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Better To Buy Outright, Or To Buy Bigger With A Mortgage?

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Better to buy outright, or to buy bigger with a mortgage?

This is the question I have to consider when the "bottom" finally appears to be here. So I'd appreciate some input :)

I am renting with my wife currently. We live in a small space, but since no kids are planned that's not such a terrible thing. We don't mind being frugal either. A garden would be nice, but hey ho.....

When we do buy in a year or two, should we enjoy the stress-free life of a flat bought outright? Or is it more financially astute to get a mortgage, use our savings as a deposit, and buy much bigger/better as an investment (don't laugh).

Using a mortgage to buy bigger must be under the assumption property will go up in value eventually (I said no laughing). But has that become a joke now? Would it be wiser to avoid those mortgage chains altogether and settle for simply what we actually need to live in, investing our future savings elsewhere?

You tell me.

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Better to buy outright, or to buy bigger with a mortgage?

This is the question I have to consider when the "bottom" finally appears to be here. So I'd appreciate some input :)

I am renting with my wife currently. We live in a small space, but since no kids are planned that's not such a terrible thing. We don't mind being frugal either. A garden would be nice, but hey ho.....

When we do buy in a year or two, should we enjoy the stress-free life of a flat bought outright? Or is it more financially astute to get a mortgage, use our savings as a deposit, and buy much bigger/better as an investment (don't laugh).

Using a mortgage to buy bigger must be under the assumption property will go up in value eventually (I said no laughing). But has that become a joke now? Would it be wiser to avoid those mortgage chains altogether and settle for simply what we actually need to live in, investing our future savings elsewhere?

You tell me.

I think it depends on what property you see at the time. Would you miss out on an extra bedroom for the sake of a 5k mortgage? I'm not saying 5k buys an extra bedroom, you might just be 5k shy of having enough funds to buy a particular house that has that extra room. Would you pay an extra 10k to be away from a main road? You'll only know at the time.

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IMO location is no 1 consideration, outside space worth paying extra for rather than an extra bedroom...buying outright is nice if you can, but a small 3 times one salary repayment mortgage is fine. ;)

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If I may extend the OP's question a bit... Is "leveraging" in any shape and form just a bad idea when it comes to property? At what point is it better to have a reasonable mortgage (max 2.5x single salary) and distribute the spare cash over relatively low risk investments, instead of putting all the cash into buying outright. Yes, I can do the maths, but would also like to know the opinion of others on this forum...

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You tell me.

As a rough guide:

If you think the value of the investment will increase at a higher rate than the cost of borrowing in the long-term then leverage up. (get a mortgage).

At the moment, borrowing costs are lower than long-term averages but I expect house prices to fall so if you must buy, cash would be best to limit your losses.

Unless prices fall well below trend, I expect average interest rates and below-average house price growth for many years means that buying a smaller place outright makes more sense.

There are some rent vs buy spreadsheets on http://www.excelexperts.com/node/14 where you can model different scenarios of interest rates, mortgage levels etc.

Of course, when it comes to it, you are going to forget all this, fall in love with a house and get the biggest mortgage you can :)

VMR.

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I'm also in a similar situation, but I have 2 kids. Option 1 = buy outright cash, something average with small garden. Option 2 = have big deposit + 3xsingle salary mortgage.

Currently I'd probably go for option 2 as I'd like a much bigger garden. I wouldn't be doing this though thinking 'investment'. Purely family needs.

If I were in your position and kids weren;t on the cards, I'd go for option one. Then with the extra money you'd be saving from not having a mortgage, save a bit of it and spend the rest on hobbies, education, skills etc.

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There is another concern as well - do you think your income will grow faster than your borrowing rate?

If so, buy big, because you effectively get to buy in at a lower market level and pay back most of the cash later in life when you are substantially richer.

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Also like to add. What's the point of having a 'bigger' house than you need? More upkeep costs, council tax, heating bills.

Just for the sake of having a bigger house in the hope it would be a good future investment.

However to get a mortgage for a house that's say in an area known for walking (because you love to walk) or have a big garden (because you love to garden), On the coast (because you fish or surf) etc etc.... I would say would be worth a mortgage because of the personal value you'd be gaining.

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Better to buy outright, or to buy bigger with a mortgage?

This is the question I have to consider when the "bottom" finally appears to be here. So I'd appreciate some input :)

I am renting with my wife currently. We live in a small space, but since no kids are planned that's not such a terrible thing. We don't mind being frugal either. A garden would be nice, but hey ho.....

When we do buy in a year or two, should we enjoy the stress-free life of a flat bought outright? Or is it more financially astute to get a mortgage, use our savings as a deposit, and buy much bigger/better as an investment (don't laugh).

