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

[sun n sea]

My business used to rent a new factory building for £1000 per month

My business now owns the same new factory building and pays just over half on servicing a repayment mortgage.

When my business rented I was responsible for all repairs and insurances

Now my business owns the same building I am responsible for all repairs & insurances.... except I get to choose who does the repairs & where I buy my insurance.

Before moving to the current building we rented for 20 years... and had f*ck all to show for the money... in this building after 10 years it's paid for in full.

[Bloo Loo]

My business used to rent a new factory building for £1000 per month

My business now owns the same new factory building and pays just over half on servicing a repayment mortgage.

When my business rented I was responsible for all repairs and insurances

Now my business owns the same building I am responsible for all repairs & insurances.... except I get to choose who does the repairs & where I buy my insurance.

Before moving to the current building we rented for 20 years... and had f*ck all to show for the money... in this building after 10 years it's paid for in full.

well, apart from the tax relief on your rental expenses in full.

Now you have a nice capital gain to pay...or maybe not.

[didntbuytolet]

+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.

I live in an ok house, made some decent moves on under 40k salary and a bit of luck and am now mortgage free at a hair under 40. I have paid 200k in overall payments (mortgage and overpayments over 13 years, 2x salary) for my average, boring box of a house, which is nominally worth 300 ish, maybe . Had I faffed about travelling like my mates instead of getting a job in my very early twenties, or continued to rent instead of pushing the boat out in 1997 and buying I would not be in this position. Let house prices fall, even at £150k for mine I'd be better off than I would have been renting (modern box, maintenance is a tin of weatherproof paint and a replacement double glazed window insert a year) and would be a cash buyer for a potential upgrade at 40 - 50% off peak, if I can be bothered.

If you are under 37 you didn't have this chance, sorry about that. If you are over 37, you did.

[worried1]

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 "

.

I don't think most people ever split the two elements. Most people would prefer to pay, say, £1,500 (£1,000 interest and £500 capital) on a repayment mortgage than they would pay £1,000 in rent even though the £1,000 is just as 'dead' either way. In this market, they would be better off renting and putting the £500 in a 2% savings acount.

The really sad thing is that a lot of people would rather pay £1,000 on an interest only mortgage than a £1,000 in rent and STILL think that they are making an investment. This is after they have forked out for a deposit and for all of the repairs that a landlord would have paid for if they had been renting!

The obsession with home 'ownership' in this country is very strong, the teaching of basic maths/personal finance much less so!

Edited March 3, 2011 by worried1

[Tired of Waiting]

I don't think most people ever split the two elements. Most people would prefer to pay, say, £1,500 (£1,000 interest and £500 capital) on a repayment mortgage than they would pay £1,000 in rent even though the £1,000 is just as 'dead' either way. In this market, they would be better off renting and putting the £500 in a 2% savings acount.

The really sad thing is that a lot of people would rather pay £1,000 on an interest only mortgage than a £1,000 in rent and STILL think that they are making an investment. This is after they have forked out for a deposit and for all of the repairs that a landlord would have paid for if they had been renting!

The obsession with home 'ownership' in this county is very strong, the teaching of basic maths/personal finance much less so!

well put W1.

Yes, I understand that.

I think inflation is a major factor behind the popular belief that property prices value always go up, or "you can't go wrong with bricks and mortar".

[Meat Puppet]

What they mean by "dead money" is that you are missing out on the chance to make a mint on a highly leveraged bet due to a combination of manipulative central bankers and herd following idiot fellow citizens.

[worried1]

well put W1.

Yes, I understand that.

I think inflation is a major factor behind the popular belief that property prices value always go up, or "you can't go wrong with bricks and mortar".

Absolutely, but it wasn't that many years ago that the theory was debunked (again). Houses became a ridiculous investment in the mid-90s, and most people were scared of investing because they has been badly burnt or new someone else who had been.

Five years later and that is all forgotten about as prices start to go up again and another ten years later and everyone still sees them a a rock solid investment even with the minor falls after 2007.

[Tired of Waiting]

What they mean by "dead money" is that you are missing out on the chance to make a mint on a highly leveraged bet due to a combination of manipulative central bankers and herd following idiot fellow citizens.

But even with inflation, prices do wobble a lot. We have to pick the right time to buy. When property prices are falling, rent is not really "dead" money. Well, it is, but the alternative is much worse! Coz you will have to pay interest AND lose capital too! That is the side most people can't see - the "deadness" of the other side as well! And this blindness puzzles me.

[Dorkins]

What they mean by "dead money" is that you are missing out on the chance to make a mint on a highly leveraged and extremely tax efficient bet due to a combination of manipulative central bankers and herd following idiot fellow citizens.

