Guv,
Monevator’s providing loads of grist for our writing mill – inflation for me, mortgage for you (and me too, for I was thinking of writing something along these lines myself – you’ve got loads of other posts to back up your other arguments.) Reads nicely.

I’ve liked your “Priced Out” post in the past and showed it to DW wrily. I’m stuck with a similar situation (and yes, me parents/in-laws tried to warn me about it too!) that was until recently bleeding me 14%!

I too advice against going for mortgage to anyone who cares to ask my opinion, as job volatility is much more higher here, but people point to my own (underwater) mortgage as their argument against my advice . Fine, you’ll live and learn, I say to them. But here’s in advance from me: “I told you so!”.

Usually the IT crowd (which is the prime target for the real-estate conmen) hang out around those IT enclaves (for easier job-hopping without losing shirt on the poperty) like Gurgaon, Hyderabad, Bangalore, thereby inflating prices in those cities artificially + substantially and putting heavy load on infrastructure and utilities: matchbox sized 10-12 apartments where a single house used to stand, and as you can imagine, road, water, sewage, garbage are all pretty stretched!

P.S: Is the mortgage repayment amount usually lesser than the monthly rent in the UK?

Here’s what I posed in Monevator, verbatim:

I don’t know how relevant an Indian perspective on this would be, but let me try to put things down.

1. Usually there’s loads of “administrative” fees that go with registering the house, etc. This is not covered as part of the bank loan here. It’s usually 10% of the cost of the house/apartment that one has to shell out of own pocket. And there’s no way you can “recover” this cost from the next sucker you’re trying to offload the house!
2. Granted, there’s a interesting case made for exhorbitant rents, but what the monthly repayment on a mortgage? In India (regardless of the location…location…), renting is about 1/3rd the price of a monthly mortgage installment for a similar dwelling. So, it is very stupid to go for a no-down-payment loan, while you could be socking away 2/3rds of a “potential” mortgage interest towards down-payment for a few years.
3. There’s also the concept of fixed/floating interest rates here, and somehow the bankers manage to con(vince) you to sign for “floating” with the carrot that interest rates will fall and your rate will follow that trend instead of a “fixed rate”. When the rates do fall however, the bank will not lower it automatically. It is your “responsibility” to go to the bank and pay them another round of “admin fees” to bring it (sort of) on par with prevailing rates. The experience is enough to kill your faith in humanity….thrice! In a nutshell, either way you choose, the system is set up to bleed you dry.
4. There used to be a provision earlier, that you can chose to pay the money back earlier than the 20-25 year period. Lots of IT boom and saved per-diems and Rupee vs. others conversions later, banks now penalise early repayment since late 2007 (peak-IT boom). It is just eye-watering to see the money leave the account month after month, and watch your rate of interest climb up every two months… Usury must be experienced before it can be commented upon!

In summary,
1. “house prices will always go up” is a myth. QED Hong Kong, USA…
2. “Timing the stock market/property bubble” to rake in the money? Who do we think we are kidding, Mr. Hitler?
3. Nothing beats the old logic of saving up for a chunk of your property’s value before committing to the mortgage……..Ever!. My father didn’t have a PhD, but he got that one figured right! And I didn’t!
4. This “Home ownership” dream is way too overrated around the world (Somewhere I read that “Debt incumbent homeowners don’t go on strike”! Ha!) So much for owning and living the dream! Yes, there’s a case for buying your home by the time you retire (my father did exactly that), but signing away the rest of your life starting in the early 20s for a “no-down-payment” mortgage is just silly.

That’s my view.
—-

@Surio if there’s one takeaway from my experience it is that if you stick at it (and can keep up the repayments) you will come good in the end, but unfortunately you are in middle age by then

You have the advantage that India has a relatively high rate of inflation, which is busy killing your debt. My Dad paid his mortgage off earlier than me, but he had the advantage of 26% inflation on his side in 1979.

In the UK under normal circumstances rent is roughly equivalent to a mortgage. A mortgage is much cheaper at the moment because of the low-interest-rate policy of the Bank of England, but under normal circumstances market forces appear to shift things to make renting only a little bit cheaper than a standard variable rate mortgage.

Waiting patiently and praying the market doesn’t hit disaster until late May, I am gleefully relishing the burning of my mortgage. Right on the money, gotta get that grit and determination going and get this stuff paid off before you do anything else. I procrastinated a bit but I’m so close I can taste it. No mortgage, no rent, is the only place to be in these really uncertain times. I really believe the mega-crash is coming. It’s just a matter of time. Don’t get caught with your pants down with debt you probably won’t be able to pay !

