CONTENTS: INTRODUCTION, 1 - SO WHY BUY A PROPERTY?, 2 - IDENTIFY YOUR STATUS RANKING, 3 - CALCULATING YOUR BUYING POWER, 4 - UNDERSTANDING THE MORTGAGE GAME, 5 - INCREASING YOUR BUYING POWER BY INCREASING YOUR STATUS RANKING, 6 - INCREASING YOUR BUYING POWER WITHOUT INCREASING YOUR STATUS RANKING, 7 - GETTING VALUE FOR MONEY, 8 - REFERENCE CHAPTER
There is only one reason why people do not buy a property – FEAR.
There is only one reason why people do buy property – CONTROL.
So if you want to get on the property ladder you need to eliminate your fears and want to take control.
They’re a number of fears that people have which are fully justified. They are not dissimilar to what business people face when appraising a potential investment. These are called risks. The difference between the ordinary person and a business person is that a business person:
- Identifies all the risks involved
- Mitigates each risk as best he or she can
- Considers the overall risk based on how well he or she can mitigate each individual risk
- Makes a decision based on the overall risk
So to get on the property ladder you need to:
- Identify all your fears involved in buying a property
- Think how you can overcome each fear involved in buying a property
- Consider the overall fear factor based on how well you can overcome each individual fear
- Decide whether you want to buy a property or not based on the overall fear factor
Fortunately for you I’m not going to ask you to think up all the fears involved in buying a property, how to overcome these fears and calculate the overall fear factor. I am going to tell you this!
Unfortunately for you I am not going to decide for you whether to buy a property or not because I am not you! However, I will present a very strong case to you and I will recommend that you buy a property - but the ultimate decision rests with you.
The Fears and How To Overcome Them
With every fear you can take what I call Countermeasures which overcome each fear. A countermeasure is an action you take to counteract each fear. No countermeasure is fool-proof otherwise the fear would not be a fear purely by its definition as it could be fully overcome.
There will still always be an overhang of fear albeit a lot less than the starting fear. This is what I call Residual Fear. The residual fear is therefore still present even after the countermeasure and thus is a real fear. You can take further countermeasures to reduce this residual fear but it depends on how far you want to go.
There will always be residual fear however. An example of residual fear that cannot be eliminated is the destruction of your house if there was a war. No insurance company will take on this risk. The only way you could mitigate this risk would be to build a bomb proof shell around your house – but this would be impractical and probably cost more than your house itself!
The fears, countermeasures and residual fears in buying a property are:
|Fear||Countermeasure||Residual Fear||Further Countermeasure|
|1||Losing your job and can’t pay the mortgage.||Buy a property that can be easily let out and the rent covers the mortgage payment comfortably.||The tenant does not pay the rent.||Take out landlord insurance that covers your for loss of rent due to tenant default.|
|2||Interest rate rises beyond affordability||Fix the interest rate for a fixed period of time.||The interest rate rises beyond affordability after the fixed period of time.||Fix the interest rate for the whole term of the mortgage.|
|3||Get caught in negative equity trap.||Don’t sell the property and realise your loss. rent it out. Wait for the recovery and then sell.||It never recovers and you have to sell.||Take out a smaller unsecured loan to cover the difference between the selling price and mortgage balance.|
|4||Have to move out of area due to change of job||Buy a property that can be easily let out and the rent covers the mortgage payment comfortably.||The tenant does not pay the rent.||Take out landlord insurance that covers your for loss of rent due to tenant default.|
|5||Major repair becomes due and can’t afford to carry out works||Take out a thorough and comprehensive buildings and contents insurance.||The policy doesn’t capture every eventuality.||Take out specific policies for specific items i.e. British Gas offer full insurance on your boiler from £8 per month.|
|6||Buying a property you can’t sell||Avoid difficult to sell properties such as studio flats, ex local authority flats, flats above shops, non-standard construction properties or any property that is difficult to get a mortgage on.||Still cant sell it!||Buy a property near a train station city or major road junction.|
|7||Financially linking yourself with a partner and becoming liable for their share||Create a document that transfers full ownership to you if your partner defaults.||Still cant afford to pay their share.||Buy a saleable property (i.e. an easily mortgageable one) and sell it! Or rent it out.|
|8||Cant pay the mortgage as it falls due, due to the irregularity of your income||Get a flexible mortgage where you can overpay on the mortgage and take payment holidays.||Still cant afford to pay the mortgage.||Get an overdraft facility or pay mortgage with your credit card cheque book and pay back when able to do so.|
Real Life Examples
|Robert||Robert was uncertain about his job as there had been a few redundancies in the past. He was worried about whether he will be able to afford the mortgage repayments if he lost his job.||I recommended him to buy a property in the easily lettable areas for no more than £80,000. This meant that his mortgage costs would be no more than £267 per month at a 5 year fixed rate. If he were to rent the property out he would get £400 per month after tenant insurance premiums. So in the eventuality he did lose his job he could cover the mortgage by letting the property out. There is also a profit margin there so he could hand the property over to a letting agent and let them deal with it and still maintain the mortgage payments. Robert could then focus on finding another job!|
|Julie||Julie was worried that even though she could afford the mortgage now at current rates she was worried that the interest rate would rise beyond affordability in the next 3 years.||I recommended that she fix the interest rate for 5 years so that the mortgage payment would be the same for the whole 5 years. I also recommended her to make overpayments to the mortgage thus reducing her overall balance so that the likely interest cost after the 5 years would be lower than if she did not make these overpayments.|
|Alex||Alex was worried about buying a property that he could not sell in 2 years for less money than he bought it for.||I recommended that Alex bought a property that needed work, in a lettable area, non-ex local authority and of standard construction for no more than £75,000. This way he would add value to the property when the work was done. When it comes to selling the property it would be likely that he would at least get his money back if not more. In the eventuality that it was worth less than what he had paid then I advised that he could rent it out for £450 with a mortgage payment of only £250 giving him a good excess of rent over mortgage payments thus allowing for voids, agent fees and repairs.|
To calculate your overall fear is to gather all the residual fears that remain. To do this you:
- Decide which fears listed above 1 to 8 are fears that you actually have
- Decide what countermeasures you are willing to take for each fear
- Calculate the residual fear for each fear applicable.