Using a mortgage to buy bigger must be under the assumption property will go up in value eventually (I said no laughing). But has that become a joke now? Would it be wiser to avoid those mortgage chains altogether and settle for simply what we actually need to live in, investing our future savings elsewhere?

You tell me.

Well I think it depends on the amount of risk you want to take and your personal job situation

A lot of the posts here seem to ignore the downside risk of job loss and inability to service debt when looking at the merits of borrowing

Also leveraged investment can destroy savings very quickly if it goes wrong, so borrowing 33% or more of the price of a house is actually very risky

On the other hand I paid off my mortgage first chance I could so I'm probably more risky adverse than most....

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What about getting an offset mortgage. You can pay back faster because interest is offset plus you always have the cash to hand. You could pay chunks off the mortgage or simply use the lump sum to drip-pay the mortgage.

We have had one of these for years and its really handy if you have a large chunk to offset. Downside is that the offset saving is crap at the moment but overall a great product IMO.

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since no kids are planned that's not such a terrible thing. We don't mind being frugal either. A garden would be nice, but hey ho.....

You tell me.

Buy a place with a garden and room for a kid or two (or a lodger)

Never buy a 1 bed flat.

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I am in a similar position and iIMHO I would say avoid falling into the old trap ie seeing your house as a potential investment vehicle. It's an asset for sure, but there is a world of difference.

You need to weigh up what is the most important thing to you and what are your life priorities. For instance, you have the chance to potentially make a dramatic and beneficial change to your lifestyle, go mortgage free and you give yourself the chance to get out of the mortgage-slave cycle, potentially cut down on your work hours and enjoy your life/family more or potentially choose a completely different career path (if that's what you want).

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I was in the same position in 2006 and after lengthy discussion with my other half and against my better instincts I agreed to go for the buy outright option; so so so glad we did that now...........

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If so, buy big, because you effectively get to buy in at a lower market level and pay back most of the cash later in life when you are substantially richer.

err, no

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It's all about timing. Think about YOU and YOUR partner's opinion on the market and your joint attitude to risk. Really what you are asking is whether you should leverage (buy bigger with a mortgage) or not (buy outright). Remember you have a third option of doing neither of these (and continue renting). People argue that buying a house is not an investment but should just be seen as a place to live etc. They may be right but what is important is understanding what the consensus think. The consensus thought that property was an investment. This was facilitated by increasing availability of leverage oportunities with relaxation of lending multiples (e.g. subprime and liar loans). BTL allowed further leverage.

Leverage is good (for those who leverage) when a market is rising but it's bad when a market is falling.

History tells us that leveraging is great for those at the beginning of a bubble, good for those at the mid-point of a bubble but bad and perhaps catastrophic for those at the end of a bubble. It can even impact those who do not invest when a bubble bursts. Housing prices are just a subset of the wider and global economy but interestingly one can impact on the other. It was leverage that left investors stranded as their positions unravelled during the Wall Street Crash. Then, the investment was shares not houses. The ramifications had much wider implications even for those who did not leverage or even invest as was seen during the depression. Asset values fell, not just shares. Will history repeat itself or can a depression be averted? Perhaps we are just in a recession? Perhaps the market will continue to rise?

Edited by crashologist

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Perhaps we are just in a recession? Perhaps the market will continue to rise?

no, in real terms it will fall for many many years, even when the recession is over. the housing-leveraged will be severly battered at best. other assets will do much better.

Edited by Si1

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Also like to add. What's the point of having a 'bigger' house than you need? More upkeep costs, council tax, heating bills.

Just for the sake of having a bigger house in the hope it would be a good future investment.

However to get a mortgage for a house that's say in an area known for walking (because you love to walk) or have a big garden (because you love to garden), On the coast (because you fish or surf) etc etc.... I would say would be worth a mortgage because of the personal value you'd be gaining.

Apart from waiting 2 to 3 years before you buy, kara gee has just given you the best advice you'll ever get!

If you want an investment, look elsewhere because leveraging and property speculation may have allowed the financial institutions to bring us closer to the brink of social collapse than we have ever seen. Because of this (and despite the FSA anouncement today), I can't see there being much cash available to buyers for a long time. This surely means the end of rampant HPI for a long, long time. IMO

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QUOTE (Charterhouse @ Jul 8 2009, 08:31 AM)

If so, buy big, because you effectively get to buy in at a lower market level and pay back most of the cash later in life when you are substantially richer.

err, no

To be fair this worked very well for the baby boomers in the 1960s-now

The million dollar question is how well it will work for generations X and Y :(

My gut instinct is that it won't work (because the past growth in lending/debt is unsustainable), but I'm interested in hearing (reasoned) arguments about why I might be wrong?

