Herman

I personally don't have a problem with having a mortgage. In fact, over the long term having as a large a mortgage as you can afford makes perfect financial sense. Its called gearing, very popular with succesful businesses all over the world. Having the biggest mortgage you can afford is good because over a 25 year period the value of the asset will rise and the value of the debt remains fixed or, with a bit of help from inflation, reduces in real terms. We had just about enough cash to live mortgage free, or almost mortgage free, here in the UK but chose to take on the biggest mortgage we can comfortably afford for exactly these reasons. The only way this logic falls down is if there is no inflation and no increase in house prices over a 25 year period. I suggest that this is extremely unlikely!

ABCDiamond

I agree totally. If I had never had mortgages when I was younger, I would not be in a position where I am now personal mortgage free !

It does make sense, I promise

Megalania

Other ways the logic can break down is:
1. The mortgage is foreclosed say due to loss ability to pay the mortgage (eg loss of income, increased expenses),
2. You can not get a mortgage due to uncertain income (eg self employed)
3. The rate of return on your money is less than the rate of interest on your mortgage.

The rate of return on capital invested in most businesses is greater than the interest rate on money borrowed by the business. Generally not so for households.

spottydog

Compared to our costs (excluding mortgage) these are a lot lower than our UK costs, living near london. Our UK costs (2 adults, no kids, lots of fish)

1 monthly pub transport tickets (zone 1-6) £145.00
Other pub transport tickets (visiting friends etc.) - £20.00
Car Tax - 12.00
Car insurance - 42.00
Car Petrol (for 700m travel/month) 50.00
Bike Tax - 3.00
Bike insurance - 30.00
Bike Petrol ( for 1200m travel/month) 55.00
Building & Contents insurance 35.00
Council Tax - 85.00
Water rates - 30.00
Elec - 40.00
Gas - 20.00
Groceries, household supp's, fish food 400.00
Mobile phone x 2 - 35.00
Phone/B-band 40.00

TOTAL MONTHLY COSTS = £1042.00 (which at $2.5 to the £ is $2600) and this does not include lunches at work (£20 a week each), spending money for nights out (can be expensive in London, we spend at least £50 a week each) and holidays (we spend a lot of money going away for weekends diving since we're nowhere near the coast here, probably £4,000 on foreign holidays and 10 weekends at £200 each - Total £8,000 a year).

After you've lived in London for a number of years most places seem cheap. We're quite lucky in that we bought our first place many years ago when prices were really low compared to now

At current prices we will be taking about £170k - £180k with us after costs getting there and although we don't expect to be able to buy a place without a mortgage we don't expect to need the same mortgage as we do here for a similar property in the London area (in our area a 2 bed 2-up 2-down terraced cottage costs £250k+ and we're in Essex half an hour from the city by tube).

Anne

Herman

As I said, getting the biggest mortgage you can afford makes sense. This should also be backed up by sensible insurance coverage. If I have an accident, was made redundant or were to die our mortgage is well covered.

The rate of return households earn on their property assets over the long term has significantly outweighed the real interest costs of a mortgage (after inflation). The impact of compound growth might help explain this, but I don't have time to create a discounted cash flow model for you.

Zebra4

Herman, ABCD, Megs - you're all really sensible.

I lived mortgage free in the UK, came to Oz and now have a big debt. Doesn't really feel any different on a day to day basis. Enjoyed life there, enjoy life here.

I'm missing something, aren't I?

Don

Makes sense if you get your timing right (re: property purchase in the context of house price cycle).

Leveraging up when property prices are about to decline in real terms by 25% over 7 years or so just makes you get poorer, faster.

Megalania

Please try this test:

You own your home outright. You mortgage it to the maximum that you can afford. You take out mortgage and income insurance. You then look for investments for the money liberated by the morgage which pay a higher rate of return after taxes and charges than the interest, charges and insurances related to your mortgage.

Herman (anyone else too), I would dearly like to hear what investments would provide such a return. Seriously - I would.

Don

Implicit in your post is the need for low risk and sure return.

If aged over 50 with UK income, could be worth investigating the immediate vesting annuity as an investment vehicle. http://www.retirement-advice.co.uk/press40.htm

Similarly, the changes in the UK pension rules from April 2006 will allow a lot of flexibility/ tax advantages - esp as regards self invested personal pensions and investment property held by your pension trust. http://britishexpats.com/forum/showt...hreadid=233343

Either could easily be used to give near-certain, pretty safe investment returns of 10-11%.

Current fixed, long term mortgage rates are typically 6-7%.

Quite a good differential.

seang

is the 6%-7% UK or Australia Don.Most EU countries trading Euro's is less still (<6%)

As an intro to investment property seems the way to go over shares even now

Shares vs property

Megalania

Good on ya!

Yes, despite the possibility of a house price downturn, I, and I imagine most people, see owning my own home as low risk. Therefore the investment risk must also be low to match.

I'll study your linked document and see if I can put it in the Australian context.

Don

UK - a quick check, you can get 5 year fixed for 5% so I imagine 25 years will be a little bit more but close.

Australia - 7 year fixed at about 7% http://www.yourmortgage.com.au/rates...egory=termloan

USA - 30 year fixed for 6% http://www.patriotus.com/ratesearch.htm

Euro - about 4% http://www.moneywizard.uk.com/offsho...ges_wizard.htm

One wheeze might be to borrow in Euros but convert to an emerging market currency and invest there. Eg highest bank interest rate in the EU right now is on Hungarian forint, where you can get 11.5%. http://english.mnb.hu/main.asp?id=2 Yet the Hungarian govt is bound by its accession treaty to join the Euro (probably by 2008-10) and will try to keep the forint in a narrow range of its current exchange rate with the Euro (limits risk). Look at what happened in Greece, Portugal, Spain in the immediate years after EU accession - their currencies strengthened vs other strong European currencies (eg Deutschmark, French Franc), as their economies improved. Same probably will happen with Hungarian forint, Czech koruna, Polish zloty. (Of course, reverse might also happen - that's th risk.)

You could gain on the interest rate differential and the currency appreciation. (Or you could lose if it all goes tits up.)

Herman

I'm talking about a 25 year time horizon. If you believe property will fall by 25% then holding off buying is a sensible idea. I think the market will soften, but the shortage of property is not going away any time soon.

I do like some of your Eastern European arbitrage opportunities. Shall we set up a hedge fund? We've got a small Euro mortgage and a small Czech Ks mortgage for a piece of land in North CzR and to buy a small flat in Brno (partly investment and partly so my wife's brother has somewhere to live).

Megs - as Don pointed out its all about risk and return. A house is a pretty low risk investment, although many argue looking risky at the moment. In the long run you can do better than property and actually over the long term equity returns have exceeded property, despite recent property booms.

Herman

We had spare cash that we could have used to reduce our mortgage or to invest. Our mortgage is fixed at 4.29% for another 3 years so that was the target rate of return. We invested some in tax free ISAs and put the money in a mix of risk profile invesments from index trackers to managed global funds, which over the long term should generate somewhere around 6% tax free. We also bought some 1 and 2 year bonds in my wife's name (she will not pay tax on the income for various reasons!) which pay around 5.5%. We also have some money invested via a Jersey trust which is tax sheltered and generates various returns from 1% in one year to 11% last year.
I am no investment guru, but do work with some clued up people who share ideas. Overall, we've done better than to reduce the mortgage. The key is finding tax efficient investments and taking some risks.

ABCDiamond

It's not sheltered from the Australian Tax Office though is it ? They will want their share.