Buy That House Anyway - Insurance Against Poverty

A couple of months ago I wrote about how getting mortgages that are too large can keep people in the vicious cycle of the rat race. Yes, it is true that a mortgage can be a burden but there is also a degree of safety in owning your own home.

If you plan wisely your mortgage will eventually be fully repaid and your cost of living reduced to very little. I believe that whatever your life plans are, you should invest in at least one property as a safety net.

Even if you plan to travel throughout your old age investing in a home ensures that if for any reason you either change your mind or health requires you to stay put you have somewhere safe to live.

Let me give you two life examples of people that I know. Their names are disguised for privacy:

Maud

Maud is 60 years old. She rents a 2-bedroom house in London at a relatively cheap rate of £600/month because she is locked into a very good contract that was agreed about 30 years ago. If Maud decided to move any similar property elsewhere in London, even within her own neighbourhood, that property would cost her £1,200 to £1,400 per month.

Moving home is therefore not an option for Maud; she couldn’t afford the rent at the higher rate.

The house she lives in has a resale value of £400,000 but it’s not hers to sell so that value is neither here nor there for her.

If Maud had bought the house 30 years ago, she would have paid just £100,000 for it and would now have owned it outright for 5 years saving £36,000 in rent (£600/month x 5 years).

She could now have either given those savings to her son who is 35 to help him get on the property ladder or done up the house which is now getting very tired. 

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She is tired of the décor in her house. Her landlord did it up 20 years ago and because everything still works well there is no reason for the landlord to update it. Landlords aren’t in the business of decorating simply to please their tenants’ tastes, they fix work that needs to be done to make a place liveable. Maud doesn’t want to decorate herself because she doesn’t own the house and could potentially be evicted for any reason, e.g. if the landlord decided to sell up.

Anyhow, Maud made her decision not to buy 30 years ago and now she has to live with it. If she lives until 80 (which is more than likely nowadays) and if her rent stays at £600 (which would be VERY lucky) she has another £144,000 of rental payments in her future.

Flowela

Flowela is 26 years old. About 3 years ago, her and her soon-to-be husband decided to buy a property. They were lucky. They secured a 4-bed house for £240,000 in a small town and used money they had saved by living at home during their university years as a deposit.

They have now been married two years and have slowly been decorating the house. It’s amazing what a lick of paint, some wallpaper and a new bathroom can do to a place. They love their home and are now settled into their jobs.

Their mortgage payments are now £800 as they just re-mortgaged into a lower rate saving them £200 per month. Unlike with rent, mortgage payments can and do tend to fall.

If they simply keep living as they do now, in another 22 years, just before Flowela and her husband turn 50 they will own their house outright.

At that point their costs will just be bills and fun. They planned well and because they currently don’t have kids they are setting money aside to invest in another property that they can use to fund their retirement.

They figure that if by the age of 30 they invest in a smaller place worth say, £120,000 or so and get tenants in there, those tenants can pay the mortgage down for them leading to a tidy little lump sum when they retire (if they decided to sell that place) or a monthly cash inflow of £600 to £1,000 which will fully fund retirement. 

Conclusion

These are two real life situations. Which life would you rather live? Getting onto the property ladder may seem scary at first and like a big commitment but in the long run it offers an immense amount of security and peace of mind.

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