Realisation

[Giordano Bruno]

Suppose the mortgage is IO. The interest would be on £200k, at 6% would be £12k pa. Over 25 years that would be £300k, and you would still owe £200k for the principal. Of course, you could be paying down the mortgage with a repayment mortgage, but that would cost more, and the renter could be saving that same extra amount (and more) and getting interest on it also. The renter would be unconcerned about hp fluctuations, negative equity, 'repossession', and not in dread of losing his or her job (at least not to the same extent as the buyer).

Why suppose the mortgage is interest only? That would defeat the objective of buying, wouldn't it?

The calculations I gave were for repayment mortntgages. And I accounted for throwing a few hundred quid a month into a savings account and compunding the interest.

Buyer wins. Hands down, and every time. Even with peak prices, and even with no HPI.

The assumption of IO is a method of establishing a lower limit, which I explain further in the text, and which is a proper mathematical technique. The IO payment of £12k pa is greater that the rent of £9.6k pa, which means that the renter can save the principal faster than the buyer can hope to pay the principal down.

However, let us assume a repayment mortgage. Using the mortgage calculator on the BBC site

http://www.bbc.co.uk/homes/property/mortgagecalculator.shtml

we get mortgage payments of £1,304 pm = £15,648 pa, which is £6,048 pa, or £504 pm, more than the renter pays, which the renter can save instead of paying as the buyer is paying. Over 25 years, with interest at 6%, the renter will take only 18 year 4 months to save the principal of £200k by saving/investing this £506 pm at 6%, using the guardian calculator at

http://money.guardian.co.uk/calculator/for...,603126,00.html

That is 6 years 8 months earlier than the buyer has paid off his/her mortgage.

Edited May 24, 2009 by Fly by Night

[Prof]

A 35 year old kipper is not going to be admired by anyone. And 100K equity at 36 is pathetic. I had four times that at 38, didn't have to live like a pauper to get there, am happily married, and lived and worked overseas.

And there we have it, Hamish has revealed himself for what he is.

Unless you`ve got as much as him, you are "pathetic". I bet he goes around thinking that all those on low salaries, who would struggle to even think about buying their own home, are "pathetic".

Hamish "Bugger you Jack, I`m Alright" McTavish.

However, I must admire you for having 400K of equity at 38, plus you are married, and have lived/worked overseas.

May the good times continue for you Hamish. No wonder you seem to be keen on HPI, you`ll need at leask £700K of equity by the time you`re 50, otherwise you too will be classed as "pathetic", won`t you ?

Edited May 24, 2009 by Prof

[youthoftoday]

Expenses my landlord has incurred since we STR last spring:

-buildings insurance £300 (?)

-new washing machine £300

-plumbing repaired for dishwasher £80

-new lock for front door £100

-statutory notice served on tenement block for roof and stonework repairs £2000

And our rent does not cover his mortgage.

These are facts-he is a 'reluctant landlord' who is renting after failing to sell at an excessive price last spring.

Hmm. I own a house. My bills:

-buildings insurance £112

-new washing machine £450 (miele - should last 20 years. 4 down so far)

-plumbing repaired for dishwasher £5 (couple of pipe fittings from B&Q) - Fitted myself.

-new lock for front door - £15 for a Yale lock from Wickes. Fitted myself.

-statutory notice served on tenement block for roof and stonework repairs. Statutory notice - don't get many of those served when you own your own house.

Your landlord really needs to DIY and shop around.

Edited May 24, 2009 by youthoftoday

[HAMISH_MCTAVISH]

The assumption of IO is a method of establishing a lower limit, which I explain further in the text, and which is a proper mathematical technique. The IO payment of £12k pa is greater that the rent of £9.6k pa, which means that the renter can save the principal faster than the buyer can hope to pay the principal down.

