It’s a fact: even as many millenials resign themselves to a life of renting, most of us are still obsessed with dreams of bricks and mortar. In many parts of the world, millenials have grown up with house prices that only ever seem to go in one direction: up. This feeds into a general idea that home ownership is a golden goose, and many of us feel a pressure to hurry – bordering on panic – in order to get on the “property ladder” before it’s too late.
In our enthusiasm, though, we forget that buying a house is a massive financial decision. For most of us, it’s the biggest purchase we’ll ever make. So it’s surprising that the question of whether or not it’s even a good idea to buy a house is often considered less than where to go on holiday next year.
The best way to approach such a big decision is to go in armed with the facts. Understanding the possible pitfalls will help you approach home ownership with maturity, wisdom and good sense. You will be able to look back in 20 years and look back on the decisions you made without regret. Here are some thoughts to get you started:
1. Affordability. A mortgage is a type of “secured” loan. This means that if you stop paying, the bank has a claim on your house. It doesn’t take a long memory to know that this threat has teeth. Psychologically, you should consider a mortgaged property as being owned by the bank.
2. Interest rates. At the time of writing, interest rates are really low. The Bank of England base rate, for example, is close to zero. In the 1980s, though, it was more like 10-15%. Over in the States, the fed funds rate similarly reached a high of 20 points in 1979 and 1980. Could you afford your mortgage repayments doubling or trebling?
3. Opportunity cost. My dad always told me that rent is money down the drain. That’s only half true. To illustrate the point, we’re going to imagine being already pretty well off. You might rent a $200,000 property for $10,000 per year which you could have bought outright. If you buy it, you save $10,000. If you don’t, you might put that money into an investment which yields 7% – $14,000. You just won $4000 per year by skipping home ownership. Of course, we’re not factoring in leverage (see below) or the tax implications and stability of that return.
4. Leverage. Property can be a powerful investment due to leverage – you can put in e.g. 20% and borrow the rest. The ordinary citizen is gonna find it hard to get a similar financing arrangement on their stock portfolio. If the value of the property goes up, you keep 100% of that additional value. Just don’t forget that this cuts both ways. Property can go down in value too, eroding all of your equity and more, and you still have to pay the mortgage.
5. Stamp duty. Some countries – like the UK – have a government tax on transferring land or property. This can go up to a hefty 12% for the most expensive properties, so can be a significant added cost of home ownership.
6. Conveyancing. Most UK buyers will use a solicitor or conveyancer to conduct searches on a property they want to buy (e.g. to check ownership or flood risk), and then to exchange contracts and complete on the property. This doesn’t scale with the cost of the property, so could easily add 1% to the cost of buying a cheaper property.
7. Survey. A full structural survey can cost hundreds. Whilst cheaper options are available, bear in mind that buying a house is a huge financial decision for most people. Weigh up other factors like the age of the house, and whether you’re in a position to cope with a large unexpected maintenance bill, to decide what the most appropriate option is here.
8. Valuation fees. Some mortgage lenders will charge a valuation fee, which could run well over £1000.
9. Mortgage early repayment costs. This one is important for us Financial Independence types. We might be in a position to pay back our mortgages faster than most. However, typically the charges range from 1–5% of the value of the early repayment. Consider looking for a mortgage with no early repayment charge if this is a path you’re looking to take.
10. Moving costs. Are you moving far? Don’t forget that you need to get your stuff from A to B. If you don’t plan this right you could be hit with significant costs, especially if you’re moving long distance.
11. Property taxes. This is really specific to where you live. An average American household spends a couple of thousand on property taxes on their home. Council tax in the UK goes to local councils to pay for services like bin collection, but households end up paying a similar amount.
12. Maintenance. Upkeeping your home can be a significant expense – one that you don’t need to pay in most countries if you’re renting. 1% of the home’s value per year is a common rule of thumb, though you will want to consider other factors like age, climate/weather and who’s living there.
13. Leasehold/Ground rent. In some parts of the UK and US, home ownership is not always quite as simple as owning outright. Especially some parts of England and Wales, and on apartments, “leasehold” is common. This means that instead of buying a property, you are buying a long-term lease on it. You do have all sorts of rights, and a level of security not usually associated with being a tenant. In the case of leasehold houses you should also be able to buy the “freehold” (~complete ownership). That process can be expensive, though. You also have an ongoing cost – ground rent – to use the land the property is built on. Be doubly cautious when buying a relatively newly built house. The leashold agreement can leave you with spiralling costs, and a house that is difficult to resell.
15. Anchoring effect. Some of us like roots, some of us like wings, some of us a bit of both. Our 20s and 30s can be a great time to indulge our wanderlust or explore living in new places before deciding where to put down roots. Whilst it’s never too late or too hard to make a change, the costs of home ownership we just covered will make you think twice about packing your bags overnight and moving somewhere new.
What do you think? Is home ownership worth it? Does it increase or decrease your freedom? Is it necessary for Financial Independence?