationship and etc. etc.

I'd be interested to know how it pans out for you.

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Aha - yes that's quite different, I thought perhaps you were buying from your landlord. As you describe it, it seems fine and you effectively know the property you are buying very well and, since you've looked around, the market too. Just one thought. You say you are buying the mirror image - do you mean that you're currently occupying the penthouse mirror or are you on another floor? Depending on the level of insulation - in my experience at the top of houses more of a problem keeping a place cool in summer than warm in winter - it can be a nightmare but this depends very much on definitions and tolerance and of course build quality. It's bound to be a nightmare tomorrow anyway so if you get the chance try it on a less-hot day. Even moderate summer days can be hell at the top of the house where there is no roof-void. And if the other flat is south-facing where yours is north then here's another possible concern. That's for you to know of course.

As to east anglia, I have a friend in Starston (Norfolk) and his son too in Norwich both of whom are happy with the market and claim to have enjoyed nothing but rises over the last 2 years. Just a slightly worrying thought. But if you think this property is ideal for you - 'a find' - then maybe you should go for it.

Best of luck.

Alright, so what would you advise the wisest course of action to be then Mr. Raygun?

They have risen 30% in the Midlands in the past year according to published statistics (have wages followed?).

Correct. Unless a deflationary spiral occurs.

That's a pretty reasonable difference (only £1,200 per year). But who pays the rates on the property now? Who pays the property taxes,? Who pays for repairs? These all have to be allocated for unless that's included in the mortgage payments already.

But if you took the extra money that you would have spent on a mortgage and upgrades (you did say you were married right? ;-) and add that to your deposit, investing the lot in some other secure investment (interest bearing T-bills, what have you) would you still be better off purchasing a home now?

Buying a home is an emotional thing. If you are doing it as an investment be very cautious. (talk to someone who lived through the

If your wife wants a house buy her a house. If you want a safe investment buy a safe investment, don't confuse the two or you could lose both your house and your investment. If the stock market drops by 80% then you lose 80% of your investment. If interest rates shoot up by 10 - 15% you could end up losing your investment and the roof over your head.

Just my humble opinion

Stephen

PS you could invest and wait a few years. If houses plummet in price you could buy then and save thousands of your after tax pounds.

Not really, but there won't be much in it.

Let's look at that a little more closely. Buying/selling costs are one-off, they aren't annual. As such they are more properly factored in to the price of the house. Maintenance and insurance are costs the landlord incurs when renting, so one has to assume that a certain fraction of the rent (and to compare like with like we must assume the rented property is unfurnished) is earmarked for that purpose. Say 10-15%.

So now we have monthly outgoings as follows:

Renting: £75 I&M, £425 wasted (into landlord's pocket). Owning: £75 I&M, £200 capital building, £400 wasted (loan interest).

Owning, you waste £25pm less, but spend £175pm more, so £200pm feeds the equity account, in effect building savings. If the value of the house stays the same, then after 5 years you're £12k better off, but have spent £10500 more. So really you're only £1500 better off. The point being that owning pre-supposes availability of a £675pm budget, and if you have that budget, it's also available when you rent, and if you only spend £500 of it on rent (inclusive of I&M), you might as well shove the other £175pm into savings, so you could have built up a £10500 nest egg over the 5 year time frame.

This ignores the effect of savings interest and compounding, but over 5 years, at low rates, it'll bias the balance in favour of owning only by some £500 or so. So owning still makes you £2k better off, which probably just about makes up for the buying and selling costs.

So it's about evens then, assuming stable house prices.

Of course there are other more important factors to consider when deciding between buying and renting. The most obvious is the direction you think house prices will go. Also the non-financial differences - such as buying gives you the opportunity to make changes to your house and you are less likely to be forced to move; renting gives you the peace of mind of not having sudden unexpected bills like a for a new boiler or overhauling the roof.

The other issue which people hardly ever seem to consider is what happens if you lose your job. Unless you are confident you'll never be unemployed for any significant length of time, this is an important issue to consider.

You get more help from the state if you're renting, unless you've got savings. But..if you're buying with a mortgage, you need never have savings, as you can plough all your spare cash into your mortgage. If it's a flexible mortgage, you can withdraw your overpayments should ever you need to. So, as far as benefits go, if you're likely to be able to save, or have capital, you're better off buying. But if you can only just make ends meet, you're better off renting.

"Ronald Raygun" wrote

I think we can probably summise that the purchase price is around 100K - he suggests in his post that "30K" is equivalent to "30%" ... ["we will have paid 30k in rent ... Fingers crossed the value of the property wont fall by that much (30%)"]

"System Prompt" wrote

Conversely - "If houses continue to skyrocket in price you could buy then and it will cost you thousands more of your after tax pounds" !

You have to be a bit careful when doing this. For example, I considered taking out an Egg flexible mortgage a couple of years back. This may have changed but I decided against it as they will not let you take out any overpayments if, for example, you are made redundant. This includes payment holidays. Great! When would you really want to get your money back.

Pete

Sounds typical of Egg. It's not the case with my Nationwide mortgage, you can withdraw overpayments whenever you want.

Is it these days? What are typical rental yields? A 25 year repayment mortgage at 4% would cost about 6.4% of the value of the house, add 1% for I&M and your paying out 7.4%.

When I looked at renting out my old house in 1999 the rental yield was about