You missed out the Third Way:

http://www.guardian.co.uk/money/blog/2011/feb/14/saving-house-deposit-first-time-buyers

Very much appreciate the post and debate; this homeowner decided a few weeks back to stop plowing spare money into his ISA and to start paying down the mortgage… for better or worse.

Ermine I agree with you that houses are overpriced. But what is the alternative? A lifetime of paying rent? How on earth are we gonna be able to afford to pay market rent in our old age?

I rent too. But Im not comfortable with it. If you can afford to buy a reasonably priced house shouldnt you? At least then you arnt worried about homelessness in your old age?

@Lemondy, once you have a mortgage paying it down is a [retty good solution – the only way you get a decent return on savings nowadays The Grauniad’s Tabitha worked hard for her £166, no…

@Dreamer, no argument that it makes sens to buy a reasonably priced house, it is more than they are unreasonable at the moment.

Monevator showed there is another way. There’s nothing wrong with paying rent if you have a large ISA portfolio that covers your rent. In many ways you have greater flexibility, and this need not stop in old age – that is the beauty of passive income! Monevator got himself to being able to buy a flat in London, outright, should he shoose to do so, in his late thirties. I was in my forties by the time I paid off my mortgage, and though Monevator’s career arc is probably a little higher than mine, he hasn’t got a hugely greater income in real terms than I had at his age. Getting a decent share portfolio and using the proceeds to address on’t housing costs if a flexible alternative, it need discipline and courage to not lose one’s head in bear markets so it doesn’t suit everybody. But actually buying the house isn’t the only way to underwrite your housing costs. I didn’t realise that when I started down the mortgage route and probably wouldn’t have had the talent to make it work, but it can be done

Ermine, Im sure that Monevator’s way is possible, but I’ll believe it when I see it, when Monevator has actually cashed in his shares and bought his house in London then I’ll tip my hat to him but not before.

But it’s not either/or. Because I have never overpaid on it I am still paying a mortgage and I’ve been nursing investments for some time. I like the flexibility that gives me, even of it’s not necessarily the most efficient way.

Hi ermine,
I thought I had replied to your remark. Reading monevator today made me look you up, and I realised I hadn’t Oops.

I am aware of this inflation eroding the value, but actually, the bank keep raising the interest rates over the “floating” rates every 2 months, and unfortunately, I am in the floating category, which means I am getting my teeth kicked in in the entire deal. I am not sure what is the proportion of people that sign fixed vs. people with floating, but we have our own share of “green eyes” and I’ve seen more floating rates were checked on the application form while I was there.

@Surio,

I feel your pain,I paid over 14% at one time. However, paying inflation +x% is not so much of a problem, because you have bought an appreciating (?) asset using leverage, and you are slowly paying down the capital, ie you are not paying inflation + x% on the whole value of the house for the whole duration of the loan.

So there’s still hope – I have never been on a fixed rate mortgage. But you only get to see the jam in the last 10 years or so – it is the tragedy of home ownership that you get to eat most of the pain when you are young

Thanks for continuing this debate here, and glad the post provoked some thoughts!

Ironically, as I’ve mentioned on the comments on my own blog, I’m not convinced this is a great way to buy a house, personally, although it’s true it’s hard to beat the flexibility.

But you miss out on the heavy lifting done by inflation and leverage.

Also, there’s a big tax break of effectively renting a house of yourself (i.e. buying your own home).

In contrast, as @Dreamer implies, actually converting my portfolio to a flat would be non-trivial. There would be substantial capital gains taxes, which in reality I can’t imagine I’d ever be happy to pay.

So in practice I’ll almost certainly use a mortgage if I buy, although I’d certainly try to raise it against the portfolio income to keep down costs (but that’s not tax efficient either!) and then perhaps over-pay every year by timed tax disposals.

I love ISAs so much that I’d be loathe to liquidate them too, so again that constrains the likelihood of directly turning equities into bricks and mortar.

cheers!

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I live in Toronto, it’s one of the biggest city (and expensive) in Canada. Right now, the average home runs about $350k (bottom) to a million dollars.

I don’t see why people need a house (even with a family) unless they’re trying to settle pernamently. As for me, I would rent cheaply in an apartment, save enough money, then buy a cheap house in a small town and live the quaint life.

If you’re single, rent. If you’re married, rent. If you got kids … move to the suburbs and buy a cookie cutter home for much less.

Either that, or buy a condo.

[...] if you had a parallel savings product for the capital. Often an endowment, but a S&S ISA is a good match too. If you save £10k a year in cash, after 25 years you would have enough to buy the average [...]