Housing

Despite hybrids schemes in which individuals typically buy some of the property outright, pay for another piece with a mortgage and rent the rest, gradually increasing their share in the property and so reducing the rent, the basic choice facing most people is ‘rent or buy’.

Basic advantages of renting are that moving elsewhere is easier and cheaper, there is a low initial outlay, the landlord is responsible for many repair and renewal issues, and good tenants can be hard to find. Disadvantages are that there is a limit to what you can do to make the property ‘home’, and the money you pay in rent is not delivering any long-term value. Although those on a low income can receive help with rent through the benefits system, much council housing stock has been sold off and it can be difficult to get a place.

Buying has almost directly the reverse effect. The property is yours to do with as you will (within limits), and the mortgage payments can be seen as a long-term investment. However, onward moves are likely to be expensive, property (especially older houses) can be costly to maintain, and the deposit (together with furnishing and other set-up costs) is likely to make your eyes water. Social housing includes housing associations, which offer a variety of opportunities for people who cannot afford commercial costs to rent or purchase properties through low-cost home ownership schemes.

Buyers should be clear about what they are buying and why. Is this the dream house or is it the first step in an ‘onwards and upwards’ ladder leading to the ideal? Is it just the most financially advantageous way of putting a roof over your head? Do you plan to live in the property now or in the future? Or is it bought to get established in the property market and will be let to tenants? In other words, is it a home or an investment? For most of us it is probably both but, if it is an investment, property should be considered alongside all other forms of savings.

A mortgage is quite simply a loan made by one individual or corporation to another to purchase property, with the property acting as security for the loan. Hence, if the person borrowing the money does not fulfil the conditions of the loan, ownership of the property may revert to the lender. This is called repossession. However, repossession is the last thing that most lenders want – they would much prefer to receive the proceeds of the loan (interest and other charges) rather than a house that may be difficult to sell.

Unless helped by a generous relative, most people taking out a mortgage have to undertake to pay back the original sum borrowed (the capital) plus interest. There are two ways of doing this: a repayment mortgage(also known as capital and interest) or an interest-only mortgage.

With a repayment mortgage, the monthly payments consist of interest and a portion of the capital debt (with payments in early years usually consisting mainly of interest so the capital sum reduces very slowly). However, provided you keep payments going up to the end of the term, you are guaranteed to clear what you owe. With an interest-only mortgage, payments include only this element of the debt so that monthly costs are lower than for a comparable repayment mortgage. However, the downside is that at the end of the mortgage term you still owe the original amount you borrowed. And if you cannot repay it, your mortgage lender is entitled to repossess your home.

Therefore, if you go for this option, you need to organise a way to repay the capital debt. Unless you can be certain of a sizeable windfall, this means saving as you go along, and there are several ways to do this. Three of the most common are an endowment, a pension plan or an individual savings account.Every repayment method involves a substantial, long-term financial commitment.

All mortgages are essentially variations of these two basic types. Some offer a fixed rate or a discount for a number of years, while others follow the Bank of England interest rate. In good times, lenders may be prepared to lend five or six times annual salary, when money is tighter it will be much less. Often, the bigger the deposit you can put down on the property, the better the mortgage terms you will be offered. But always remember that circumstances may change. Anyone who had a mortgage around 20 years ago will remember the pain of interest rates of 15% or more, and anyone who has lost their job will also have felt the panic of a sudden inability to make the payments.

When the economy is doing well, you will have the satisfaction of seeing your stake in the property – your equity – increase because the value of the property rises, and the amount of the loan – the lender’s equity – gradually reduce. However, in a slowdown or recession, when prices fall, you can find that the loan suddenly becomes larger than the value of the property – this is called negative equity.

Nothing in this very basic explanation of housing should deter people from house purchase, but all the implications need to be understood before you embark on what will probably be the most important financial decision of your life.

Always take professional financial advice and remember that values of everything can, and do, go up or down.