Added to for you, and I completely agree. When you buy a house it comes with a lot of benefits not available to investors in other asset classes like savings, shares, or pensions. Renters are second class citizens not just at cocktail parties, but also when it comes to the legal, tax and benefit systems.

[888]

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.

If the landlord is in negative equity, he obviously made the wrong investment and leveraged himself too much. You have to do the maths before you become a landlord. The problem was too many TV programmes encouraging people to become landlords who had no right being one, and simply thought because the banks will lend they should borrow. Serves them right.

[the_duke_of_hazzard]

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

My effective return at the moment is 4.38%. This is on a mixture of NS&I certs, 1-3 year bonds and standard cash ISAs (ie all cash).

That would be 1095 a month on 300K.

My rent is 1350pcm, and 2 identical houses on my street sold last year for ~640K.

NB the %age calculation is based on the last 12 months' rolling average, ie not just what happened last month to NS&I index.

Edited March 3, 2011 by the_duke_of_hazzard

[mightytharg]

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

Other people just understand it better than you.

Rent is just dead money, you spend it, it's gone.

Mortgage interest is more like savings, it goes towards paying off your debts.

How does this work? Through inflation. For example, imagine inflation is 5%, risk free rate is also 5%. Now imagine you pay 6% interest on an interest only mortgage. Now, unlike rent, this 6% isn't dead money. One percent goes to someone like me, a deserving, hardworking, banker. The other 5% is to offset inflation. After a year you have paid off around 5% of your mortgage, simply through inflation, yippee!

Unbelievably, for buy-to-letters it gets even better. Remember they also pay 1% to the banker, and 5% to offset inflation. But here's the thing - they get to offset the whole 6% against their taxes. So, they pay 1% for the mortgage, and get >2% back in tax breaks!

I know this news may be hard to take for you die-hard housepricecrashers, but that is how it is.

Sorry,

Tharg.

[Tired of Waiting]

Other people just understand it better than you.

Rent is just dead money, you spend it, it's gone.

Mortgage interest is more like savings, it goes towards paying off your debts.

How does this work? Through inflation.

You should read the whole thread before coming up with obvious statements like that.

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.

And regarding:

For example, imagine inflation is 5%, risk free rate is also 5%. Now imagine you pay 6% interest on an interest only mortgage. Now, unlike rent, this 6% isn't dead money. One percent goes to someone like me, a deserving, hardworking, banker. The other 5% is to offset inflation. After a year you have paid off around 5% of your mortgage, simply through inflation, yippee!

You are describing the current, unusual, situation, where and when IR = inflation. But It won't last. Besides, in the same period, say 2011, the house you bought will lose some 10% nominal, 15% real.

And all that affect buy-to-letters as well.

"Sorry"

[mightytharg]

"Sorry"

You seem to be in denial. If you're happy with that than it's OK.

If not, re-read my post carefully and look up "the time value of money". It seems simple to quantitative financial experts like me, but might be difficult for the average bear.

Essential point isn't that houses are a great investment, just that you have to consider that what you owe is inflated away by the passage of time. Therefore what you pay for a mortgage (even an interest only one) is not directly comparable with the amount you pay in rent.

[Tired of Waiting]

You seem to be in denial. If you're happy with that than it's OK.

If not, re-read my post carefully and look up "the time value of money". It seems simple to quantitative financial experts like me, (...)

OK then, what do you think about these numbers then:

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.

Essential point isn't that houses are a great investment, just that you have to consider that what you owe is inflated away by the passage of time. Therefore what you pay for a mortgage (even an interest only one) is not directly comparable with the amount you pay in rent.

Again, that is obvious! Didn't you read my quote? Again, here:

"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."

By the way, you do know the difference between nominal and real, don't you, "oh expert"?

[noodle doodle]

One way of looking at interest-only mortgages is that it IS basically rent, but rent with the option of buying the house you're in at the end of 15/20/25 years at the price it was when you started i.e. a lot cheaper than it will be by then.

at say 4% HPI a year for 25 years you're picking up a house for roughly 2/7ths, even at 3% you're getting if for less than half

(Of course, another way to look at it is that it encourages people to overstretch the amount they borrow, and there's other arguments against IO which is why I'm an plain vanilla repayment man myself)

[Muswell Hillbilly]

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

I always use Karl Jeacle’s Mortgage Calculator, which has all kinds of useful options.

[Tired of Waiting]

I always use Karl Jeacle’s Mortgage Calculator, which has all kinds of useful options.

Thank you MH.

[888]

My effective return at the moment is 4.38%. This is on a mixture of NS&I certs, 1-3 year bonds and standard cash ISAs (ie all cash).

That would be 1095 a month on 300K.

Nothing to do with the rent discussion.

