GFF’s Disappearing Housing Equity

Whilst the virus has changed our lives, it’s also playing havoc with the economy and the housing market. For those of us who are following the path to Financial Independence what does this practically mean?

For a bit of clarity or background; GFF lives in a lovely house in a nice part of a LCOL city in Scotland. We are all very happy here and whilst the cost of the house is low compared to other cities/properties, the value for us is immense. I really like our house and whilst I could easily leave a lot of Scotland behind (neds, midges, the weather), I do like our house and where we live.

FIRE, property, the virus – what’s going on?

The practicalities of retiring abroad are a bit funny – tax-free savings in ISAs or LISAs become taxable, there’s healthcare to consider and all that – so maybe we’d just keep our residence in the UK and holiday away a lot. After all, the UK is very favourable to low earning, asset rich retirees.

Anyway, the virus can’t be very good news for property prices, precisely because since the economy will/has shrunk due to lower activity, there’s less money to pump into the already inflated value of properties. Anecdotal evidence of a boom in house prices that I’ve seen says that the recent stamp duty freebie has had the desired short-term, headline grabbing, bounce that was hoped for. Longer term, I’m afraid the relentless march of house prices into ever more unaffordable heights has come to an end.

Home Ownership vs. Renting for Financial Independence

There’s a good discussion on what’s the right way to live your life in this regard. I think that in the UK there are very good reasons to own a property instead of renting and these can be summarised below:

  • mortgages are cheaper than rent
  • rented properties are often in poor stat of repair/decoration/quality
  • house price growth is tax free
  • the property/location you want may not be available to rent
  • homeowners have greater security of tenure

Mortgages for Life

GFF’s fashion hero?

One of the ideas of getting a mortgage is that you will pay it off at some point. Pah! – that’s so old skool! Now, we can just live our lives in perpetual debt. Borrow too much to begin with. Re-mortgage when your teaser rate runs out and MEW for a new car or holiday. Rinse and repeat until you hit retirement age. Then take out an Equity Release mortgage to let you enjoy all that property wealth you worked so hard for! That’s one way of doing it, geriatric interest only mortgages for all! If you watch TV you’ll see loads of ads for them (or maybe just if you watch Michael Portillo train shows like the Master does when we are on holiday – he’s not the target audience.

On a more serious note, having a generation of people who are living in properties that are too big for them, that they can’t afford, and never even paid for and spend their days gorging on their property wealth whilst the younger generations are living in smaller properties, paying substantially more and having nothing to show for it is a recipe for disaster. Intergenerational property inequality is a massive problem – not due to be solved by government any decade soon.

Back on topic. The other is to avoid repaying your mortgage (possibly by getting an IO mortgage), putting that money into your pension and taking out that money when you hit 58 as part of your 25% tax free lump sum. That’s the route I’m going for.

The Importance of Housing Equity

I predict that my house will drop by 25% due to the virus and stabilise after that. That makes my own housing equity chart look like this (by the way, I take housing equity to be the value of our house less all debts, mortgage, loans, stooze money.

As you can see, since we moved into our house our housing equity increased over the years (sorry for no axis but numbers just distract). This was due to our mortgage payments paying off the capital each month and the average house prices in our area going up (on average). BUT disaster strikes in 2020 and our equity drops to near zero! That’s a big big drop.

What to do about Housing Equity?

So our equity is close to zero. There’s no real reason for me to worry. We can easily cover our mortgage payments and our mortgage company won’t care. They have lots of mortgagees who are struggling to pay – we’re not one of them. There’s no great need to overpay the mortgage – it’s actual likely to be a poor investment for 1) the low interest rate of the mortgage compared to investment gains 2) tax position on other investments like LISAs/SIPPSs.

And it doesn’t really matter that much how much equity you have except when you come to re-mortgage or when you sell how much money you walk away with. Now, how do you re-mortgage your house when you are Financially Independent, but with no formal PAYE earnings – I don’t know. And when I find out I’ll let you know.

