Why you should (and shouldn’t!) buy property

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Jess came to me to help her decide whether to buy a house (or not!). Now ten years into her career she was in a position, with some help from her parents, to buy a house. The problem was that she wasn’t sure that was really what she wanted.

All the conflicting advice she was receiving was preventing her from getting clarity on the potential financial implications of buying, or not buying, a house.

Her parents had offered to help, although she would still have to pay them back, and the mortgage payments were also going to be higher than her rent so affordability post purchase was another thing to consider.

After modelling various different scenarios, and numerous calls and emails, she did end up buying the house.

Although she wasn’t sure initially, in the end she decided that she did in fact want a home.

The advice she received about when to buy meant she started second guessing herself and without even realising, started viewing buying a house only as an investment decision.

She ended up opting for a half repayment, half interest only mortgage with a fixed rate for two years so as to ease the transition. The plan was then to remortgage at the end of the fixed rate period to a full repayment mortgage.

This enabled her to buy the house and continue to save each month towards her goals beyond the house.

Thinking about buying? Here are three signs that you should go for it…

You want a home

The biggest reason to buy a house is because you want a place to call your own. It’s quite simple but people often get caught up with other considerations and start worrying about factors outside of their control.

If you’re keen to put roots down somewhere, and ideally like the idea of staying in one place for a number of years, go for it! When you buy a new house you can give it your own personal stamp. That could be the furniture, a new kitchen perhaps or even a pet. While renting it’s really difficult to do any of those things. A lot of the time you don’t have much of a say as to what happens to and with the property.

You want to climb the property ladder

If you’re a first time buyer, you might not be able to afford your dream property now, but your first home could make it easier to upgrade down the line. If you purchase a property with a mortgage, instead of paying rent you’ll start building up equity in the property.

As the value of your home grows, and you benefit from salary increases, you’ll most likely be in a position to afford a more expensive property later than you would have if you’d just kept your deposit in a savings account.

Of course, this assumes that the value of your home will go up, and that your salary will increase over time, both of which may not be the case. Nevertheless, if you’re in a position to buy now and you want to buy a bigger family home later, it may be better to use your first home as a stepping stone than to put off buying now altogether.

You’re looking to increase your stability

One of the big benefits of buying vs renting is the long term stability that owning your own home can bring. While renters may not be tied down in the same way, they also run the risk of being kicked out by a landlord with just a few months notice. At some point in life most people will want to settle down. They want to invest in a neighbourhood, in a community, and see themselves building a life in that area.

There might be a particular school or other things nearby which are important to you. Buying a house is a big decision, it’s a real commitment which should give you a sense of stability and security.

On the other hand, here are three reasons to hold back...

You can’t afford it

One of the biggest mistakes I see people make is draining all of their savings to buy a house, without really considering whether they can afford to do so.

When buying, or moving house, there are lots of unexpected and hidden costs that people don’t think about in advance. And even if they have all been budgeted for, draining all your savings means you have no emergency fund, which could leave you in a precarious position.

If something happens shortly after purchasing then you may find yourself in real trouble. I had a case where a couple had done exactly this - they had drained all their savings to buy a house and taken on a large mortgage. Then they suddenly found out they were going to have a baby which was 3 years earlier than planned. Buying the house meant that they were going to have to cut their spending by more than half to build up enough money to cope with the costs of the child in early years.

Of course, buying a home is always likely to require a big chunk of your savings, but that doesn’t mean you need to take more risk than necessary. It makes sense to think about how you might cope if something unexpected were to happen before taking the plunge.

You see the property solely as an investment

For many people, the desire to purchase property is not motivated by having somewhere to live, but instead they see it as an investment. Some even know people in their lives who have done very well from buying and selling property and want to get in on the action.

However, there’s a number of important things to consider before taking this route. First, like any investment, there’s a risk that the value of your property could go down as well as up. Usually the best way to manage this risk is to spread your money across different investments so that if one goes down in value, the others will hopefully make up for it.

The problem is that most people thinking about investing in property are not able to diversify at all. They are planning to put a significant proportion of their savings into just one property. As a result, they are in a sense putting all of their eggs in one basket. What if you’re unable to find a tenant for a number of months and so have no rent income to pay the mortgage? What if there’s expensive maintenance costs you hadn’t considered?

Second, even if the value of your property does increase in value, you won’t actually benefit from that increase until you sell it - a process that is itself expensive and may take months to do. As a result, it’s extra important to make sure you have other savings and investments which you can use to pay for your short and medium term goals. A property investment only makes sense when you know you won’t need to sell for a number of years.

Finally, most first time landlords underestimate the amount of time and money it will take to manage the property. From dealing with tenants and estate agents to paying for boiler repairs and so on - you’re committing to an ongoing responsibility which you should be aware of.

Of course, property investing can be a good investment if you’re in the right position and are conscious of the time and money you’ll need to keep investing on an annual basis. On the other hand, there are alternative investment opportunities which could be much more suitable given your goals and current finances.

You value flexibility and being able to move easily

Buying a property doesn’t just mean putting down a deposit, there are other costs involved. If you keep moving house then you’re going to keep incurring these costs. Do that every couple of years and you’ll start racking up quite the bill!

If you want to be flexible and able to adapt to changing life plans then continuing to rent makes more sense. It may be hard when others around you are buying houses but remember that everyone’s plan is different.