In the first of our newly “themed” updates, I thought I would go straight in on a topic that I feel very passionately about.
Your Home is not an Asset
I was reading the Times over the weekend. The general tone was of doom and gloom around the property market. Their lead story on Saturday was Beware 100% mortgage negative equity pitfall which got me thinking about 2 key points:
1) 100% mortgages (yes, they still exist) and 95% mortgages make it possible for many people to buy, who weren’t able to do so from about 2010 to 2016. Surely this is a good thing that more people can buy their own home rather than putting up with expensive rent or getting under their parents feet forever.
2) YOUR HOME IS NOT AN ASSET – This is a long held view of mine, which is not very popular but true. What does it matter if prices go up, down or sideways? Your home is your home. The clue is in the title. You can’t eat equity, so why do people view their home as an investment or even worry about house prices at all? Particularly in London we have a very warped view of this. For example, if you wanted a jacket and you saw they were on sale by 10%, you would jump at it and buy one. You wouldn’t think “I don’t like that they have gone down in price, I’ll wait until they are 10% more expensive than today and buy one then”. We only apply this bizarre logic to the property market for some reason.
If you want to become wealthy by the time you retire, which I would hope would be all our goals as that is why we work after all (and to qualify that statement – “wealthy” simply means not being dependant on anyone else). Buying a home and paying off the mortgage is a fundamental part of that process (as is saving for retirement via a pension, investments or even Buy To Let purchases – while protecting your assets, family and income while you are working. But more on this another time). As if you don’t, you may well be working well into your 70’s to service a mortgage, or be forced to sell and downsize to a property that is too small or in an area you didn’t want to be in. Neither are ideal situations. However, with proper planning this can be avoided.
I’m not suggesting everyone has a repayment mortgage. Interest Only loans and not paying of the loan entirely may be a viable solution for some people. For example, I have enough equity in my house in South West London to buy a similar house in Woking where I grew up. So I am comfortable having my relatively small mortgage on an Interest Only basis. Also owning a business means I may well have the means to clear the loan in full before I retire. So as I have 2 viable repayment routes (downsizing or selling my business), that works for me. If you are considering this route, also consider your own exit plans to make sure they are achievable and fit with lender criteria (any of our advisers can guide you through your own specific circumstances and find the appropriate lender). Nor should you break your neck to pay the debt off. As above, you do need to have an eye on saving for the future, and the longer you do that for the better. While always allowing for a budget for adequate protection for the mortgage (as if your income stops, you won’t be able to stay in the property or plan for the future. Again, we can advise you on this as we care about all our clients).
I know it is not the sexiest of subject matters, but with interest rates so low, and the property market suppressed, now is the ideal time to make the move you wanted, or focus on getting debt paid off if you aren’t planning on moving.
However, these conditions won’t stay the same forever. History teaches us that interest rates are likely to rise in the future, as will house prices (if you are in doubt over house prices, please do play with the Nationwide House Price tool – www.nationwide.co.uk/hpi – just look over 5, 10, 15 years or longer to see what has happened to prices in your area. While there is no guarantee the future will represent the past, it is a very good guide of what to expect). So my advice would be take advantage of these conditions, as when you look back in 10, 20 or 30 years you will be so glad that you planned ahead and aren’t having to comprise your plans in later life, as you planned for it all and have achieved the goal you wanted. Which for our clients, we want you all to be happy and wealthy into retirement.
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