For most of us, buying property constitutes the most significant purchasing decisions we will make in our lives. Just getting onto the ladder to begin with is becoming increasingly difficult, particularly in countries like the U.K. which have experienced decades long bull runs in their residential property markets.
There are a couple of key ‘input’s we need to include in such a vital decision-making process. Utility? Of course, this is typically a driving factor behind why we make decisions regarding our homes. Do we need to move to find more space for a growing family? Are we relocating for work or lifestyle reasons? Are we downsizing after the kids have flown the nest? Affordability? Yes sure, this is probably the central consideration and where we will focus.
Affordability is most often looked at in a 2-D way. Current mortgage/rent = X, desired mortgage = Y. But does Y-X fit within my actual or forecasted overall monthly budget? Whilst this is an exercise in which most buyers will proactively engage, in the UK your lenders are mandated to ensure it is undertaken. However, for many of us, personal financial management can occur much earlier in the process. Post 2007-8, lenders require significant deposit payments, often up to 25% to achieve attractive rates. For first time buyers and those looking to significantly upsize, funding these deposits can involve many years of saving and investment prior to purchase.
A mortgage may be the most tangible way many of us deal with financial risk on a day-to-day, or more accurately month-to-month basis. The risk of interest rate rises and the effect they can have on mortgage obligations can be acute unless they are considered properly and meaningfully. Also, most of us buy property based on the axiom that prices will drift upwards inexorably. Over the long term, this is probably true. However short to medium term fluctuations can have disastrous implications, for example if your risk analysis does not prepare you properly for unforeseen events like the global pandemic. Again, few tools available on the market offer an all-encompassing ‘holistic’ framework which can contextualise how we can make such decisions to lead to optimal outcomes but let us try to imagine how such a tool could look.
After setting my monthly income levels and answering a couple of questions about my attitude to risk, I set my desired levels of property value, the interest rate, and the down payment I wish to contribute to my mortgage. Then OutRank, our financial calculation engine, calculates my monthly housing budget. I can now examine how different mortgage terms – for instance, various levels of amortization, can impact my financial situation in the long term. One of the core features of OutRank is the holistic nature of such an analysis. Say, I would like to invest a portion of my remaining housing budget after interest and amortization payments into the financial market. OutRank would calculate an impact of this decision on my net worth over the years, given the riskiness of the investment product I would choose.
Whilst our mortgages will always be a principal personal finance concern, they should not be a millstone around our necks. Most importantly, we should give ourselves the breathing space to live a full and proper life at the same time as managing our housing costs. With good planning and preparation, we can all navigate the associated risks and achieve good outcomes.