However, let us assume a repayment mortgage. Using the mortgage calculator on the BBC site

http://www.bbc.co.uk/homes/property/mortgagecalculator.shtml

we get mortgage payments of £1,304 pm = £15,648 pa, which is £6,048 pa, or £504 pm, more than the renter pays, which the renter can save instead of paying as the buyer is paying. Over 25 years, with interest at 6%, the renter will take only 18 year 4 months to save the principal of £200k by saving/investing this £506 pm at 6%, using the guardian calculator at

http://money.guardian.co.uk/calculator/for...,603126,00.html

That is 6 years 8 months earlier than the buyer has paid off his/her mortgage.

Which would be all well and good if you hadn't missed a fundamental point.

Banks borrow from savers, and loan to mortgage holders. They take a margin for doing so, usually around 2%. Therefore for a borrowing rate of 6%, you will get a gross savings rate of around 4%, and that will still be subject to tax, so a net savings rate of around 3% is more like it.

Leading to a 3% annual differential in your calculations. And again, the buyer wins.

And thats before you account for inflation of rents or HPI. And again, the buyer wins.

Recalculate, you'll see.

[Injin]

Which would be all well and good if you hadn't missed a fundamental point.

Banks borrow from savers, and loan to mortgage holders.

[youthoftoday]

There are probably a million people out there who have rented their whole lives and ar perfectly happy with their lot.

In somewhere like Germany that figure is probably closer to 10 million.

Proof enough for you ?

Or are they all wrong and you are right.

Again.

The population of Germany is about 80 million. About 3/4 rent. So that's 60 million.

So what you are saying is 60 million Germans can't be wrong. Again.

Third time lucky eh?

[Giordano Bruno]

Which would be all well and good if you hadn't missed a fundamental point.

Banks borrow from savers, and loan to mortgage holders. They take a margin for doing so, usually around 2%. Therefore for a borrowing rate of 6%, you will get a gross savings rate of around 4%, and that will still be subject to tax, so a net savings rate of around 3% is more like it.

Leading to a 3% annual differential in your calculations. And again, the buyer wins.

And thats before you account for inflation of rents or HPI. And again, the buyer wins.

Recalculate, you'll see.

I think a differential of 3% is large. I will probably look to see what differentials are likely to be, and then recalculate.

[happyhaddock]

Which would be all well and good if you hadn't missed a fundamental point.

Banks borrow from savers, and loan to mortgage holders. They take a margin for doing so, usually around 2%. Therefore for a borrowing rate of 6%, you will get a gross savings rate of around 4%, and that will still be subject to tax, so a net savings rate of around 3% is more like it.

Leading to a 3% annual differential in your calculations. And again, the buyer wins.

And thats before you account for inflation of rents or HPI. And again, the buyer wins.

Recalculate, you'll see.

Even if you accept the figure of 3% return, you still need to take account of the real amount required to service a 200K repayment mortgage, £488 more than the £800 rent that you quote, not 300 (where did you pluck that figure from?) with your 6% interest rate.

Taking the initial £50K deposit, adding £488 each month and compounding annually at 3% results in a return of £321,664 after 25 years. A 4% return would yield £382,484. 6% would yield £546,322!

Recalculate, you might not see though.

[Authoritarian]

Not if it's worth 6K today.

Cars and houses are different, obviously. Both have an upkeep cost. But cars, being a disposable consumer good, generally depreciate. Houses, being a long term durable asset, generally appreciate.

To put it in perspective, if you had bought a Ferrari in 1960, that car today would be worth many dozens of times what you paid for it. As would a house in Chelsea. Neither would be a cost, only the interest paid to purchase them via a loan would be.

I love this argument. How come cars are more or less the same price all over the country then but house prices fluctuate wildly. A run down house in Chelsea will be worth a lot more than a reasonable one on a sink estate oop north, you can't say the same about a ford fiesta.

[cashinmattress]

What do you guys let McSpamish hijack your threads? It's always the same BORING inane argument involving fantasy finance based upon some transcendental number he pulls out of his buttocks.

A lot of us wouldn't mind seeing some personal opinion posts and threads hitting the top of the front page that haven't been McSpamish-bombed.

[Badger]

So CCC, perhaps you can enlighten us......

Assume the following.

30 years old, lives til 75.