In the meantime, the collapse/boom of the property market doesn’t really impact me at all – the disappearance of our housing equity is just a storm in a spreadsheet and given all the chaos in the world right now it’s the least of anyone’s problems let alone ours.

Thanks, GFF

17 Comments

  1. Interesting thoughts.

    I am in a similar position, but we intend to have the mortgage be gone by the time we hit FI.

    The main reason is that I see it as a bit of a sequence of returns risk hedge. Rent or mortgage payments are a fixed cash flow requirement. If the market tanks and we decide that we would like to reduce our spending by say 10%, we would not be able to reduce our rent or mortgage payments, and these would make a significant portion of our monthly spending. The result is that we would have to make bigger reductions elsewhere.

    I also like the fact that we are not beholden to any mortgage company. If they jack up the interest rates or add extra fees, we don’t need to worry about it. In fact, the remaining amount on our mortgage is actually less that the ‘cash’ I have in premium bonds now. I could get rid of it today if I wanted to (and didn’t mind the early repayment charges), but I prefer to have the options available to spend the money elsewhere. However if circumstances change or it becomes difficult to get a remortgage at renewal time, I don’t need to worry or accept a bad deal.

    Liked by 1 person

    1. that’s sort of how I see things. Our mortgage payment would be about an extra 25% on to our happy-FIRE number making life difficult. But for SORR, as I’ve said in my post about VCTs, (https://gentlemansfamilyfinances.wordpress.com/2020/07/31/vcts-for-financial-independence-part-3-making-it-work-for-you/) we can use the sale of VCTs to balance that SORR risk.
      I wouldn’t worry about mortgage companies jacking up rates – these days cheap, easy access credit is almost a human right.

      I’ve had a look at your website – so my question for you is do you live in Edinburgh and commute to Grangemouth or do you live in the LCOL surroundings? That’ll make a big difference to your own position.

      Like

      1. I live in Polmont (10 minute cycle ride to Grangemouth), though (pre pandemic) my wife commuted into Edinburgh.

        If cost wasn’t a concern, we probably would like to live in Edinburgh from the social aspect, but cost is a concern so we live in the sticks and enjoy a house with a garden.

        Liked by 1 person

  2. Sorry, I posted a reply against your 2018 post so I’ll post here too as not sure you review comments against old posts! 🙂

    I think I missed your Geriatric Interest Only Mortgage post the first time round because it’s something I would probably consider myself.

    I don’t own the property I live in so at some point into old age, I will likely still be renting or paying off a mortgage of some sort.

    With no dependents, the Geriatric IO Mortgage appeals to me – why not let the bank have the property when I pop my clogs?

    It’s an option that I can’t disregard completely. I need to work out what’s what but am putting it off.

    Liked by 1 person

  3. I won’t lie, as a ‘mid-20s-er’, the idea home ownership, for some reason, terrifies me. I’m saving into a LISA and anything over the 4K I’m saving into other pots for a future deposit. But I just can’t see any way of affording even the smallest place on my one income. Even if I could the idea of tying myself down to a 25 year mortgage is frightening; I can’t even commit to a 12 month gym membership.

    I hate the argument of ‘well just move up North then’ – so what? Away from ALL my friends, ALL my family and my job I quite like?

    Meh, I’m sure it’s something I’ll eventually get over like investing risk and 0% interest credit (when it makes sense), but for now it’s just a terrifying pipe dream.

    Liked by 1 person

    1. I feel for you – some parts are a victim of their own success with House prices pricing out the natives and unless you get housing benefit (and that’s not a great life) you need to compromise on location, locale or size.

      A good question to ask is how many dinner parties does the average millennial go to in any given year?
      Separate dining space is a luxury few can afford.
      In many cases FIRE is a reaction to this intergenerational inequality

      Like

  4. The pay off the mortgage using the 25% lump sum left me going “How did i not think of that?”.

    The “should i overpay my mortgage” is the classic behavioural finance conundrum. I like to consider myself fairly clued up on personal finance and know that the long run its not the best decision to overpay. However, i sometimes still consider doing it!!!

    Liked by 1 person

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