" Rent Is Dead Money". And Interest Is Not? Or Do People Think...

[Tired of Waiting]

People know that "rent is dead money". But why most people can't see that mortgage interest is dead money too??

Just a thought: Do people think that if interest is, say "5%", do they think that only 5% of their monthly payment will be interest?! I can see this misunderstanding happening.

Actually, on a 25 years mortgage, in the first year, 70% of the monthly payments is interest = dead money. At 6% interest, it's 76%.

We can use this mortgage calculator, to show that. Just put £100,000 there, then compare re-payments with interest only:

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

Edited for clarity, including "in the 1st year...".

I'll try to find a calculator that shows the total interest paid throughout the entire mortgage.

.

Edited March 3, 2011 by Tired of Waiting

[neil324]

Of course. Say some one in the pub says i only paid £100K for my house. If they are paying it off over 25 years they are not, you need to include the interest payments also. At a guess another £50k?

[TheCountOfNowhere]

The house I am now living in, estimate asking price value.

£300K

To buy at that level would cost me around £1800 per month in lost interest or mortgage interest.

Rent, £800 per month.

saving, £1000.00 per month

That's about, 12k p.a.

Compounded over 25 years I can save about 500K renting. The question is will the 300K house be work 800K in 25 years.

I doubt it.

Buying an over-priced house at the top of the biggest housing bubblein history...is wasted money.

Also, you have the benefit of being mobile,no up keep, down/up size easily. etc

[Bruce Banner]

Rent is not dead money, it pays for a roof over your head.

[the_duke_of_hazzard]

The vast majority of the populace don't even understand what "in real terms" means, I'll wager.

Edited March 3, 2011 by the_duke_of_hazzard

[Tired of Waiting]

Of course. Say some one in the pub says i only paid £100K for my house. If they are paying it off over 25 years they are not, you need to include the interest payments also. At a guess another £50k?

According to that BBC mortgage calculator, at 5%/year interest, monthly payments would be £591.27 x 12 months x 25 years = £177,381 in total.

At 6% it would be £651.88 x 12month x 25years = £195,564 in total.

To be fair, inflation should reduce the real amount paid back, in real terms in the future, but specially in the first years the amount of interest is huge. In a falling market it is much better to wait a few years (2 or 3?), and avoid the capital loss and negative equity.

If prices fall by some 10%:

At 6%/year, if you finance 100k in 25 years you will pay £651.88/month over 25 years.

But if you wait 2 or 3 years, and buy for 90k, you will pay £653.88 over only 20 years!

At 5%/year:

100k in 25 years = £591.27/month

90k in 20 years = £601.81/month

At these rates, a house 10% cheaper means you are mortgage free 20% sooner.

.

Edited March 3, 2011 by Tired of Waiting

[Bloo Loo]

whatever you do...costs.

purchase the right to live somewhere..it costs. it costs in rent, in opportunity costs, repairs, renewals, risk, whatever.

Nobody does something for nothing in a FIAT controlled society.

[Dorkins]

The "rent is dead money" crowd are not entirely wrong though. At pretty much any time from 1945 to 1996 if you had bought a 3 bed semi on a 90% mortgage at the age of 25 and lived in it until you died of old age, it would have been a lot cheaper than renting the same house over the same time period. Plus, you would own the house when you finished paying it off.

Not saying the same is true now, but for most of the time since the war renting long term in the private market has been a mug's game.

[fadeaway]

lost interest or mortgage interest.

Highlighted as THE single most important concept to grasp when considering the true cost of renting vs buying.

So often overlooked.

[Bloo Loo]

The "rent is dead money" crowd are not entirely wrong though. At pretty much any time from 1945 to 1996 if you had bought a 3 bed semi on a 90% mortgage at the age of 25 and lived in it until you died of old age, it would have been a lot cheaper than renting the same house over the same time period. Plus, you would own the house when you finished paying it off.

Not saying the same is true now, but for most of the time since the war renting long term in the private market has been a mug's game.

you forget inflation and high interest rates.

A house, is a house is a house.

it doesnt gain in value...indeed, it consumes resources in repairs, decorations, garden, modernisations.

inflation gives an illusion of benefit.

what a mortgage is is a forced savings plan.....thats what equity is...the savings you contribute-debt.

