Should I Buy A House?
Taking the first step onto the property ladder is probably the hardest. Quite apart from the financial considerations and obstacles, there is the issue of understanding the property market and judging whether it is the right time to buy a house. This is all after you have thought about your current stage of life and is now a good time to buy a house?
So the three main factors to consider when asking yourself the question: is it worth buying a house? Are:
Can I afford to buy a house?
Is this the right stage of my life for me to buy a house?
Is this a good time economically to buy a house?
These three considerations will be continually referred to throughout this article, as fundamentally they underpin everything. Once you have made the decision that you would like to live independently, then traditionally you are faced with two options; renting a home or buying a home.
Your own personal characteristics are also a big factor in how you choose to live; ie. what are your personal ambitions for the next few years and can you commit to buying a house?
Finally, we will look at the property market itself. This might appear to be a bit of a minefield to someone with no experience of it, but you do have the advantage that it is reasonably predictable, there is a lot of historic data upon which to base decisions, and it is a market that is accessible to literally anyone.
So the combination of good research and good advice, should result in you making some informed decisions to help you get on the first rung of the property ladder, if you can afford it and it is what you want.
The property ladder
This is an oft-quoted term, but is an accurate analogy of what the property market represents. In an ideal world you would enter the market as a first-time buyer in your mid-20s through buying a modest property, then your family would grow, your property will increase in value, which gives you the equity to buy a new, bigger property.
This continues as you make your way up the ladder, making money on each deal until you are able to own a property outright. This can help you accumulate a nice little nest egg for later life.
Of course there are many life decisions you need to make and a lot of market factors which need to go your way, before this scenario becomes reality. And in actual fact, navigating the property ladder is much harder than that. You may not have the cash reserves to afford a deposit on your first home, you might not have a stable job to afford the mortgage payments, the type of properties you want might not be realistically affordable, even if they are, the housing market might dictate that they don’t accumulate in value as you thought they would.
Things change in life and you need to make decisions accordingly, and hence, the property market can be a real struggle for some people, and they need to think on a more short term basis. It is no surprise, therefore, that the rental sector is always thriving. So this is another consideration you need to make. Should I rent or buy a property? And this is where we will start.
Renting or buying?
The question, is it better to rent or buy a property, can only really be answered by the individual concerned, because the logic and common sense supporting this decision is very much based in personal circumstances.
There is a lot of uncertainty around taking your first step onto the property ladder, and maybe you aren’t yet ready to make the commitment to taking out a mortgage and buying your own bricks and mortar?
This is quite a common scenario and in these circumstances, the rental sector can seem like a more attractive fall-back option. The problem comes when you are able to take a longer term view of your personal situation, and you realise you are stuck in a rented property because you haven’t got the finances to afford your own house.
At that point you begin to realise that paying money to a landlord is dead money that you are earning nothing from and will never see again.
The benefits of buying over renting
The obvious benefit is that you are on the property ladder and as long as you can maintain your mortgage payments, you are hopefully starting to earn some equity.
‘Equity’ is the accumulation in value that your property will hopefully achieve over time, which will eventually be money in your pocket, or more likely, money you can use to move onto to a bigger property.
Renting a home will never give you equity, it is merely a means of keeping a roof over your head.
If you are at a stage of life where you are settled in a good job, are in a stable relationship and are maybe thinking about starting a family, then buying a property is definitely preferable to renting one. You can of course rent a property that is big enough for a family, but that is unlikely to be cost effective.
Owning a home gives you stability in your life and of course you can choose a location that suits you in terms of work, schools and local amenities. You also have the freedom to upgrade and add value to your house by adding extensions, a driveway, a conservatory or decking.
You can decorate however you wish and have total freedom over furnishings. These are all things that are rarely offered by a tenancy contract, and you will have to live with the property pretty much exactly how you first saw it.
The benefits of renting over buying
Renting versus buying often comes down to simple finance. There are a number of upfront costs which come with buying a property, such as a deposit, stamp duty, legal fees, estate agent fees, removal costs and then initial decoration and furnishings.
Renting a property removes all of that cost as you are moving directly into a ready-made property that is ‘sold as seen’, or at least ‘rented as seen’.
