08 January, 2021
First-time buyer guide #1: Should I buy?
“Buying is right and renting is wrong”
“You’re throwing money away when you rent”
“You can’t lose if you buy property”
Over the years I’ve heard a lot of people assume that buying is always the right thing to do. And every time I need to explain why it’s not quite that simple. Why has it taken me 25 years to decide to write it down? Procrastination I expect, but no excuse now.
Should I buy? - It’s not for everyone
The starting point is to dispel a couple of myths.
Myth 1: You can’t lose.
If you don't carefully plan both buying and running a home you can lose money on property.
Myth 2: Buying is always better than renting
For many people renting is the better option because it can fulfil more of their needs.
I’ve met many people who regret buying a house or believe that they should have at least waited before buying.
I guess it’s only fair to declare my own position and say that my wife (Michelle) and I are homeowners and have been since 1994, which was just before I came into the financial services industry. We went through all the same emotions and thoughts that many of you will be going through now. If we knew back then what we know now, there are a number of things that we would probably have done differently.
The first one was asking ourselves “should we own or rent?”. Both our parents owned, so we just assumed buying was right and didn’t even look at renting as an option.
So buying must be right, right? Wrong, for many reasons. Renting can be right for many people in many scenarios.
Here are the important questions to ask yourself when considering the benefits of renting or buying:
- Do you want ultimate control over the property itself?
- Which gives me more flexibility now?
- Is now the right time to sink savings into a long term commitment?
- Do you want the responsibility of a large long term debt?
- Is renting the better option for now?
Knowledge is power, so try not to answer these questions without first giving yourself the information to give a reasoned and balanced response. There are financial and non-financial elements to this, so let's go through each.
I am putting these non-financial aspects first because in my experience they are often forgotten or glossed over. Even if you just confirm what your instincts were, it's worth going through the process.
Do you want ultimate control over the property itself? Which gives me more flexibility now?
- Owning your home usually means you can make any changes or improvements you wish.
- If you own your home, as long as you maintain your mortgage payments, no-one can make you move out.
- When relationships break down, owning a home can make things more complicated. If you are buying as a couple, be brutally honest with one another and ask yourselves if you’re both ready. Of course, there’s nothing stopping you saving up while you decide.
- If you are homeowner and not DIY-inclined, then basic redecoration or minor changes to the house might be beyond your ability and you will be incurring the costs of tradesmen.
Trust me, you might not find out how proficient you are (or are not) at DIY until it’s too late. After 26 years Michelle still won’t let me touch a paint brush.
- Generally, but not exclusively, renting gives you more options over where you live and in what type of property. You might be able to rent in an area you couldn’t afford to buy in.
- Renting is generally easier and offers greater flexibility (and lower costs) when it comes to moving.
- If you’re renting, usually you will need to get permission from the landlord to make changes. This can include simple things like painting a room or putting up a new TV.
- Some landlords don’t allow pets or they might restrict the type of pets. Some might even reject tenants with children.
- If you’re renting and the landlord wants to sell the place, you will most likely need to move out.
Aside from the impact of taking on a mortgage (which we'll come to later), you need to consider the things that might impact whether or not now is the right time to buy.
Also, it's important to remember that things can go wrong and have an impact on your finances. Let’s delve into these areas.
Is now the right time?
Do you have goals that are more of a priority to you now? Renting does usually involve paying an upfront bond (or deposit), but it doesn’t involve the same high up-front costs that owning does.
This could mean that you can prioritise other shorter term goals such as a wedding. In short, renting may suit you more now, even if you choose to buy later.
On the flip side, while this is not guaranteed, the past shows us that house prices (and rental costs) have risen over time. The rate of house price growth has historically exceeded both inflation and the interest you can earn on savings accounts.
So if house prices keep growing, this makes it a good investment doesn’t it? Well maybe, if you keep hold of it over the longer term.
However, my experience shows that it is an investment where the money is rarely ever accessed yourself. Owning a home should be seen as buying an illiquid asset that you can only access by ‘downsizing’ (i.e. selling and buying a cheaper property) or taking out some form of equity release loan.
If you can afford to, our advice is to both repay debts such as a mortgage and also build up other savings, pensions and investments to meet life’s other goals.
When things go wrong with the property
Owning your home means that if things go wrong then you're on the hook - unless it's covered by insurance or a warrant. The typical examples are leaks and broken down boilers.
