March 24, 2018
This question could go even further back to “should I buy a property in the first place?” but this is more of a subjective question because the intangible emotional benefits of owning your own home almost always outweighs the tangible burden of a 40-year mortgage that comes with it. For most, it simply is a rite of passage to fulfill the ideal of the American Dream. So long as banks and mortgage providers can continue to rely on that pipedream, they’ll remain in business. Just think about why they were so desperate to dish out mortgages to anyone back in 2007. Mortgages are one of the longest-dated liabilities and forms of debt that anyone can own. Sure, a lot of economists consider this to be ‘good’ debt but this is dangerous thinking. It shouldn’t be used as an excuse to maximise your borrowing, especially when it comes to re-mortgaging on your property to borrow more against the equity in your home.
Properties are also considered to be one of the most standard investments one can own. An apartment is tangible, constructed out of bricks and mortar, stuff that you can feel. It’s the place where memories are made especially when it comes to raising a family. But don’t let emotions blind you in terms of the reasons why you want to own your own home. What we are trying to say is that your primary place of residence should be considered a liability not an asset. It regularly takes money out of your pocket instead of putting money in your pocket.
If you are still paying off a mortgage, then your home is the bank’s asset, not yours.
It is ridiculous to think that a high-earning individual in the top 1% in London or New York is still unable to afford buying a property outright. It is even more ridiculous to think that the UK government, for example, have accepted the fate of the real estate market brought down on the first generation of rental life-timers.
Given this, there are a few things to bear in mind:
- There is no shame in not owning a property. Just know that you can put your money to better use elsewhere, especially when you’re younger. As long as the return you can get from investing in the S&P 500 is larger than the interest rate on your mortgage, you should go for the former.
- If you must own a property, buy as soon as you can and within your means. The nature of the real estate market is that demand more often than not outstrips supply due to population growth and limited land. Prices go up accordingly.
- Take advantage, if you can, of instances such as the uncertainty around Brexit and the sub-prime mortgage crisis. Sellers are often willing to negotiate lower selling prices for their properties especially in these circumstances.
- Stay away from properties with high service charge and costly ground rent.
- Ensure you have a sufficient deposit so that you don’t overstretch your budget. Especially with interest rates on the rise, you don’t want to be caught stressing over your mortgage repayments 2-3 years down the line. Expect 3 US rate hikes of 0.25% each in 2018, and 1 UK rate hike of 0.25% towards the end of 2018 or early 2019. In Australia, be wary of changes in early 2019.
- If the maximum eligible price of your dream apartment is £500,000 (mortgage + deposit + help from relatives), do yourself a favour and purchase a property that is at least 30% cheaper compared to your maximum affordable limit. This will put you in a way more favourable position not just from a financial stand-point but also relieve the stress that comes with having a 30-year mortgage.
- If you can, secure 5-year fixed rates. It would be wise to lock the current rates in at the earliest opportunity before banks decide to increase their rates.
- Prioritise having an emergency fund over over-payments on your mortgage. This is very important to understand. An emergency fund gives you the liquidity, i.e. cash in hand, at a moment’s notice. Over-payments on your mortgage means you won’t see that cash again so easily.
- Be wary of the penalties that may apply on over-payments. Imagine that – being punished for being fiscally responsible. Well, that’s the nature of capitalism – businesses like spenders rather than savers. If you can’t beat them, join them. Don’t overpay if you will be slapped with penalties. It’s not worth it. Invest the money instead in a low-cost index fund.
As we mentioned earlier, your primary residence should be considered a liability (particularly valid when fixed maintenance costs are high), but any additional properties you might own would be considered assets because they are treated as investment properties that earn a potential rental return that is higher than the costs of maintaining it.
While we’ve spoken a lot about the rational reasons for not paying down a mortgage, there are certainly more emotional considerations to take into account as well. You will likely have heard that debt, whether ‘good’ or ‘bad’, should be paid off as soon as possible. It is simply safer and better for peace of mind, to be in positive territory. We are firm believers of this too, especially when it comes to ‘bad’ debt such as credit card bills, overdraft charges and student loans. Pay those liabilities off before they continue to constitute a drag on your lifestyle. We know colleagues of ours who are in their 50s who are still paying off their student loans because the interest on them just got out of hand but are still happy paying $180 a month on TV subscriptions. This is not healthy on the pocket or your heart. Don’t get distracted. Kill that burden as soon as possible for your own sake before it kills you.
When it comes to ‘good’ debt such as a mortgage, it is more acceptable to not worry about this so long as you continue to meet the payments and you invest elsewhere with a higher return. Know that if the mortgage gets out of hand that there is an opportunity to sell your property and either downsize or rent, neither of which are undesirable.
In summary, while there is no right or wrong choice to purchase a property, take note of the strategies you should execute either way to ensure you have firm control over your finances.
If you liked this article, please consider donating even a fraction of an XLM!