If you are at a stage of life where you are single, just started in a new job or are not quite sure what your long term career is going to be, or you have friends in other cities and may fancy moving somewhere else to work, then making a commitment to buying a house doesn’t make sense.
Renting is very much seen as a convenient short term solution, and there is nothing wrong with that. You have complete freedom and flexibility whilst renting and are only tied to the terms of a contract you agree to. In addition, you may be able to rent for a couple of years whilst also saving a deposit for buying a house. This is a common scenario and is achievable if you find the right rental property.
Another upside to renting is that you are not exposed to the risk of negative equity, that is the property you buy reducing in value due to market forces, and hence you actually owe money when it is sold, if indeed you can sell it.
Most property is bought on the understanding that it will increase in value, but that is not always the case and a combination of bad decisions or unfortunate factors outside your control, can put you into debt. Renting a property avoids all that.
Making the decision to buy or rent
Assuming all other factors enable you to buy a house, the decision to rent or buy comes down to the stage of life you are at and whether you want to ‘put down some roots’. Finances are of course the biggest factor and it is true that you could be paying rent on a property over a period of time, during which your circumstances might change.
Your job becomes more stable, you start a relationship and you calculate that the monthly rent you are paying is equivalent to an affordable mortgage payment, and you have money left over each month. This is all telling you it might be the right time to buy a house.
The general rule is that renting over the long term is not advisable, because your money isn’t working for you. However, circumstances might dictate that short term tenancies are better for your lifestyle and in actual fact you don’t want the commitment and responsibility of owning a home.
That is completely your choice and ultimately, the right or wrong answer is different for everyone.
Are you ready to buy a house?
Making the decision as to whether you are personally ready to buy a house, generally boils down to two factors; lifestyle needs and financial considerations.
If you like the concept of owning a home, and with some discipline and sacrifice you could afford it, but you are still attached to the idea of annual holidays with friends, a regular social life and keeping up with material purchases, then this is all telling you that perhaps you aren’t ready for the commitment of taking on a mortgage.
Many people try to take on both and find themselves in a difficult situation. Naturally there is a balance to be found, because you don’t need to live like a monk to hold down a mortgage, but it does require some cost-cutting and a general commitment to mature a little.
This might only be for a short period, so you can afford the deposit and the upfront costs, but owning a home does change a person, because you naturally want to spend more time in the place you have invested so much in. But that doesn’t necessarily suit everyone.
Lifestyle needs also come down to your personal and career ambitions. Do you want to start a family? Do you need to buy a house near to schools and supermarkets? Are you happy in your job and career? Is your income stable?
A mortgage lender won’t view your situation favourably if you are moving from job-to-job, your income is erratic or you have no long term career plan. You represent a risk in this situation and hence, buying a home might not be for you.
Quite simply, can you afford to buy a house? And more importantly, can you afford to buy one now?
A deposit on a typical property in the UK represents between 5 and 20% of the asking price, so you can do your research on the kind of property you would like and the kind of mortgage deals being offered and work out if this is a realistic proposition.
You may have some money for a deposit saved already, but is it enough? Does this represent all your savings? It might not be advisable to commit every penny you have saved up to a deposit on a property investment, unless the market conditions are very favourable and you are very likely to start building up some equity to replace your savings. This can be difficult to guarantee.
It is possible to calculate what a lender will offer you, and there are online tools that can help you with this. Generally, the amount you can borrow is based on your affordability, so a bank will look at the property you want and the monthly payments associated with that, and then look at your income – and if relevant that of your partner – and what money you might have leftover.
It is not in the bank’s interests to see you broke and destitute and scrimping every penny to be able to pay the mortgage each month, inevitably this will lead to you defaulting on payments.
In a similar sense, if there is no way you can save up the money for a deposit, you will find it very difficult to get on the first rung of the property ladder, and this is a common obstacle to many people.
The bigger deposit you can put down, the lower your monthly mortgage payments will be, and the lower the amount of interest you will pay over the long term.
You need to remember that the shorter the mortgage term, the less interest you will pay, so the overall cost of a 15-year term £200,000 mortgage, will probably be less than the overall cost of a 25-year term £200,000 mortgage, but the monthly costs on the longer term agreement will be less.
