Should we buy a house, or wait?

Question

I am a 22 year old currently renting accommodation with my partner in the UK, and we are wondering if now is a good time to buy a property, and whether or not we can afford it.

As background, my salary before tax is £70,000 p.a. and my partner's is £36,000 p.a. This year I have a guaranteed bonus of £30,000 (i.e. written into my employment contract) before tax. After this, my target bonus is £10,000 p.a.

We are looking at houses around £500,000/£550,000 in the area just inside the M25 and when we are ready to buy, we will have savings of £55,000 for a deposit and £20,000 for stamp duty and legal fees.

Looking at Mortgage calculators such as provided by Halifax, based on these figures it would appear that we may be eligible for a mortgage up to ~£530,000, which should be enough. A mortgage of this amount will require repayments in the order of £2300-£3000 per month. After tax, our joint earnings per month is about £6345, without bonuses.

I am aware that interest rates are currently low, and am conscious that recently 3 members of the Bank of England MPC voted in favour of raising the base rate; so I do not want to miss out on preferential mortgage rates.

Moreover, if we do not buy a house, we will be spending money on rent, probably ~£1500 per month and this will just be expenditure with no assets at the end to show for it.

So my question is: based on this information, should we be looking to buy ASAP, or wait to accumulate more savings and buy a house using a smaller mortgage?

Answer 1

Some highly pessimistic things worth noting to go alongside all the stability and tax break upside that homes generally provide:

• Negative equity is no joke and basically the only thing that bankrupts the middle classes consistently en masse. The UK is at the end of a huge housing bull run where rents are extremely cheap relative to buying (often in the 1% range within the M25), Brexit is looming and interest rates could well sky rocket with inflation. Borrowing ~500k to buy a highly illiquid asset you might have to fire sale in case of emergency/job loss etc for 300k in a few years when lots of (relatively) cheap rental housing is available to rent risk free, could be argued to be a highly lopsided and dangerous bet vs the alternatives.

• Locking in 'preferential' mortgage rates can be a huge trap: low interest rates generally increase asset values. If/when they rise, assets fall in value as the demand shrinks, making you highly exposed to huge losses if you need to sell before it is paid off. In the case of housing this can be exceptionally vicious as the liquidity dramatically dries up during falls, meaning fire sales become much more severe than they are for more liquid assets like stock.

• Weirdly and unlike most products, people tend to buy the very best house they can get leverage for, rather than work out what they need/want and finding the best value equivalent. If a bank will lend you £20 a day to buy lunch, and you can just afford to pay it, do you hunt out the very best £20 lunch you can every day, or do you make some solid compromises so you can save money for other things etc? You seem to be hunting very close to the absolute peak amount you can spend on these numbers.

• Related to above, at that level of mortgage/salary you have very little margin for error if either of you lose jobs etc.

• Houses are much more expensive to maintain/trade than most people think. You spend ~2-5% every time you buy and sell, and you can easily spend 2-20k+ a year depending what happens just keeping the thing watertight, paid for, liveable and staying up. You need to factor this in and be pessimistic when you do.

• Most people don't factor in these costs to the apparent 'index' rise in house values and what they expect to sell for in x years. In reality no buy and hold investor can ever realise even close to the quoted house price returns as they are basically stocks you have to pay 5% each time you buy or sell and then 1-20% percent a year to own - they have to rise dramatically over time for you to even break even after all the costs.

In general you should buy homes to make memories, not money, and to buy them at prices that don't cause you sleepless nights in case of disasters.

Answer 2

You are very young, you make a huge amount of money, and you have (from what information you provide) very little debt.

If you simply want to buy a house for whatever reason, sure, but be honest with yourself about why you want to buy it. I see a lot of people who think they're doing it for smart financial reasons, but then when I ask them about their pension savings and credit card debts and so on, there is no evidence that they are actually the kind of person who makes decisions for smart financial reasons. If you want a house because that seems like the thing that people do, maybe you could think more about what you actually want.

If your concern is putting your money to work for you (you seem to dislike that you pay rent each month and after that month you don't have anything to show for your money, except of course that you didn't spent the last month living on the streets), you can do a lot better than getting a mortgage. For example, living frugally you should be able to dump 50k a year into investments; if you did that for a few years, you could reasonably expect the return to cover your rent and bills in a surprisingly small number of years (a lot less than a 25 year mortgage).

Your question seems to be starting from the position that you should buy a house. You're asking if you should buy it now, or wait. You are rich enough now (and if your earnings keep going up, will be even more rich in a few years) that you should perhaps question your need to buy a house. With your kind of money, at this stage of your life, you can do a lot better.

Answer 3

Advantages of buying:

1. With every mortgage payment you build equity, while with rent, once you sign the check the money is gone. Eventually you will own the house and can live there for free.

2. You can redecorate or remodel to your own liking, rather than being stuck with what the landlord decides is attractive, cost-effective, etc.

3. Here in the U.S. there are tax breaks for homeowners. I'm not sure if that's true in U.K.

Advantages of renting:

1. If you decide to move, you may be stuck paying out a lease, but the financial penalty is small. With a house, you may find it difficult to sell. You may be stuck accepting a big loss or having to pay a mortgage on the empty house while you are also paying for your new place.

2. When there are maintenance issues, you call the landlord and it's up to him to fix it. You don't have to come up with the money to pay for repairs.

3. You usually have less maintenance work to do: with a house you have to mow the lawn, clear snow from the driveway, etc. With a rental, usually the landlord does that for you. (Not always, depends on type of rental, but.)

You can often buy a house for less than it would cost to rent an equivalent property, but this can be misleading. When you buy, you have to pay property taxes and pay for maintenance; when you rent, these things are included in the rent.

How expensive a house you can afford to buy is not a question that can be answered objectively. Banks have formulas that limit how much they will loan you, but in my experience that's always been a rather high upper bound, much more than I would actually be comfortable borrowing. The biggest issue really is, How important is it to you to have a nice house? If your life-long dream is to have a big, luxurious, expensive house, then maybe it's worth it to you to pour every spare penny you have into the mortgage. Other people might prefer to spend less on their house so that they have spare cash for a nice car, concert tickets, video games, cocaine, whatever.

Bear in mind that if you get a mortgage that you can just barely afford, what do you do if something goes wrong and you can't afford it any more? What if you lose your job and have to take a lower-paying job? What if some disaster strikes and you have some other huge expense? Etc.

On the flip side, the burden of a mortgage usually goes down over time. Most people find that their incomes go up over time, between inflation and growing experience. But the amount of a mortgage is fixed, or if it varies it varies with interest rates, probably bouncing up and down rather than going steadily up like inflation. So it's likely -- not at all certain, but likely -- that if you can just barely afford the payment now, that in 5 or 10 years it won't be as big a burden.