House, 250K. Deposit, 50K. Term 25 years. Mortgage interest 6%. Rent £800. Rental inflation, 2% pa. HPI, 2% pa. Savings interest, 4%.

Now calculate lifetime rent versus buy costs........

Within the context of this thread, which is, "I may never buy, it's not worthwhile" or some such nonsense, please prove how renting for a lifetime is better than buying.

Oh, thats right, you can't.

OK, I'll make it impossibly easy for you. Calculate 1% average HPI for 25 years, and only 1% average rental increase. No? Still can't do it?

Gee, wonder why......

Some things in life cannot be measured with numbers.

[Badger]

A 35 year old kipper is not going to be admired by anyone. And 100K equity at 36 is pathetic. I had four times that at 38, didn't have to live like a pauper to get there, am happily married, and lived and worked overseas.

Wow.

Just wow

That is truly the saddest statement I've ever heard from a human being.

My condolences.

[simpleton]

Why suppose the mortgage is interest only? That would defeat the objective of buying, wouldn't it?

The calculations I gave were for repayment mortntgages. And I accounted for throwing a few hundred quid a month into a savings account and compunding the interest.

Buyer wins. Hands down, and every time. Even with peak prices, and even with no HPI.

Oh dear. If you believe that, then I'm a bit worried.

Look. Let's keep this simple.

If (as seems to be implied) you bought a property right at the peak of a very, very large property bubble - then that probably wasn't a particularly good move.

Perhaps you should have waited until prices had come down?

P.S Please, please.... No more of your back-of-a-fag packet calculations. Just looking at them makes me feel like I'm drinking deeply from the Well of Nothingness.

[Wonga]

Obssessed, British, property dickheads.... don't you just love em'!

[carbonoid]

What do you guys let McSpamish hijack your threads? It's always the same BORING inane argument involving fantasy finance based upon some transcendental number he pulls out of his buttocks.

A lot of us wouldn't mind seeing some personal opinion posts and threads hitting the top of the front page that haven't been McSpamish-bombed.

+1. Putting the dirty little doo-doo eater on ignore was the best move I've made since not buying a pile of bricks in 2006.

[scottbeard]

Do not make the mistake I made. I thought "mortgage free" & "financial independence" were the same thing.

It was quite a shock, after having paid my mortgage off a few years ago to discover that I still could not escape from the misery of dilbert land as there are still bills to pay, food to be bought etc. (especially if you have kids)

Maybe not mortgage slavery, but slavery all the same

Throughout history everyone but a very lucky few has had to work their whole life to get food and support their families, from cavemen to the present day. Is it slavery, or just life?

[kara gee]

I'm running the risk of being totally shot down here, but I'm going to be a bit controversial now and agree with Hamish - (But only in relation to the house I rent may I add)

Renting - The house I rent I pay £7,020 pa rent. 25 years = £175,500

Current values of similar properties are about £125k (about 25% off peak sold)

£25k in bank earning 4% =£1000pa. Savings pot after 25 years =£66,645

Buying - With a £25k deposit and a £100k mortgage (5% 25 years) = £7,092 pa repayment. 25 years = £177,300

So I guess what I am saying here, is in this case, is after the 25 years, the renter has a savings pot, but still has to pay rent, where as, the buyer, has no savings pot but no longer needs to pay anything for their mortgage.

I also see that to achieve these benefits of buying over renting, the mortgage payments and rental payments have to be in line. I am aware that most places in the country are NOT in line and often mortgage payments would be double that of renting.

Obviously we could all do a similar calculation for our own area/house, and have completely different results.

So why don't I buy rather than rent if the ratios are so good in my area?

My str fund interest just about covers our rental costs, which allows us to break even. This also allows us to save pretty heavily too. Also I don't want to buy a house, I want to buy land to self-build. I also strongly believe that house/land prices have a lot further to go over the next couple of years so I'm happy to sit back a while longer yet.

[eric pebble]

Having researched prices paid for similar properties using the various tools at my disposal it seems that prices back in 2007 were, quite frankly, way, way too high.

They were/are

LOONY PRICES...

