In line with our risk management framework, today we published our Q4 2019 performance update.
To buy or not to buy?
For many people in their 20s and 30s in the UK, the ultimate dream is to get a foothold on the housing ladder. Coughing up increasingly obscene amounts for rent, particularly within the confines of the M25, is something that pleases precious few, and the insult to what already feels like severe injury is that such payments serve merely to pay off the mortgage of a stranger.
It all amounts to what has been aptly dubbed the ‘housing crisis’, and for those within touching distance of said elusive ladder, the decision to hop on board the homeowners’ wagon at the earliest available opportunity seems like a no-brainer. However, the still waters of the complexities and costs involved run deeper than many may think, and it is certainly best practice to factor in all the variables before making one of life’s greatest commitments.
Buying is a good idea, right?
The advantages of owning one’s home are fairly well documented. Not having to deal with troublesome landlords is certainly one of the more favourable non-financial benefits! And if stability is what you’re after, you can rest easy in your own home safe in the knowledge that there will never again be expiring lease agreements hanging over your head. It’s an especially important factor for those with young children, as it allows them to more easily settle into the school of their choosing.
First-time buyers also received a surprising boost at Budget 2015. Chancellor George Osborne announced that a new Help to Buy ISA (HISA) scheme is set to launch this autumn, meaning the Government will top you up by 25% on up to £200 saved each month. Furthermore, if you put in up to £1,000 when you first open your HISA, you will receive an additional 25% kickback on this amount. Therefore, you could earn up to £300 in top ups by the end of the first month (i.e. 25% of [1,000 + 200]). The maximum that Government will contribute in total is £3,000, which by that stage would mean you’ve saved £12,000 on your own. Furthermore, you’ll earn interest on these ISAs; as you would with an ordinary cash ISA.
So what’s the downside?
Owning a home is a massive financial undertaking, and it’s important to take into account everything that goes into it before signing on the dotted line. The following factors highlight the potential drawbacks:
- Upfront costs: Making that first down payment on a property is a massive step, but by no means is it the finish line. Don’t forget that beyond your mortgage repayments, you’ll also need to cough up for legal fees (usually a solicitor), a survey, stamp duty and removal costs.
- Rates: Although base rates have been at record lows recently, such a status quo cannot last forever. Those who rent property will largely be unconcerned when Governor Mark Carney next decides to hike these rates, but for many of those with a mortgage, repayments will increase accordingly, thus making it more expensive to be a homeowner in relative terms. Of course, landlords may pass on some of this increase to their tenants, however the impact should be less significant.
- Maintenance: As much as you may want to rid yourself of that nuisance of a landlord, the truth is that as a renter you are generally not liable for repair and maintenance costs. As a homeowner, you will be. Can you afford to fix the boiler if it breaks down? If the roof is leaking, will you be able to cover the costs of getting someone in? Spreading yourself too thinly in terms of budget could mean you miss out on meals out, holidays and activities with family and friends. Owning a home is no good if you miss out on the joys of life!
- Fluctuations: If the value of your house falls, there is a chance you might be unable to sell if it ends up dropping below the amount you owe your mortgage lender.
- Flexibility: One of the great perks of renting is that you are far more mobile. If you move office, or want to be closer to friends, there are fewer barriers with relocating than if you are a homeowner. Selling up and moving on is not only more time consuming; it’s more expensive too.
So which option is best for me right now?
The decision ultimately comes down to value. The big attraction of being a homeowner is that it gives you the chance to build your net asset value, or ‘equity’.
And even if your mortgage is more than the equivalent rental cost initially, you shouldn’t become too disillusioned as there is a good chance the property’s value will appreciate over time. In addition, rentals will likely continue to rise, and you might recoup any ‘losses’ over this period sooner than you think.
A good rule of thumb is that if your house value needs to go up by 3 per cent each year over rent for you to break even over a five-year period, then – other things equal - buying is probably for you. But once this number creeps up to 5 or 6 per cent, then renting could be the more sensible choice from a financial point of view.
In addition, you need to be in it for the long haul if you’re looking at buying. If your time horizon is only five years, then you’re probably better off renting, as it often takes at least five years to come out ahead in terms of your purchase.
In the end, it all hinges on your personal situation as to which option is best for you. The appeal of paying off your own mortgage each month, rather than someone else’s, will always carry immense appeal. And indeed it is something legitimate to strive for. However, the key is to ensure that you are ready, in every sense of the word, for all that comes with being a homeowner.
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