I was speaking to a friend the other day who’s just about to buy a house, using an interest only mortgage, maxed out to the hilt. When I asked why he is buying, his answer was, “because renting is just throwing money away isn’t it, I think it’s time to own my own property!”
I find this logic farcical (and in a friendly way I told him so). He is considering an interest only mortgage, because a repayment mortgage is too expensive, in other words, he’s not going to repay any of the actual debt, just service the interest each month. Yet his quote was renting is “throwing money away” – what’s this, chopped liver? All his plan means is simply giving the mortgage company the money instead of a landlord and he’s paying 50% more than before, so there’s less room for saving and/or repaying the capital.
On top of this, the mortgage will be at 95% LTV (ie he only has a 5% deposit) so as for “I thought it was time to own my own property” well sorry, but you don’t own it – the mortgage company owns most of it, and if you can’t repay (and they’ve absolutely maxed out borrowing) because of a change in circumstance or as interest rates go up; the mortgage company will simply take it back.
Now of course, if house prices continue to rise he will be able to sell the property and make a profit, then again if he continues to want to own property, the price of what he needs to buy will go up too.
I think we need to challenge the logic of the ‘renting is a dirty word’ myth; this isn’t the first time I’ve said this, I expanded in much more detail in my past blog (read here) but this brought it home to me. There’s nothing wrong with wanting to buy a house, but there are many people out there just getting a mortgage, not buying the house…. it’s time for a change in the way we think (also see the free Mortgage and Remortgage Guides)
Please be careful.
