Many folk ask why I don’t own a property and pay rent (or as some call it to me, dead money) on a house.
I’m paying for a service: for a landlord to supply and maintain a property for a given fee a week/month. My earnings (I’m currently unemployed due to this wonder recovery recession) pay for that service for which I’m normally happy. If not happy then, depending on the circumstances, the landlord has to put it right.
I looked into mortgages years ago but the mere fact of paying three, perhaps four times, the amount of money back to the bank full well knowing at any time they could recall the debt, well it begs belief why anyone would do it. Between 2001 and 2004 I was watching house prices going skywards with no sign of stopping. That sinking feeling when I turned to my wife and said, “I think we’ve missed the boat”.
The one piece of information that stuck in my head was from an old Open University programme describing how house prices work on average 15 year cycle from bottoming out to peak. If you say that they last bottoming out was in 1991 then by 2005/6 you’d expect to see something happening. At the start of 2008 I had friends merrily gloating under the illusion that “you never lose on property”. How wrong they were. I had to watch as they lost jobs, paniced and desperately tried to sell up as prices and demand took a sharp nosedive.
I’m not planning on getting a “dead pledge” anytime soon. And why? Well the rental rates work in my favour.
If I want to buy a house right now for say, £175,000 then my monthly repayment over 25 years would be (at 5% as a baseline) £1034.72 a month. Now the interest rates are rock bottom but the bank rates aren’t, so any rise (and it will happen eventually this feel good on the interest rates can’t last forever – we need to get real). Nice rule of thumb is to work out the worse case senario, if the interest rate ever hit 12%, which is possible as it’s happened before, could you afford £1859.37 (that doesn’t include the insurances you have to take out either so you could be hitting nearer £2000 a month). An average rent is well below the 5% baseline figure right now.
The rough guide is that a mortgage should take no more than 33% of your monthly income. So at worst case are you earning £6000 a month if the worse case happened? For some reason this modicum of sense totally escaped people and the banks over the years. Asset bound wealth is no substitute for cash in hand. Assets can create avenues to generate cash in form or loans or recouped money from rent. If the demand falls though so does your income from the asset.
For all the people, marketers, media, PR who are spinning out that the recession is over…. it’s utter rubbish in my eyes. On the street there are people panicing and no longer over the value of their house, it’s now a case of not losing their job so they can continue to pay for it.