Tag Archives: housing

Your mortgage or your life?

Following on from my realisation that the average income earner could retire at 52, I’ve started to analyse the relative importance of various categories of expenditure in preventing early retirement. Here, I look at housing.

Given that housing represents the single largest life time expenditure item for most people in the U.K., getting your housing strategy correct is vitally important for early retirement. As far as I’m concerned, it is simply irrational to rent in the long term, so, if you can afford it, buying really is the only option. However, the average-consumer goes about this in the wrong way – i.e. by spreading their mortgage repayments over a relatively long, 25 year term and dragging the mortgage out even longer because of trading up to a larger property.

According to this is money, a typical first-time buyer who buys a £151,000 home with a £121,000 repayment mortgage over 25 years will pay back £212, 000, calculated at 5% interest. In my calculations I’ve been a little more optimistic, to reflect some of the better interest rates out there at the moment, and assumed an average life-time interest rate of 4%, so borrowing the same amount  (£121 000) at 4% over 25 years means paying back a total of £191,600, at £638 a month or £7664 a year, which is equivalent to 9 years worth of earnings on the median-salary. Of these repayments, interest accounts for £191, 600 – £121, 000 = £70, 000, which in itself is equivalent to almost 3 years of work earning the median salary. (See endnotes 8-12)

In my frugal-consumer model (Spread sheet ) the same figure is paid back over 11 years, which means paying back a total of £149, 764, at £1135 a month or £13, 620 a year,  equivalent to 7 years worth of earnings on the median salary. Compared to the average individual, the frugal-consumer saves themselves over £40, 000 or the equivalent of nearly 2 years worth of work earning the median salary.

The above scenario is actually extremely generous in its comparison – In the sense that while my 11 year pay-back model is, I think, reasonably achievable for the average income earner, my ‘average’ consumer model is in fact not realistic – If a couple chooses to ‘trade up’ to a house then their costs of housing almost double.

The Average house price is currently £264K – And if we apply the same payback-ratios as above, then a  4% mortgage over 25 years gives a total payback amount of £385K (5% gives  £424K).

(NB – Many people will pay back more than this – 30 years is rapidly becoming the norm for mortgage repayment periods – In 2012, the number of mortgages with more than 30 years on the term had risen to 27.8%, up from less than 3% ten years earlier, and the longer the mortgage term, the greater the interest!

So let’s just pause…. assuming that you stay in a one or two bed flat for the rest of your life and stick to the standard mortgage term, then that will cost you £250K over the course of your lifetime, but if you want a family-home, you are looking at something in the region of £400K. Looked at in starker terms, if we take the median salary, these figures represent approximately 12 and 20 years of work respectively. If you compare the later of these to my frugal-consumer model, you lose 9 additional years working to pay for property.

To make an even starker comparison, there are several people in the UK who have built their own houses for 10 times less than these figures both in terms of money and time, it becomes clear that most of the above years are basically years spent making someone else rich – A combination of the land owner, property developer, previous owner and/ or mortgage-lender – And I think anyone who is either considering getting on the property ladder or who is currently on it needs to urgently consider some of the available, cheaper, alternatives to housing.

Or look at it this way – If you walked in to work tomorrow and your boss offered you a year, or two, or ten off on full pay, that’d be pretty nice, wouldn’t it? Or if you won £100K on the lottery, that’d be at least Facebookable. These are the types of figures radical housing alternatives can save you…..And these are the figures you throw away by being a mortgage slave.

NB – The point of this post isn’t necessarily to criticise the injustice of a system based on debt, the aim is simply to raise awareness of the extreme savings that can be made in terms of your money and your life if you just pay that damn mortgage down as quickly as possible.

References

http://www.thisismoney.co.uk/money/mortgageshome/article-1633400/Mortgage-calculator-Compare-true-cost-rates-fees.html

Related Posts

1. How the Average Income Earner could retire at 52

My Life Analysed – The madness of my mortgage

I bought 25% of my lovely brand new, 2 bedroom flat in Surrey about 4 years ago now, and in that time I’ve saved £22000  ready to buy it outright. A recent valuation ‘valued’ the flat @ £190 000, so when I buy outright I will need to borrow about £120 000 to buy the 75% I don’t own, which, added to the roughly £20 000 I still owe on the bit I already own will mean an overall mortgage of £140 000….

Based on the best deal available (with The Post Officce according to Money Supermarket) if I take this mortgage out over a 15 year* period, I will pay £44 000 in interest, meaning I will pay back a total of about £184 000. Based on my take home pay which is just over £2400/ month, or about £29000/ year, this equates to about nearly six years of my life.

The only ‘rational’ response to this situation is one of anger. Anger at the fact that in this social system where land ownership is concentrated in the hands of the few and where a handful of financial institutions are given the right to generate money and thus interest out of thin air, I end up giving away 5 years of my life in order to make profit for the propertied elite and a further 1 or more years to pay the rentiers.

If I were given a quarter of an acre of land, some tools (which I could borrow not own), some people to work with occassionally, and the odd bit of expertise for the techy stuff, and I could build my own place for less than £10 000 – and do it in six months – so less than a year of total work-money-time.

Instead of this, however, restricted by Britain’s archaic planning regulations and the near certainty of not being gifted a quarter of an acre in a Tory heartland, I’m forced into a situation in which the only means** whereby I can meet my basic human needs results in my giving a further 5 years of my time to pay the profits of the various institutions surrounding the construction and financing of my flat – the original landowners, the construction company and the financiers.

Given all of this, I think people should not see ‘getting on the property ladder’ as something to be celebrated, not when our efforts to climb it are fast followed by the shaft-pole of capital.
To go a bit Baumanesque on this, housing is a basic human need, but the housing market in the UK is, I believe, a great example of one of those parts of the system that most of us have very little control over, and we are forced into accepting an extremely inefficient individualised solution to meeting this basic need – Renting in insecure accomodation for the first decade of our adult lives while we scrimp enough for a deposit, and then paying a hugely inflated sum when we finally purchase the property.

We never even imagine that we can change this system – And for many of us we think we’ve  ‘won’ when we ‘play hard ball and get 10k off the asking price, or we might feel smugly satisfied when we ‘save’ a few grand from shoppping around for a good mortage deal, failing to face up to the fact that a few grand is nothing compared to the £100K in interest we’re facing over the next two decades.

Having settled into our mortgage repayment schedule, our house then becomes part of our ontological security, and we go about filling it with our identity-markers to further make ourselves secure….We forget about the fact that this object which ties us to the system more so than any other object only does so if we allow those with more power than us to leech years of our lives from us.

What is really grim about this situation is that although the house, that locus of ultra-individualised privatism offers a very insecure security because the same system that ties us into the 25 year mortgage is also the same system that can generate both high unemployment in the interest of short term profits or high interest rates in the interest of long-term (relative) stability, not to mention the current issue with inflation.

Someone remind me again while I’m going along with this>>>????**Actually I am being somewhat melodramatic, there are alternatives… As I’ll outline later.

*Over the more standard 25 year term,  I would pay back £84 000 in interest – brining my total life-work up to about 7.5 years…..