A mortgage can be an investment

To many people, a mortgage seems to be more of a burden than an investment and they need a house more for nesting than investing.  Nevertheless, a well-chosen property bought in conjunction with an equally well-chosen mortgage can prove to be a fine, long term investment.  There are over a hundred different lenders offering a plethora of diverse mortgage schemes and products and there are thousands of different combinations.

There is no one single best buy for everyone, just as there is no single best buy product for investors.  Much depends on personal attitudes to aspects like risk and reward.  Some people are quite comfortable with a safe and secure investment return of say 4% pa, and would question the logic of trying for a 10% return if there was a chance of loosing their capital.  Others might say what is the point of accepting a paltry 4% when it is possible to go for 20% - it's a chance worth taking.  Either philosophy carries its own lifestyle risk. A ‘safety first’ approach may result in a lower, but consistent, standard of living, whereas a speculative approach might create a millionaire - or a pauper.

A mortgage considered on its own is a sort of negative investment and the property it intrinsically supports provides the upside.  We need to make the optimum choice for both components to ensure we get the best value for money overall.

Fortunately it is possible to set down a method to arrive at your own personalised "best buy".  Once you have some knowledge of the individual ingredients that make up this best-buy decision, it is then fairly straightforward to come to your own conclusion.

But before looking at the mortgage schemes themselves in more detail, we must first consider a fundamental question.

Is buying a house better than renting one?
Everyone needs a home once they have departed their parent's nest; most people want to build their own nest anyway.

All home hunters have an initial choice between renting and buying. It is helpful to look at the financial pros and cons of each option to see if one approach is a better than the other.  The short answer is that renting is probably better for a person likely to want to move within about two years. Buying a house, with a mortgage, is probably the best bet for the longer term.  Let us see why.

Renting usually requires no more than a month’s rent as deposit, a regular rental payment in advance and, depending on the tenancy terms, the landlord usually looks after major repairs.  Renting is straightforward, quick and easy and can be for short or long term.  But the money expended on rent is gone forever.

Buying your own home usually requires a deposit, some cash for professional fees and a mortgage. House purchase can be quite a frustrating process over a period of months. However, houses do tend to increase in value. They can of course fall in value too, and have done so. But in the long term, houses have always risen in value, usually in line with wages.

Thirty years go I remember a colleague saying to me "Buy land - they don't make it anymore, but they do make more people.  A constant supply and increasing demand mean only one thing - prices go up!”   Manhattan Island in America was bought for just $24 in 1626 – that’s now the whole of New York - worth probably $24 per square millimetre today!

Well that prophecy has proved right in the long term but it was pretty uncomfortable for many people when house prices fell continually for 5 years in the early 1990's.  Have a look at the graphs in Figure 14 and 14a, which illustrate the last 30 years of house prices, wages and inflation.

One of the causes of the fall in house prices in 1990 was the previous five years boom.  This boom culminated in an almost indecent rush to buy a house in the late 1980's.  Everyone wanted to make money out of the attractive increases in house prices regardless of personal affordability.  Moreover the government had disclosed that they intended to reduce MIRAS (Mortgage Interest Relief at Source) for couples unless they obtained their mortgage before a given date. 

This simple indiscretion seeded the frenzy that was to follow, with some couples buying houses with no forward planning apart from greedy profit sharing.  The following economic recession significantly reduced confidence in the job market at a time when many wanted to take their profits.  People do not like buying houses when confidence is low. The consequent downward adjustment in house prices was inevitable.