So for example if you had the following fears and were willing to take the following countermeasures then your overall fear is all the contents of the residual fear column:
|Fear||Countermeasures willing to take||Residual Fear|
|1||Losing your job and can’t pay the mortgage.||Buy a property that can be easily let out and the rent covers the mortgage payment comfortably.||The tenant does not pay the rent.|
|3||Get caught in negative equity trap.||Don’t sell the property and realise your loss. rent it out. Wait for the recovery and then sell.||It never recovers and you have to sell.|
|4||Have to move out of area due to change of job||Buy a property that can be easily let out and the rent covers the mortgage payment comfortably.||The tenant does not pay the rent.|
|6||Buying a property you can’t sell||None.||Buying a property you can’t sell|
|8||Cant pay the mortgage as it falls due, due to the irregularity of your income||None.||Cant pay the mortgage as it falls due, due to the irregularity of your income|
So the overall fear is that if you needed to let the property out the tenant didn’t pay, the property falls in value below what you paid for it, the property becomes unsaleable and you can’t pay the mortgage on time.
If you are happy with this overall fear then you will buy a property. If you are not then you won’t buy a property. If you are not happy with the overall fear then I suggest you take more countermeasures so that your overall fear is reduced to a level that you are happy with.
But to take on an overall fear there must be some benefits! This leads on nicely to the benefits of owning a property.
The Benefits Of Owning A Property
The reason why people take on the ‘pain’ or overall fear of owning a property is because of the ‘pleasure’ or benefits of owning a property. It’s the simple pain pleasure principle. If the pleasure can outweigh the pain then we take action.
So we’ve identified the pain element – so what’s the pleasure? Here are some of the benefits of owning a property that override the overall fear of owning a property:
|1||Its cheaper!||Mortgage payments are invariably cheaper than rent unless you rent at the very top end of the market. The mortgage market is very competitive at the moment and theoretically you can reduce your living costs by up to 70%!|
Tenants pay a premium to rent a house because the landlord is taking full risk on owning the property. I am a landlord and I am very happy to take this premium as I consider the risk of owning a property low compared to the reward I receive as rent.
If you can get your overall fear of owning a property to a manageable level then the cost savings benefit alone makes it worthwhile.
|2||Creates deposit for the next home.||The equity you build up in the property can be used to buy your next property. If you buy a flat for £50,000 with a 100% mortgage and the price rises to £80,000 in 5 years then you have amassed £30,000 in equity. You can then use this £30,000 equity as a deposit and by doing this it opens up the mortgage market. You will then be able to go to a higher income multiple lender. Also, if your income has increased by 20% over the 5 years then you could buy a house worth £110,000. This could mean moving from a 1 bed flat to a 2 bed semi in a better area.|
If you didn’t have the equity then you would have to buy this same house on a 100% mortgage. This would mean that your income would of have needed to doubled for you to afford this same house. You then have to estimate how likely is that? So buying you first house makes it easier to get a better property further down the line.
|3||You’re not at the mercy of your landlord||If you rent a property then it is not your property! Property law dictates that a landlord can get possession of a property by giving the tenant two months notice. The landlord does not need to give a reason why. It is his right to seek possession as the landlord owns the property.|
So you may get very settled in your landlord’s property, make friends and really get accustomed to the area. But low and behold the landlord returns from his trip around the world and wants his property back! You have no grounds for defence – you have to get out!
By owning your own property you have full peace of mind that you can stay there as long as you want. There will be no landlord ready and waiting to take back your property. The only way you can lose your property is if you do not keep up with your mortgage payments or the house falls under a compulsory purchase order. Well if you cant keep up with your mortgage payments then you definitely cant keep up with your rent so you’d get thrown out anyway. Compulsory purchase orders are very rare and are hard to predict.
Owning your own property gives you independence and control over how you live your life.
|4||You can add value to your living space||Paying rent is money down the drain. We all know that. But improvements to your own living space in rented accommodation is even more money down the drain! If you’re fed up with the kitchen or bathroom of your property and replace either or both then you will never recoup the cost of this. The only person that will, will be your landlord! You will only add value to a property that is not yours.|
If you own your own property and make selective improvements then the full cost or more can be recouped when you come to sell the property. This cost will not only make living at your property more enjoyable but will add real money to the eventual selling price of the property.
I have to be honest. I decided to own my first property based on the four reasons above rather than any of the eight fears listed above. It just seemed to make sense. With hindsight I should have considered the eight fears as I would have chosen a different property that I chose - and made a lot more money. But I cannot complain. Even though my property hasn’t trebled or quadrupled in value, as it would have done if I had followed my own advice, I still own my first property, which is rented out, that earns me a steady income now.
I hope you can see from the above that not owning a property is worse than owning a property. Obviously owning an asset, like property, carries a certain degree of risk and responsibility but the pleasure clearly outweighs the pain.
I hope I have convinced you into buying your first property. Now to the next part – actually buying one!