Draw Breath

Congratulations to Maca, who's just bought himself some digs. Fair dues to him, and I mean that. But never let me pass over an opportunity to poo on someone's parade. So here goes...

Maca says that they bought the house because "we figure we’re better off paying our mortgage than someone else’s mortgage." Is this true in the present climate? Is the property ladder the place to be when it's really a snake?

The way I figure it, putting aside all those intangible joys like trips to Ikea etc, the 'am I better off paying my own mortgage?' calculation ought to proceed according to the maxim that the fall in property prices minus the amount paid off the principal on the mortgage ought not be greater than the outlay in rent (by the way, I had this expressed in an equation a couple of minutes ago but decided that I'd never be invited to dinner parties again if I posted it. Truly I am a sad, sad person).

So, if the amount you spend on your rent is more than a fall in value of your house minus the amount you pay onto the principal on the mortgage then buy. If not, then rent. Or, to take an example: in the first year of a mortgage, assuming an average priced €300,000 house at 5.4% APR, you will only pay about €4,200 off the principal (and €16,000 odd in interest). In that time in 2008, the house will have fallen in value by €24,000 (about 8% according to Goodbody). So the purchase of a house is worthwhile if you would otherwise fork out €19,600 in rent in the year. That's €1,633 a month. Of course, you could buy a cheaper house. It's also not unlikely, if you are renting a house, that this calculation might work in favour of buying (well, that or renting somewhere smaller). On the other hand, you could be saddled with a higher interest rate on your mortgage than I've allowed for here. Either way, what is undoubtedly true is that part of the value of the house will simply disappear into thin air in 2008/9. And lots of the mortgage will go toward the upkeep of the bank's shareholders, not towards the principal on the loan.

In which case it's not unlikely that renting until prices bottom out would be better overall than paying one's own mortgage. Let someone else suffer the loss in wealth and then jump onto the ladder. Or at least that it's not automatically the case that you are better off paying your own mortgage from 2008 than you would be leaving it until 2010.