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laurejon

Buying Today Could Be Your Only Chance To Ever Get Into The Market.

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Seeing as its yet another rainy day, and I am on a week off I thought I would put my mind to some calculations to illustrate what I knew, but could not be bothered to work out in the past.

The subject is Compound Interest, something people appear to have very little grasp of these days.

Supposing you wish to buy a property in an area where you can find a job that pays a wage that you could live on. You would have to spend around 200k on a property, for sure if you live in the North of England and work for a local council you are a different beast as you earn an above average salary, and live in a deprived area whereby you can pick up a house for little more than the price of a postage stamp. However we are talking real people, who have to work for a real living here, and who are not subsidised by hard working British Families who are the taxpayers of this nation. Not Gordons Goffers who earn huge sums, and are protected by Gordons offshore legislation.

Had you purchased in 2006, you would not have had to shop around to find a mortgage fixed for the term of 25 years at 5%.

House prices would have to drop 50% to be comparable to having borrowed last year at 5% when rates are 12%

So you borrow 200k @ 5%, your repayments would be £1,169p pcm, and you would repay in total £350,754

If you wait until the end of this year you may well be looking at interest rates of 8%, so for the same money you would be paying 1,543p pcm and your total repayment over the term of 25yrs would be £463,000.

That mistake has cost you £112,246 and that pain of higher mortgage payments each month, an additional £374pcm

Ah, I hear you cry, higher interest rates will make people reduce the price of their properties, so you will not need to borrow 200k.

Unfortunately had you done your sums you would find that a 200k house would have to drop to £150,000 with an interest rate of 8%, to be comparable to my first illustration with house price of 200k and an interest rate of 5%.

I think 8% is a conservative estimate, if things turn sour rates would most likely rise to 12% to be of any use in stemming runaway inflation, which is their primary intention when they raise rates.

It could well be the case that to buy today with a rate of 6% fixed for the term, which is fequently available, could well worth be taking.

Edited by laurejon

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Guest Skint Academic

... assuming of course that you are in a recession proof job!

Personally, I don't want to buy something so ridiculously highly priced over its fundamental value and prefer to emigrate instead.

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Seeing as its yet another rainy day, and I am on a week off I thought I would put my mind to some calculations to illustrate what I knew, but could not be bothered to work out in the past.

The subject is Compound Interest, something people appear to have very little grasp of these days.

Supposing you wish to buy a property in an area where you can find a job that pays a wage that you could live on. You would have to spend around 200k on a property, for sure if you live in the North of England and work for a local council you are a different beast as you earn an above average salary, and live in a deprived area whereby you can pick up a house for little more than the price of a postage stamp. However we are talking real people, who have to work for a real living here, and who are not subsidised by hard working British Families who are the taxpayers of this nation. Not Gordons Goffers who earn huge sums, and are protected by Gordons offshore legislation.

Had you purchased in 2006, you would not have had to shop around to find a mortgage fixed for the term of 25 years at 5%.

House prices would have to drop 50% to be comparable to having borrowed last year at 5% when rates are 12%

So you borrow 200k @ 5%, your repayments would be £1,169p pcm, and you would repay in total £350,754

If you wait until the end of this year you may well be looking at interest rates of 8%, so for the same money you would be paying 1,543p pcm and your total repayment over the term of 25yrs would be £463,000.

That mistake has cost you £112,246 and that pain of higher mortgage payments each month, an additional £374pcm

Ah, I hear you cry, higher interest rates will make people reduce the price of their properties, so you will not need to borrow 200k.

Unfortunately had you done your sums you would find that a 200k house would have to drop to £150,000 with an interest rate of 8%, to be comparable to my first illustration with house price of 200k and an interest rate of 5%.

I think 8% is a conservative estimate, if things turn sour rates would most likely rise to 12% to be of any use in stemming runaway inflation, which is their primary intention when they raise rates.

It could well be the case that to buy today with a rate of 6% fixed for the term, which is fequently available, could well worth be taking.

Yes you are right, I had better get down to the EA this afternoon!

:P

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Supposing you wish to buy a property in an area where you can find a job that pays a wage that you could live on. You would have to spend around 200k on a property, for sure if you live in the North of England and work for a local council you are a different beast as you earn an above average salary, and live in a deprived area whereby you can pick up a house for little more than the price of a postage stamp. However we are talking real people, who have to work for a real living here, and who are not subsidised by hard working British Families who are the taxpayers of this nation. Not Gordons Goffers who earn huge sums, and are protected by Gordons offshore legislation.

Could you enlighten me on that first section of comment......not sure im reading it correctly..... please give a correct comparative if you could........as council work north of england v real people,real living, is confusing me.....

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A 200k house would have to drop to 110k with rates at 12% to be comparable to the 5% you could have picked up last year.

I think prices will drop around 25%, and when they do rates will be around 8.5%.

So if you can afford it, todays cheap money will not be repeated for a very long time, if indeed ever.

Average rates over the past 70 years have been 7%, look across the world and take a good look at where rates are heading, and that is back to normal, not high rates.

