Securing your Home
We are a nation of homeowners. Aren't we?
You’ve got to have somewhere to live. So you can't avoid the decision of where and how to do so.
But you don't have to do that now. If this is your first trawl through the site you may want to jump to Saving.
Rent or buy
Your first decision is whether to rent or buy.
If you rent you have flexibility but are at the mercy of a landlord you may not know. If you intend to buy sometime in the future you have taken on price risk – you’ll buy eventually, but at a price higher or lower than today.
If you buy you have taken on price risk of a different sort. Or have you? Surely you own an asset now and the value of assets matters if you own them, doesn’t it?
Well, sometimes. Generally, the value of an asset only matters twice – when you buy and when you sell. You are going to sell your house, or a similar asset you have arrived at through exchanges, when you enter your nursing home. And that’s a long time away.
Let's have a different look at it.
The economics of buying
You've got to live somewhere. So, to look at the economics of buying your own home, compare the costs of buying with the costs of renting. Now, would buying (instead of renting) be a good idea?
If your bought your house you would 'save' the rental payments (in exchange for a mortgage). These rental payments must compensate a landlord for his costs of ownership. These include:
- financing costs, offset by expected capital appreciation,
- repairs and upkeep,
- management fees,
- dead-letting periods,
- landlord's own management time and expenses,
- legal and other expenses relating to disputes with tenant,
- investment risk premium (no need to understand this yet!).
If you buy your own house you become a landlord with the most marvellous tenant:- yourself! Compared with an independent landlord:-
- Your financing costs net of capital appreciation will be the same or lower.
- Repairs and upkeep will be the same or lower (you will make sure they are done properly, with an owner's care and foresight; and you may do them yourself at low cost or even as an enjoyable recreation).
- There will be no management fees.
- There will be no dead-letting periods.
- There will be no landlord's management time - what's to manage?
- There will be no disputes with the tenant.
- No investment risk premium will be required (still no need to understand this!).
Not only that, your 'profit' (the difference between the rental you would have paid and the costs of ownership) will be untaxed, as will any capital gain on sale of the property (provided it's what the tax man calls your 'designated primary residence'.
Can you think of a better investment? If you can, by all means make it and good luck to you.
No, we haven't said 'buy your house, and as soon as possible'. One of the the themes of this site is that financial management is above all a personal matter depending on your circumstances and temperament. For example, the flexibility of rental would be attractive to those who need to move. Or you may have a view on the state of the housing market. Or you may just prefer to pay for someone else to bear the burden of home ownership. Your views on these things will affect your decision.
What we are saying is that there is a fundamental financial advantage in the discipline of home ownership.
Don't let's get ahead of ourselves. This is just mechanics.
It's actually quite difficult mechanics. Ignore it for now. Or take a peek at What Mortgage?, if you must.