You need to balance these scenarios and work out which suits you best, but of course your options might be restricted by what deal the lender is prepared to offer you. You should also be aware that interest rates can rise, and therefore, depending on what mortgage agreement you have, so can your repayments.
The bank wants to see that you can comfortably afford the repayments whilst living a comfortable life in terms of food, bills and other associated lifestyle costs. In this sense, the bank is not just looking at your situation today and what you can afford to do right this minute, they are looking long term and whether you can realistically commit to see out the mortgage over a 15, 20 or even a 30-year term.
Likewise, lenders don’t like to see debt or uncertainty. If they see a precarious financial situation whereby if you lose your job, you could be in big trouble as institutions call in their debts, then you represent a huge risk to them. So before you even think about is it worth buying a house? You need to have a stable, secure and risk-free financial situation.
Once you have established whether you can afford to buy a house, and have concluded that it makes economic sense to do so, then - pending any bad decisions in terms of location, the type of property you buy or the timing of buying it in relation to the state of the market – you should see your investment grow and start to create some equity.
Understanding the housing market
Of all the investment markets out there, the property market is probably the most stable and the most predictable, in that house prices can go both up and down, but you generally know why and can foresee when it is going to happen.
Sudden and unpredictable outside forces are rare, but we have seen them in scenarios such as the 2008 banking crash and the COVID pandemic of 2020.
These both contracted the market and triggered a fall in house prices, meaning that it was a buyer’s market, but there could be an associated concern that the property you bought might not then increase in value as expected.
It can be a challenge to understand the property market, but on the whole, there is lots of market and historical data upon which you can base decisions.
Locations and types of property can become more fashionable, popular and therefore expensive. And it works both ways.
For example, you could buy a decent-sized semi-detached property for £150,000 – which is relatively cheap – but if it is in a poor area economically or because of a high crime rate etc, then the property might not increase in value and you might struggle to sell it.
You might also need to spend a lot of money on it to make it liveable or desirable, which adds to your costs and your potential losses if you can’t achieve your £150,000 asking price.
That said, there are lots of ways that you can research locations, foresee future developments and identify properties appropriate to your lifestyle needs, so that you can buy a property as a solid investment which ‘should’ accumulate in value under normal market conditions.
Furthermore, the Government will often act to stimulate a stagnant housing market if they see that demand is outstripping supply, or vice versa. In recent years they have helped first-time buyers with the various ‘help to buy’ initiatives, and also with the Stamp Duty holiday of 2020, when purchases of £500,000 or less were exempt from the considerable cost of stamp duty.
Falling house prices can also be something of a red herring, and you would be advised to research what average house prices were 12 months ago, rather than what they are now. If you read dramatic media reports that house prices have fallen for four consecutive months, for example, this might be because they were abnormally high beforehand.
So the property you have your eye on might have cost £250,000 last June, and this June the asking price is still £250,000. In between it may have risen and fallen again. So if you hear that house prices are falling, it doesn’t necessarily mean it is a bad time to buy, and it actually means that the house you buy is more likely to accumulate in value more quickly when the market recovers.
It is wise to apply some patience if the state of the housing market is critical to your decision as to whether you should buy a house. Economies can recover very quickly, and factors such as Brexit might not affect the market as badly as experts predict. Sometimes these influences are only short term and six months later, it is a good time to buy again.
When assessing the market you sometimes need to be decisive, but this should always be against a background of good advice. For example, you may have put your moving plans on hold when the Brexit vote was made in 2016, but by the time it actually affects the market you could feasibly have moved house twice over.
Likewise, mortgage lenders reduce the attractiveness of their loans when the market contracts, but that doesn’t last forever, so keep an eye on the market and be prepared to act when enough of the influencing factors are lined up in your favour.
So……………should I buy a house?
In terms of timing, you need to ask yourself whether buying a house is out of necessity or is it discretionary?
Market forces will then tell you whether it is a good time to buy or not, and if you don’t ‘have’ to move right now, it might be wise to wait a few months so that the property – or the type of property - you have your eye on is more desirable financially and in terms of the housing market.
Ultimately, there is a constant need to weigh up your personal circumstances and the current and foreseeable future state of the property market.
So the rule of thumb to stick to is that, if you want to buy a house, can afford to buy a house and it makes economic sense to buy a house, then you should probably buy a house.