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That's a very good illustration and thanks for taking the time to do it.

I think you consider a 25% drop from 200k to 150k to be unrealistic. I think it's highly likely.... and probably more.

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Could you enlighten me on that first section of comment......not sure im reading it correctly..... please give a correct comparative if you could........as council work north of england v real people,real living, is confusing me.....

The average price of a property in an area whereby you can gain employment that would pay a living wage is around 200k.

Obviously over 40% of people living in the North of England would disagree as house prices are much cheaper than the South of England and they work in the public services, on the same wage that someone working in public services in the South is on. So for them they would dispute the 200k figure, as houses are much cheaper in the North of England.

They would argue that a house can be picked up for 140k today, and they are very affordable.

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I guess it would depend upon you not moving for 25 years?

F

Absolutely. If you want to move up or release equity at any time during the next 25 years you have to move to the lender's SVR. Anyone taking a 25 year fix on those terms needs their head examining IMHO

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A 200k house would have to drop to 110k with rates at 12% to be comparable to the 5% you could have picked up last year.

I think prices will drop around 25%, and when they do rates will be around 8.5%.

So if you can afford it, todays cheap money will not be repeated for a very long time, if indeed ever.

Average rates over the past 70 years have been 7%, look across the world and take a good look at where rates are heading, and that is back to normal, not high rates.

Er... ignore my last. The site is slowing down with all the attention!

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Seeing as its yet another rainy day, and I am on a week off I thought I would put my mind to some calculations to illustrate what I knew, but could not be bothered to work out in the past.

The subject is Compound Interest, something people appear to have very little grasp of these days.

Supposing you wish to buy a property in an area where you can find a job that pays a wage that you could live on. You would have to spend around 200k on a property, for sure if you live in the North of England and work for a local council you are a different beast as you earn an above average salary, and live in a deprived area whereby you can pick up a house for little more than the price of a postage stamp. However we are talking real people, who have to work for a real living here, and who are not subsidised by hard working British Families who are the taxpayers of this nation. Not Gordons Goffers who earn huge sums, and are protected by Gordons offshore legislation.

Had you purchased in 2006, you would not have had to shop around to find a mortgage fixed for the term of 25 years at 5%.

House prices would have to drop 50% to be comparable to having borrowed last year at 5% when rates are 12%

So you borrow 200k @ 5%, your repayments would be £1,169p pcm, and you would repay in total £350,754

If you wait until the end of this year you may well be looking at interest rates of 8%, so for the same money you would be paying 1,543p pcm and your total repayment over the term of 25yrs would be £463,000.

That mistake has cost you £112,246 and that pain of higher mortgage payments each month, an additional £374pcm

Ah, I hear you cry, higher interest rates will make people reduce the price of their properties, so you will not need to borrow 200k.

Unfortunately had you done your sums you would find that a 200k house would have to drop to £150,000 with an interest rate of 8%, to be comparable to my first illustration with house price of 200k and an interest rate of 5%.

I think 8% is a conservative estimate, if things turn sour rates would most likely rise to 12% to be of any use in stemming runaway inflation, which is their primary intention when they raise rates.

It could well be the case that to buy today with a rate of 6% fixed for the term, which is fequently available, could well worth be taking.

Are you aware of the debt burden concept? Higher IRs on a smaller principle sum are preferable to lower IRs on a larger sum becuase general inflation will reduce the original capital in real terms, and a high IR environment is indicative of high inflation. Ergo, your wages should be rising more quickly, therefore your debt burden is reduced.

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The average price of a property in an area whereby you can gain employment that would pay a living wage is around 200k.

Obviously over 40% of people living in the North of England would disagree as house prices are much cheaper than the South of England and they work in the public services, on the same wage that someone working in public services in the South is on. So for them they would dispute the 200k figure, as houses are much cheaper in the North of England.

They would argue that a house can be picked up for 140k today, and they are very affordable.

This is simply not true - wages in the PS for the South are higher than they are in the North.

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Absolutely. If you want to move up or release equity at any time during the next 25 years you have to move to the lender's SVR. Anyone taking a 25 year fix on those terms needs their head examining IMHO

You must have worked in the Blair Cabinet Spin Office.

That is not the case, fixed rate mortgages are portable, they go with you to the next property, and should you wish to take on additional borrowing it would be identified as Loan2, and treated as such. Obviously Loan2 would be at a rate you negotiate on the day. Moving house does not mean you have to go to SVR, your loan and the contract surrounding it remains intact.

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You must have worked in the Blair Cabinet Spin Office.

That is not the case, fixed rate mortgages are portable, they go with you to the next property, and should you wish to take on additional borrowing it would be identified as Loan2, and treated as such. Obviously Loan2 would be at a rate you negotiate on the day. Moving house does not mean you have to go to SVR, your loan and the contract surrounding it remains intact.

Exactly. The Lender's SVR - they've got you by the balls once you sign up to one of these.