Like when you buy a car, many sellers may know things are on their last legs but are crossing their fingers that they sell before they break down completely. We’ll look more into valuations and surveys another day.
If you're a tenant, it’s usually the landlord’s job to fix big problems. These costs can often run into the thousands and tenants are all too pleased not to have to foot the bill.
When I bought my first home, within 6 months we needed a new boiler and windows. We had no emergency fund, so spent a number of weeks wearing extra clothing before eventually taking on an extra loan to get the work done. It's one reason why we recommend building up an emergency fund before buying a home.
When things go wrong with your income
If your income is not secure or you suddenly find yourself with a lower income, then you might be in a better position as a renter. It is usually easier and cheaper to move somewhere else if you rent.
However, if you own your home and your income is suddenly reduced, you run the risk of losing your home. At the very least, you’ll incur some significant costs if you need to move house.
It's worth noting that banks and building societies won’t resort to forcing house sales in the first instance, but they won't wait forever for their money either.
Most wannabe homeowners need to take on the responsibility of having a large long term debt, i.e. a mortgage. This means taking on the risk that you might lose your home if you don’t keep up repayments.
Mortgages and your emotions
I don’t think you would be human if this didn’t invoke some worry. Michelle and I were worried for a good number of years and this is only natural.
However, if this fear totally paralyses you to the point that you can’t sleep at night or it is negatively affecting other parts of your life, then I would suggest that renting might be better for you.
There is no shame in this. In fact, big respect from me if you recognise this in yourself and decide that renting is best for you.
Mortgages and their impact on where you live
Assuming you are happy to consider borrowing, then you should next be aware that depending on where you want to live, mortgage payments might be more or less expensive than rental costs in the same area.
So while you may be comfortable with a mortgage, you may feel that renting in a nicer place outweighs the potential benefits of owning in a less desirable area.
I’ve seen many people living in the more central areas of London choose to continue renting in the city, rather than buying on the outskirts.
Mortgage impact over the longer term
Even assuming house prices continue to escalate in the long term, there is still no guarantee that you will make money, especially when you add in all the costs of homeownership and the amount of interest you may pay on a mortgage over it’s full term.
I totally understand people who say paying rent every month doesn’t give you anything back. But make sure you also appreciate that a big chunk of a monthly mortgage payment is simply to cover the interest on the loan itself. The amount of capital you pay off in the first few years is minimal.
It’s also very important to remember that interest rates might not always be as low as they are now.
For example, if you secured a 25 year £200,000 mortgage today at a rate of 1.75%, this would cost circa £825 a month. But if rates went up just 3% you'd be shelling out £1,140 a month.
Accessing competitive mortgages
Finally, if you want competitive mortgage rates, you will need to have a larger deposit. Your credit score and the size of your deposit will all impact your mortgage arrangements. More on this in future articles.
As a minimum under the Help to Buy scheme, you will need at least 5% of the value of the home. Saving for a larger deposit should mean lower mortgage payments, but might take longer t in the first place.
The purpose of this first section of my guide was to make you think long and hard about buying a home and not believe the hype that renting is wrong and owning is the only option in town.
Hopefully, it will make you think hard about what being a homeowner means, considering if it is right for you or if renting is the better option.
I guess even at this late stage it’s also worth pointing out that even if you decide to rent for now, you can still save money for your future and if your circumstances change, then any savings you built up just puts you further ahead if you decide to buy in the future.
Ultimately, only you can choose what’s right for your circumstances and your budget. There are pros and cons to each aspect and the reality is that things change and over time. The important thing is to make an informed decision.
If decide that you want to become a homeowner, then the next step is working out how much you can afford to borrow and how much you need to save. This is covered in the next article, ‘Setting your target - Getting realistic’.
Bye for now!
Adviser Top Picks - Should I own?
- Lose the mindset that says you have to buy. You need to make a balanced decision that is right for you.
- Never let the answer be driven solely by the numbers. The decision to buy is a very personal decision and lies between a mix of what the numbers and the physical and emotional aspects.
- Don’t buy your home with a primary objective of it being an investment. You are buying a place to live. The reality is that any growth in the property value will most likely be seen by the beneficiaries of your will, unless you choose to ‘downsize’ or take out a loan against the property.
- Taking on a huge debt is scary. If borrowing large amounts of money scares you, then I'm pleased. It means you are taking it seriously. However, if it scares you to the point that it is affecting other aspects of your life, renting may be the better option for now.