[IntoTheStorm]

Even if you accept the figure of 3% return, you still need to take account of the real amount required to service a 200K repayment mortgage, £488 more than the £800 rent that you quote, not 300 (where did you pluck that figure from?) with your 6% interest rate.

Taking the initial £50K deposit, adding £488 each month and compounding annually at 3% results in a return of £321,664 after 25 years. A 4% return would yield £382,484. 6% would yield £546,322!

Recalculate, you might not see though.

Thanks for running this..

I liked how Hamish in his 1st version of his example conviently gave Mr Buyer a £50k deposit but poor Mr renter seemed to start with nothing, when he tallied up the final figures. Surely to be comparable he had to get a £50k deposit pot.....?

I know the example is purely hypothetical with the 0% HPI and Rent PI, but one only has to look at it to realise what the best option is, which is borne out by the above.

You can invest your £50k in a house with a guaranteed 0% HPI for the next 25 years. And over the said next 25 years pour in a further £200k in principal repayments, all into an asset with 0% growth.

Or you can invest your initial £50k into an asset with a set annual return of 4%. All the payment differential of rent vs mortgage payment can also be poured into this 4% return..

It doesn't exactly take a financial genius to work out which is going to be the winner since a 0% return is a go no where fast, but somehow the house is still the winner in Hamishs mind.

Hamish if it makes you feel better how about thinking of the £50k as invested in small house that does go up 4% annually vs the £250k house in a different area that has 0% HPI... Then property can still be the winner...:-)

And now its not working, the figures are changing, at the start we had a nice 4% net return to work with, now things are getting a bit closer its suddenly '4% less tax' oh 3%..

Of course I totally admit that once you introduce that once you introduce a basic 2-3% HPI and 2-3% Rent PI things very quickly begin to swing in favour of the Buyer.

I like the £400k equity by 38 bit to, any particular reason you chose 38, Hamish when the other poster mentioned 36? Was that middle of 2007 or something when you had the most impressive number to report? Plus its bad form to get into a p... sing contest, I'm sure theres plenty of us on here who would hardly be overwhelmed by a paper £400k.

My paper equity in mid 2007 (on 3 properties) was possibly double what is now, but theres not much point me quoting it to the world in 2009.

Out of interest Hamish, are you an engineer? Your mathematics are generally very strong, with assumptions made etc and some clear reasonings, but you seem to miss key finance fundamentals at times, or forget the odd thing if it helps bias it in your favour. Howabout this one, whats your 25 year outlook on HPI for Aberdeen, when the North sea oil will be down to a trickle? Maybe your 0% HPI in your example will turn out to be optimistic:-)

[Firefly]

The population of Germany is about 80 million. About 3/4 rent. So that's 60 million.

So what you are saying is 60 million Germans can't be wrong. Again.

Third time lucky eh?

But then 3/4 of the population are foreign workers or with dual citizenship and houses in Turkey, Serbia or wherever they come from

[Authoritarian]

I don't think people should rule out buying their own home entirely.

If I was in that fortunate position then what I would be hoping for would be for the country to turn to a nice amount of sh!t. Enough to seriously damage house prices in the short to medium term but not enough to bankrupt us and turn this country into a disease ridden hell hole.

A lot will depend on national debt. If they continue to load up on it then this country will be going to the dogs. If they can get it under control though then we may have a chance of getting through to other side.

[Tonkers]

Here we go again, "McTavamatics"

The cost of buying a £250K house is £186,582 ? Interest rates haven`t gone negative, have they ?

See, I didn`t even have to mention the interest on the savings.

This is starting to drive me nuts, no-one factors in mortgage interest when saying how much they have 'bought' their house for. I think it would be a shock for many!

[Harry Monk]

We are discussing costs versus renting for a lifetime, CCC.

But that largely depends on the starting point.

By paying £8,000 in rent since 2007, my mortgage would be £40,000 less if I bought today and will be £70,000 less when I do buy.

Surely you can see that for me and the majority on HPC, renting is a far more sensible option at the time being, with houses falling by thousands of pounds every month?