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Are you aware of the debt burden concept? Higher IRs on a smaller principle sum are preferable to lower IRs on a larger sum becuase general inflation will reduce the original capital in real terms, and a high IR environment is indicative of high inflation. Ergo, your wages should be rising more quickly, therefore your debt burden is reduced.

How so?

I have illustrated that waiting will cost you in higher monthly payments that may push you over the edge, and you repay over 140k more for the same house in total payments.

Inflation erodes debt, but it also erodes savings.

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…and another thing, your point about compound interest is very important.

People who bought their house for £200k think they make a profit if they sell it for £250k and totally ignore the fact that have paid a massive amount in interest.

Example. Someone ‘gave’ £99k for their house, so think that, because they could now sell it for £200k that they have ‘made’ £101K. They totally ignore the fact that paying off their mortgage has cost them the best part of £74k in interest.

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How so?

I have illustrated that waiting will cost you in higher monthly payments that may push you over the edge, and you repay over 140k more for the same house in total payments.

Inflation erodes debt, but it also erodes savings.

That depends on how you hold your savings (i.e. gov't bonds).

Buying at a high price in a low IR environment is madness and you know it!

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…and another thing, your point about compound interest is very important.

People who bought their house for £200k think they make a profit if they sell it for £250k and totally ignore the fact that have paid a massive amount in interest.

Example. Someone ‘gave’ £99k for their house, so think that, because they could now sell it for £200k that they have ‘made’ £101K. They totally ignore the fact that paying off their mortgage has cost them the best part of £74k in interest.

This subject is more difficult.

For sure if you have a free house availabe to live in rent free, then the sums would be different.

However if you take my example your case does not stand up.

I purchased a property in 2000, or 225k, its now worth around 450K should I sell it.

To rent that property or similar would have cost me around 1,300pcm in rent and for that I would have made my landlord over 200k, I would walk away today with nothing.

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... assuming of course that you are in a recession proof job!

Personally, I don't want to buy something so ridiculously highly priced over its fundamental value and prefer to emigrate instead.

Yes I think this makes the most sense

I bought in 2003 but I may emigrate before trading up

I enjoy my present job and it is the only thing stopping me as my girlfriend has family overseas so we could live with them initially.

For the time being I will stay here as I have an enjoyable job and no children so do not have to trade up.

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25 year fixed rate headline loan at 5%

Find me someone who has that...

Better to owe little at massive interest rates then a lot at low interest rates...

Interest rates head both ways, loans only go down.....

Simple, remember prices dropping already over good chunks... flats static for years now...

New builds with crazy discounts and cash backs...

all gooooooooooooooooooood:)

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If interest rates are 12% then what is the average wage. Do you really earn the same amount of money over a 25 year period?

Also any overpayments are going to massively decrease the total paid over time on a smaller sum. And why are rates going up if prices are dropping by "25%"

Edited by maxwell

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The subject is Compound Interest, something people appear to have very little grasp of these days.

Including you it would appear. Definition of compound interest:

Interest which is calculated not only on the initial principal but also the accumulated interest of prior periods

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That depends on how you hold your savings (i.e. gov't bonds).

Buying at a high price in a low IR environment is madness and you know it!

There is a balance, and I think I have shown that in my illustrations.

If you held off from buying as you wanted prices to lower, it may well be a very long wait.

Rates are heading up, and there will be a corrosponding reduction in prices, however you will end up paying more in repayments over the long term as rates corrospond with prices.

House prices went up as rates were low, in real terms taking into account wage inflation and interest rates today, house prices are much the same today as they were five years ago.

The trick was to catch house prices on the backfoot as rates dropped suddenly, prices took four years to rise to maintain the equilibrium. That day is gone!!!. However do the sums, it might well pay to get in today, as rents are increasing along with everything else.

Edited by laurejon

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This subject is more difficult.

For sure if you have a free house availabe to live in rent free, then the sums would be different.

However if you take my example your case does not stand up.

I purchased a property in 2000, or 225k, its now worth around 450K should I sell it.

To rent that property or similar would have cost me around 1,300pcm in rent and for that I would have made my landlord over 200k, I would walk away today with nothing.

I hope that you are not making the point that house prices have gone up since 2000?

Damn, did they....?

mates sister just bought a flat in cardiff... £160,000 of a guy who [paid £250,000 in 2003

its gone odd all over, but not always in the same direction.....

(mostly up recently... though...;) but that has been changing)

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This subject is more difficult.

For sure if you have a free house availabe to live in rent free, then the sums would be different.

However if you take my example your case does not stand up.

I purchased a property in 2000, or 225k, its now worth around 450K should I sell it.

To rent that property or similar would have cost me around 1,300pcm in rent and for that I would have made my landlord over 200k, I would walk away today with nothing.

Hang on, you've lost me...

Are you seriously suggesting that buying TODAY is better than waiting for a lower price in a higher IR environment? Your example suck BTW, of course you’d have been paying your landlords rent IF THEY HAD BOUGHT AT £200k. Not in today’s market if the property is £450k to buy and £1300 pcm to rent.

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