S1E7: Should you rent or buy? | Financial wellbeing pro Jason Butler
Owning your home is a core part of the British identity, but does it still make financial sense? Is it actually a good investment? To find out, we’re sitting down with Jason Butler who was a financial advisor for 25 years and is now a financial wellbeing speaker, author, consultant and property investor.
What you should remember after this episode
It’s never been harder for first-time buyers to get on the property ladder, but it’s also probably never been easier to make money.
You can’t buy a property and just expect to make real money/value like previous generations. It takes much more diligence (or luck) to find good deals.
There are times when it’s better to rent and there are times when it’s better to buy. Generally you don’t want to be paying rent if you’re going to be in the same place for the long term. But if you value flexibility, or think you might move in the next few years, or think the property won’t suit you in a few years because you’re planning a family (stuff like this) - then renting might be best for now. Don’t just think about who you are today, think about who you’re going to become.
Finding a good deal on a home takes a lot of effort. You should treat it like your part-time job.
According to Jason, the house you live in is generally not a great investment but it is a good way of tricking yourself into saving. By the end of your life/mortgage you’ve hopefully paid off a big loan and have something you need that you’ve been forced to save for - a roof over your head.
If you’re buying, you’re trying to find a seller with a reason to sell quickly/at a good price, whilst of course being in a strong position yourself.
Jason thinks now is actually a great time for first-time buyers. If you can be patient, you can benefit from the expected reduction in house prices because of recent interest rate increases. 1m - 1.8m people will come off their low fixed interest rate mortgages in the next 12 months which should push prices down because a % of those people won’t be able to afford their homes. Brutal but that’s the reality, and it should affect prices.
This is also why Jason thinks we’re at the start of a ‘buyer’s market’.
You need to understand the difference between a property being cheap and a property being good value. Things are often cheap for a reason.
One of the best places to find good value properties is probate sales, i.e. after someone has died. Often the family are looking for a quick deal and don’t know the local market very well because they didn’t live in the property.
Estate agents have to submit your bid to the seller unless the seller has expressly said they won’t accept below asking price.
As a first-time buyer you’re in a good position because of stamp duty relief.
Once you’ve got a formal mortgage offer (not a mortgage in principle) you normally have 6 months to confirm the deal, assuming your circumstances don’t change. This means you can secure a remortgage deal 6 months out from when you need to, but then, if a better offer comes along in the meantime, you can apply for that new offer.
What you should do after this episode
If you’re trying to answer the rent or buy question, you need to figure out the best choice given your life plans. For example, Jason said the ‘cross-over period’ for his daughter is about 3 years, i.e. if she were to spend three years living in Cambridge, it would start to make more financial sense to buy rather than rent. Have a play with this rent or buy calculator to figure out what works for you.
If you’re buying a property, try not to rush. Instead take your time developing a sense of what good value looks like, e.g. a great price per square foot in a particular area. Familiarise yourself so you’ll know a good deal when you see it and can then pounce - having got yourself in the best financial shape you can.
Banks want you to think about borrowing in multiples of earnings, like 4.5x your income. But what you really need to work out is what you can afford, i.e. the amount you can spend on your mortgage each month. Annoyingly there’s no calculator online for this but you can reverse engineer it by playing with a mortgage calculator like this. You’re trying to get to a point where, for argument’s sake, you know that you have £100,000 for a deposit, and know you can afford to pay up to £1,200/month on a mortgage, which at a 6% interest rate on a repayment mortgage for 30 years, means you can borrow £200,000, i.e. the maximum you can afford to pay for a house is £300,000 - even if the bank will lend you more. This doesn’t include any other costs of course like stamp duty which must be factored in. Every cost needs a place in your spreadsheet, or you won’t know if you’re getting a good deal - or can afford it.
Consider adding 10% to what you spend on your monthly mortgage to cover contingencies and repairs.
Don’t go above what you can’t afford, regardless of what the seller is asking for.
Don’t just take the narrative from vested interests like the seller or estate agent or lender.
Don’t be afraid to put in a ‘cheeky bid’ below asking price. Just because the seller wants a particular price, it doesn’t mean the price is reasonable, or you should pay it.
Be prepared to keep offering on a property that keeps not selling. You’re looking for an angle.
Always check the boiler, plumbing and electrics before buying a property.
For more detail on what you should look at, check out the homeowners alliance guides.
You might want to read some of Jason’s books, which are on a lot of financial topics (not just property) but still…
If you’re remortgaging soon, you can prepare for the nasty shock of the interest rate rise by living as if you were already paying the increased rate today. This should improve your ability to cope.