But you have to pay tax on the 4.38%. Cash ISAs you do not have to pay tax, but even if you joined back in 1999 when then first started you have no more than £40K in Cash ISAs. So, that means £260K is taxable. 4.38% of £260K is £11.4K, take of a tax allowance of £6K say, that makes £5.4K taxable at 20% i.e. £1.1K in tax. Therefore you income is only £10.3K on £260K. i.e. 3.96%. If you have used up you tax allowance the tax on £11.4K will be £2.3K therefore net income of £9.1K on £260K or 3.5%.

[Bloo Loo]

Other people just understand it better than you.

Rent is just dead money, you spend it, it's gone.

Mortgage interest is more like savings, it goes towards paying off your debts.

How does this work? Through inflation. For example, imagine inflation is 5%, risk free rate is also 5%. Now imagine you pay 6% interest on an interest only mortgage. Now, unlike rent, this 6% isn't dead money. One percent goes to someone like me, a deserving, hardworking, banker. The other 5% is to offset inflation. After a year you have paid off around 5% of your mortgage, simply through inflation, yippee!

Unbelievably, for buy-to-letters it gets even better. Remember they also pay 1% to the banker, and 5% to offset inflation. But here's the thing - they get to offset the whole 6% against their taxes. So, they pay 1% for the mortgage, and get >2% back in tax breaks!

I know this news may be hard to take for you die-hard housepricecrashers, but that is how it is.

Sorry,

Tharg.

of course...lets say you have the average house.

lets say its £160K

Lets say you have saved about 20%...your money in equity...you have a loan outstanding or £130K...IO.

lets look at todays Halifax data.

Oh dears, the house is dropped .9 %, lets call it £1600.....

.9%...thats nothing...its about what I could get for saving..

but wait....Its YOUR equity thats dropped £1600....so, on Monday, your books showed you with £30K worth, and this morning, you are worth.£28400.

wow, about 6% of non dead money gone.

But wait..its worse...you are paying interest on your mortgage....what another £400? thats £2000 YOU lost in one month....whereas the renter has paid out say £800 for the average home, and his 30K ( lets even things out) have earned some money too.

renting could be called dead money in a credit boom...but....you have to get out to cash out...that means renting on the way down...

A mortgage for most is exactly how people descibe it....a ball and chain.

[Lepista]

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.

I think you may have something there. it'[s so stupid, it's probably true.

I always chuckle when people are not prepared to "sell for less than they've paid" for a house... but they'd be happy to sell for £105k if they'd "paid" £100k for it.

[Bruce Banner]

......It seems simple to quantitative financial experts like me, but might be difficult for the average bear......

You are a patronising person

It is simple, let me explain yet again.

We all have to pay for a roof over our heads and there are three way we can do it.

1, Pay rent to a landlord.

2, Take out a mortgage and pay interest to a lender.

3, Pay cash and lose the income on the money that you now have tied up in a depreciating, illiquid, asset.

[Tired of Waiting]

I think you may have something there. it'[s so stupid, it's probably true.

I always chuckle when people are not prepared to "sell for less than they've paid" for a house... but they'd be happy to sell for £105k if they'd "paid" £100k for it.

This possibility crossed my mind coz sometime ago I heard 2 little stories that ... I'll just tell them:

1) My wife told me that she heard on the BBC, on some report about credit cards, that many (most?) teenagers don't know what APR means, and many (most?) thought that the higher the better.

2) A couple got their first annual mortgage statement, and was very surprised to see how little of their debt had been paid off during their first year.

This (2) is even worse. They were "surprised"?! These were adults, that had signed a contract to buy a house and had no knowledge or understanding whatsoever of what they had done.

If even people who bought already don't know what they've done, I bet even more prospective buyers don't know either.

Perhaps regulation should force mortgage companies to send monthly statements. That should educate the people pretty fast.

[Bloo Loo]

This possibility crossed my mind coz sometime ago I heard 2 little stories that ... I'll just tell them:

1) My wife told me that she heard on the BBC, on some report about credit cards, that many (most?) teenagers don't know what APR means, and many (most?) thought that the higher the better.

2) A couple got their first annual mortgage statement, and was very surprised to see how little of their debt had been paid off during their first year.

This (2) is even worse. They were "surprised"?! These were adults, that had signed a contract to buy a house and had no knowledge or understanding whatsoever of what they had done.

If even people who bought already don't know what they've done, I bet even more prospective buyers don't know either.

Perhaps regulation should force mortgage companies to send monthly statements. That should educate the people pretty fast.

nobody knows what APR means...depends on the bank and they way they choose to calculate it.

[Tired of Waiting]

nobody knows what APR means...depends on the bank and they way they choose to calculate it.

Yes, I know, I don't mean technically precise. But "the higher the better"?! When choosing a credit card? To borrow from?!