[abroad]

The house I am now living in, estimate asking price value.

£300K

To buy at that level would cost me around £1800 per month in lost interest or mortgage interest.

You won't get 1800 a month interest return for a 300K deposit. You'd do very well to get 800......

[Tired of Waiting]

The "rent is dead money" crowd are not entirely wrong though. (...)

I agree that rent is dead money. I said as much in the OP. My point is that people fail to see that interest is dead money too.

Using the example of "TheCountOfNowhere" above, if someone in his position saves the difference, he will be able to buy a house cash much sooner than if he buys now with a 25 years mortgage. On the other hand if he (and a tenant in your example below), just spends the difference, then of course they would not have anything in their old age.

But that is a different matter: self discipline v "mortgage-enforced" discipline (very costly "financial-nanny-service" though).

(...) At pretty much any time from 1945 to 1996 if you had bought a 3 bed semi on a 90% mortgage at the age of 25 and lived in it until you died of old age, it would have been a lot cheaper than renting the same house over the same time period. Plus, you would own the house when you finished paying it off.

Not saying the same is true now, but for most of the time since the war renting long term in the private market has been a mug's game.

I don't have the numbers to compare both options in the past. But i am quite sure this is not the time to buy, still near the top of the biggest house price bubble in British (world?) history.

[Tired of Waiting]

You won't get 1800 a month interest return for a 300K deposit. You'd do very well to get 800......

Interest rates are very low now (though not as low as your 800 suggests), but they will go up from now onwards. And if inflation stays at these levels, or go higher, then IR will go really high.

[BelfastVI]

The vast majority of the populace don't even understand what "in real terms" means, I'll wager.

Nether, it appears does Neil Above

Of course. Say some one in the pub says i only paid £100K for my house. If they are paying it off over 25 years they are not, you need to include the interest payments also. At a guess another £50k?

[Bloo Loo]

I agree that rent is dead money. I said as much in the OP. My point is that people fail to see that interest is dead money too.

Using the example of "TheCountOfNowhere" above, if someone in his position saves the difference, he will be able to buy a house cash much sooner than if he buys now with a 25 years mortgage. On the other hand if he (and a tenant in your example below), just spends the difference, then of course they would not have anything in their old age.

But that is a different matter: self discipline v "mortgage-enforced" discipline (very costly "financial-nanny-service" though).

I don't have the numbers to compare both options in the past. But i am quite sure this is not the time to buy, still near the top of the biggest house price bubble in British (world?) history.

not dead...spent.

[Dorkins]

you forget inflation and high interest rates.

A house, is a house is a house.

it doesnt gain in value...indeed, it consumes resources in repairs, decorations, garden, modernisations.

inflation gives an illusion of benefit.

what a mortgage is is a forced savings plan.....thats what equity is...the savings you contribute-debt.

I haven't forgotten inflation and high interest rates at all, they certainly affect the real value of the mortgage payments you have to make. I expect people with big mortgages were wincing when interest rates went past 14%.

Whether you rent or buy, you have to pay for housing. It still seems though that for most of the decades since the war, buying has probably been the cheaper way to house oneself even when you factor in repairs and the opportunity cost of not saving more or putting it in equities.

Housing has some huge advantages, not least that it is pretty much the only tax-free way to transfer the value of wages through time. Shares are subject to capital gains, interest on savings is taxable and pensions are subject to income tax when you come to collect.

Edit: By the way this is not me turning bull, I just think there are real reasons why rent is not equivalent to mortgage interest.

Edited March 3, 2011 by Dorkins

[888]

People know that "rent is dead money". But why most people can't see that mortgage interest is dead money too??

Just a thought: Do people think that if interest is, say "5%", do they think that only 5% of their monthly payment will be interest?! I can see this misunderstanding happening.

Actually, on a 25 years mortgage, in the first year, 70% of the monthly payments is interest = dead money. At 6% interest, it's 76%.

We can use this mortgage calculator, to show that. Just put £100,000 there, then compare re-payments with interest only:

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

Edited for clarity, including "in the 1st year...".

I'll try to find a calculator that shows the total interest paid throughout the entire mortgage.

.

That's why the rich pay for it in cash, and BTL landlords get their tentants to pay the mortgage.