[HAMISH_MCTAVISH]

I know the example is purely hypothetical with the 0% HPI and Rent PI, but one only has to look at it to realise what the best option is, which is borne out by the above.

You can invest your £50k in a house with a guaranteed 0% HPI for the next 25 years. And over the said next 25 years pour in a further £200k in principal repayments, all into an asset with 0% growth.

Or you can invest your initial £50k into an asset with a set annual return of 4%. All the payment differential of rent vs mortgage payment can also be poured into this 4% return..

It doesn't exactly take a financial genius to work out which is going to be the winner since a 0% return is a go no where fast, but somehow the house is still the winner in Hamishs mind.

Yes, it seems I got sucked into my own trap. I started out picking numbers that were ridiculously biased in favour of renting, just to prove a point. And proved the wrong point in the process.

Ooops.

Hamish if it makes you feel better how about thinking of the £50k as invested in small house that does go up 4% annually vs the £250k house in a different area that has 0% HPI... Then property can still be the winner...:-)

Of course I totally admit that once you introduce that once you introduce a basic 2-3% HPI and 2-3% Rent PI things very quickly begin to swing in favour of the Buyer.

Indeed they do. The moment Rent PI and House PI move anywhere near in line with inflation, the jobs done.

I like the £400k equity by 38 bit to, any particular reason you chose 38, Hamish when the other poster mentioned 36? Was that middle of 2007 or something when you had the most impressive number to report? Plus its bad form to get into a p... sing contest, I'm sure theres plenty of us on here who would hardly be overwhelmed by a paper £400k.

My paper equity in mid 2007 (on 3 properties) was possibly double what is now, but theres not much point me quoting it to the world in 2009.

Yes, I know, I really shouldn't get sucked in by CCC. It was a retort to his claims that we are all jealous of his cunning plan to live at home with his parents and wait for a crash. Ill advised argument in hindsight. 38 was the age I paid off the mortgage on my first house, which is why I picked it.

Out of interest Hamish, are you an engineer? Your mathematics are generally very strong, with assumptions made etc and some clear reasonings, but you seem to miss key finance fundamentals at times, or forget the odd thing if it helps bias it in your favour.

Ops manager. Finance is (clearly ) not my thing, thats what we have FD's for. Given my somewhat average performance in this thread, perhaps it's better that I stick to bean generation, and continue to let others count them......

Howabout this one, whats your 25 year outlook on HPI for Aberdeen, when the North sea oil will be down to a trickle? Maybe your 0% HPI in your example will turn out to be optimistic:-)

Oh, I intend to have sold up and moved somewhere sunny to retire long before then. The peak of the next oil boom sounds about right to me. Another 10-15 years I'd guess, but perhaps sooner, perhaps a little longer.

But in fairness to poor old Aberdeen, I rather suspect it will do better than many people think. Only 13% of people in Aberdeen are employed in Oil & Gas. This figure has been decreasing steadily since 2000, to no ill effect yet. Aberdeens oil industry companies already generate 40% of their revenue from overseas. And there is already significant investment in alternative energy and life sciences, where Aberdeen Uni and it's spin off companies are a world leader apparently.

Aberdeen, even in the worst case scenario, would be a regional capital of a tourism and agriculture based economy. Much like Inverness. Which is not a bad place to live, and can hardly be accused of having "cheap" houses. Of course, Aberdeen would still have it's 3 large Universities on top of that. Not as good as today, but still better than most comparably sized towns north of Birmingham, would be my guess for post-oil Aberdeen.

[HAMISH_MCTAVISH]

Surely you can see that for me and the majority on HPC, renting is a far more sensible option at the time being, with houses falling by thousands of pounds every month?

I've never disputed that to delay purchase for a few years, in the middle of a crash, can make a lot of sense.

But in general terms the way to get ahead is to buy as early in life as possible, and overpay your mortgage as much

as possible. If a person comes of house buying age in the middle of a crash, of course they should wait it out and save some money.

But those that delayed purchase since 2000 (and there are some on here) because they thought houses weree too expensive even then..... are quite frankly screwed by comparison to just getting on with it and buying a house back then.