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It's all about timing. Think about YOU and YOUR partner's opinion on the market and your joint attitude to risk. Really what you are asking is whether you should leverage (buy bigger with a mortgage) or not (buy outright). Remember you have a third option of doing neither of these (and continue renting). People argue that buying a house is not an investment but should just be seen as a place to live etc. They may be right but what is important is understanding what the consensus think. The consensus thought that property was an investment. This was facilitated by increasing availability of leverage oportunities with relaxation of lending multiples (e.g. subprime and liar loans). BTL allowed further leverage.

Leverage is good (for those who leverage) when a market is rising but it's bad when a market is falling.

History tells us that leveraging is great for those at the beginning of a bubble, good for those at the mid-point of a bubble but bad and perhaps catastrophic for those at the end of a bubble. It can even impact those who do not invest when a bubble bursts. Housing prices are just a subset of the wider and global economy but interestingly one can impact on the other. It was leverage that left investors stranded as their positions unravelled during the Wall Street Crash. Then, the investment was shares not houses. The ramifications had much wider implications even for those who did not leverage or even invest as was seen during the depression. Asset values fell, not just shares. Will history repeat itself or can a depression be averted? Perhaps we are just in a recession? Perhaps the market will continue to rise?

Couldn't agree more buying things with borrowed money is the fastest way to get rich or poor

Most risky/ most upside: buy a house with leverage

Least risky/ least upside: rent

Some risk/ some upside: buy a house with cash

The last option means you can survive being wrong, but not have the bragging rights of being omnipotent

Of course, timing with investment is also crucial, so no reason not to just rent and wait and see...

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Least risky/ least upside: rent

Of course, timing with investment is also crucial, so no reason not to just rent and wait and see...

you've contradicted yourself. so which is it?

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QUOTE (Neverland @ Jul 8 2009, 10:54 AM)

Least risky/ least upside: rent

Of course, timing with investment is also crucial, so no reason not to just rent and wait and see...

you've contradicted yourself. so which is it?

I know, I'm sorry I don't know everything! :blink:

Personally I would suggest only buying a place for cash from a position of renting now if it absolutely meets all your criteria perfectly (as such a place would rarely come up)

I think its only sensible to leverage up more than 33% of LTV to buy somehting if you are VERY sure of your job/salary for the next 2-3 years

Taking out a big loan of 3x salary is something for the very brave/certain, thats probably 5-6 years of ALL your post tax income?

I think everyone missed the point made earlier about offset mortgages being a good idea also - having your cake and eating it is also good

Is that concrete enough Si?

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I'd buy bigger/better than you need with, if necessary, a small mortgage.

An extra bedroom for guests is always nice, an extra reception room so that you can easily have space for yourself if necessary. A decent sized garden so you can indulge yourself.

And most importantly - the very best location you can afford. Your unique criteria will determine that.

Never look at your home as an investment - enjoy it to the max when you live there. Life's too short to worry about whether you've "made" or "lost" an extra £50K after 25 years of struggle.

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To be fair this worked very well for the baby boomers in the 1960s-now

The million dollar question is how well it will work for generations X and Y :(

My gut instinct is that it won't work (because the past growth in lending/debt is unsustainable), but I'm interested in hearing (reasoned) arguments about why I might be wrong?

demographics and occupancy ratio will be even more important than suppressed lending imho. over 50s own a lot of big homes as will be downsizing for retirement and latter years selling to generations with less population. lower intrinsic demand over a period of decades allied to disporportionate additional square footage appearing from retirees equals lower natural house price level.

this could be circumvented by immigration , I would think limityed to SE/London.

Edited by Si1

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I am in a similar position and iIMHO I would say avoid falling into the old trap ie seeing your house as a potential investment vehicle. It's an asset for sure, but there is a world of difference.

You need to weigh up what is the most important thing to you and what are your life priorities. For instance, you have the chance to potentially make a dramatic and beneficial change to your lifestyle, go mortgage free and you give yourself the chance to get out of the mortgage-slave cycle, potentially cut down on your work hours and enjoy your life/family more or potentially choose a completely different career path (if that's what you want).

+1

The question is, if you buy the smaller property, what will you do with the rest of your money? If it will buy you things you value more than a bigger house then buy the smaller. If not, buy the bigger.

I bought a big house without really thinking it through enough. I am now in the process of selling it (probably at a loss) and will buy a smaller one in 2010/11. There are so many other uses for your money than buying a house - make sure you have considered them all before writing that cheque.

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