Any mortgage that a rich person has is used to flip the property for profit, and not to provide a roof over his head.

If you only have one property you're not going to be making any money unless you sell at a profit and move to a cheaper country.

[Tired of Waiting]

That's why the rich pay for it in cash, and BTL landlords get their tentants to pay the mortgage.

Any mortgage that a rich person has is used to flip the property for profit, and not to provide a roof over his head.

If you only have one property you're not going to be making any money unless you sell at a profit and move to a cheaper country.

One way to reduce massively the total amount of interest paid (and our personal strategy) is to buy a modest property first, with a large deposit, and pay as much as possible as fast as possible. Then (some 5 years later?) upgrade with a large deposit again, and pay it off as fast as possible.

Also timing is essential, of course. We'll wait for lower house prices. 1 to 3 years? Our rent is low, and or deposit is growing.

If we get this right we could be mortgage free in some... 15 years?, as we will reduce the waste on interest payments.

[TheCountOfNowhere]

You won't get 1800 a month interest return for a 300K deposit. You'd do very well to get 800......

Depends on the investment/interest rates etc. I get about that on £300K NS and I index linked saving certs I have.

[Van]

At the end of the day you have to either rent a house, or rent the money to buy a house.

[Tired of Waiting]

At the end of the day you have to either rent a house, or rent the money to buy a house.

Exactly.

But to go back to the OP, why most people can't see that?

That is my question.

Why??

I think many people may think, or "feel" (more likely) that:

" Interest rate = 5%/year. My mortgage payment is £1,000 = £950 paying the house, £50 interest "

.

Edited March 3, 2011 by Tired of Waiting

[Bloo Loo]

That's why the rich pay for it in cash, and BTL landlords get their tentants to pay the mortgage.

Any mortgage that a rich person has is used to flip the property for profit, and not to provide a roof over his head.

If you only have one property you're not going to be making any money unless you sell at a profit and move to a cheaper country.

Many thousands of BTL Landlords are NOT having their mortgages paid to their benefit.

Their loans are now covering a depreciating asset, and many are in negative equity.

All the renter is covering is the loan to the bank...ie, the banker is making money....but then again, thats the case with a mortgage too.

My landlord spent £5000 on new double glazing and repairs...roughly, last year....he's spending the same again this year...new windows to the lounge ( its huge), new roof to the shed, and repaird to a leaky water system.

Before we moved in, new carpets and water tank....just had a toilet disembowelled and a new stopcock installed.

add in the capital losses, and the biggest benefit ot the landlord, who lives next door, is me.

[pablopatito]

Its all ifs and buts about what will happen to inflation, interest rates, house prices and rents in the future. But I'm pretty certain I would be financially better off over the course of my lifetime if I bought a house now rather than rented my entire life. I'm delaying buying because I'm expecting (or should that be 'hoping'?) that prices will fall in the short term. But the key point is I'm only *delaying* buying, at no point have I considered renting forever. I'd hate to be seventy and retired and relying on my pension to pay my rent. And if I didn't think prices will probably fall (even if its just in real terms) in the next year or two then I'd buy tomorrow. I'm guessing this must be true of most posters on here, otherwise they wouldn't be interested in a forum about house prices.

[blackgoose]

That's why the rich pay for it in cash, and BTL landlords get their tentants to pay the mortgage.

Many rich people take a mortgage out anyway, as they think that they might be able to make more profit from investments than lose from paying the interest on a mortgage. (especially now with mortgage rates still very low)

[Dorkins]

Its all ifs and buts about what will happen to inflation, interest rates, house prices and rents in the future. But I'm pretty certain I would be financially better off over the course of my lifetime if I bought a house now rather than rented my entire life. I'm delaying buying because I'm expecting (or should that be 'hoping'?) that prices will fall in the short term. But the key point is I'm only *delaying* buying, at no point have I considered renting forever. I'd hate to be seventy and retired and relying on my pension to pay my rent. And if I didn't think prices will probably fall (even if its just in real terms) in the next year or two then I'd buy tomorrow. I'm guessing this must be true of most posters on here, otherwise they wouldn't be interested in a forum about house prices.

+1

If you can finish paying off your mortgage in your mid-late 40s that leaves you with half of your adult life living rent free. Rents would need to be half of mortgage interest to make renting long term an attractive option.