plonkee money an english-er's thoughts on personal finance

January 5, 2009

mulling over negative equity

Filed under: house — Tags: , — plonkee @ 8:25 pm

I’m worried about my house.

Well not exactly my house, which is fine. But the value of my house and the mortgage on it.

I knew full well when I bought my house that it was probably near the top of the market, but I slightly pushed that to the back of my mind for the following reasons:

  • prices in the area hadn’t moved for 2 years
  • negative equity is not a problem if you’re not planning on moving and can afford to pay the mortgage
  • it’s as important to buy when it’s right for your personal circumstances as the market

I disliked the flat that I was renting. I had enough money saved up / received in windfalls to mean that I had a 10% deposit plus fees plus a little extra for decorating. Rents were about the same as mortgage payments, so if I wanted to upgrade there would be no cashflow benefit in renting. It made sense to me to buy.

In return for my investment I have

  • a home that I really like
  • a mortgage of £87k to pay off (£500 a month for 30 years)
  • an asset whose market value is £80k and falling (slowly)

Yes, I can see what you’re saying. Financially has not necessarily been the best purchase so far.

With my rational self, I can see that a house is not a short term investment. In the long run it is likely that the house will increase in value – probably at the same rate (on average) as wages. Besides which, it doesn’t matter if it doesn’t because I don’t need the house to even stay the same in value to eventually pay off the mortgage. Although the house would have been cheaper if I’d waited, it’s much harder to get a mortgage than it was 18 months ago – I wouldn’t have a large enough deposit to get a good rate for example. At the time, the decision I made was reasonable. It might still turn out to be a mistake, but not one that I could reasonably have forseen in advance.

My irrational self however is more concerned that any future lack of income could eventually lead to complete bankruptcy (rather than just homelessness) because the house is in negative equity. As I have self-employment earnings and some savings, I’m exceedingly unlikely to qualify for any help with my mortgage payments should I lose my job. I’m also the type of person who likes to have plenty of options and so even though I want to stay in the house for the next few years I feel slightly trapped. On the cash flow question, my mortgage payment now is the same proportion of my take home pay as my rent used to be (wage inflation is an amazing thing).

I am wondering, somewhat tentatively, whether it’s a good idea to revisit the pay off the house vs save and invest argument. When I last did this, shortly after purchasing the house I endeed up slightly in favour of saving and investing. Now, some of the variables have changed – particularly my own comfort with my mortgage debt, which is just as valid an input as the relative investment returns.

In the next couple of days I’ll go through the figures and see how they stack up.

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