Money Tips Network

Most people make their life’s main investment in property. Taking out a mortgage is a different form of investment from the others discussed in this chapter since it is an investment financed by borrowing. The other schemes discussed involve the use of money saved from income. One of the great advantages of investing in property is that the cost of repaying the interest (not the capital) on a mortgage is eligible for income tax relief at the investor’s marginal rate. However, this applies only on the first ?30,000 of a mortgage and them only if the house is the main residence of the borrower.

Although the attractions of home ownership seem obvious, it is well to remember that house buyers are, in fact, making a complex calculation. The alternative to house buying is, of course, renting. Mortgage repayments are at first considerably more expensive than rents and to the payments must be added the rates bill. However, mortgage payments go up and down with the rate of interest and not, like rents, with the rate of inflation. After a couple of years, the mortgage payment normally becomes competitive with rents.

Of course, most people see the benefits of property investment in terms of the increase in house prices. However, as one house’s price is increasing, so are the prices of all the others. When the house is sold, the next house may be even more expensive. The costs of moving are also high. Estate agents normally take 1.5 per cent of the price, solicitors a further 1 per cent and stamp duty 1 per cent more, making 3.5 per cent in all. On top of those costs are the charges of removal men and the inconvenience involved.

Just to illustrate the complexities, suppose a young married couple buy a flat for ?40,000 with a deposit of ?4,000. Previously they had paid rent of ?30 a week each or ?3,120 a year. The monthly mortgage payments, after tax relief, are ?300 a month, making ?3,600 a year to which rates of ?500 are added to make a total of ?4,100 in all. Added to that are several extra payments – ?400 stamp duty, ?400 solicitor’s fees and, say, ?200 for surveys, making ?1,000 in all (first-time buyers pay no estate agent’s fees). So, in the first year, the couple pay out ?1,980 more than they would have, had they rented. To that must be added the loss of interest on the ?4,000 deposit. At 10 per cent a year, say, that makes an extra ?400. So, the total income loss is ?2,380. Assume that house prices have increased at the end of a year by 10 per cent. They have gained ?4,000 but if they moved, they would have to pay another ?1,000 in moving expenses plus ?600 in estate agent’s fees. That is an effective capital gain of ?2,400, leaving them even in the first year but that does not allow for costs of repair to the house or of payments on furniture, neither of which are paid by a tenant.

House buying is expensive. The 1980s boom in prices was exceptional; normally buying a house requires a fairly long-term approach to investment. However, a tenant will pay rent for ever, while most home owners will have paid off their mortgages by the time they have retired and their earnings have been cut. The worst time for house buyers is soon after their purchase, but, as the salary increases, the burden of a mortgage is reduced.

Whether or not all house buyers have made the sort of complex calculations described above, investing in property has posed an extremely good investment over the last few years. The growth in home ownership, rising incomes and the limited supply of housing have fuelled a phenomenal house-price boom. But in all the euphoria, one should remember prices can fall. In the USA, prices in certain areas have fallen drastically leaving many people with a house worth less than their mortgage. Some have been known to vanish without trace, choosing to abandon their homes rather than face the mortgage payments.