How to buy (afford) your first home and should you pay off your mortgage?
This is about the struggle to buy your first home, and the the dilemma of whether to pay off your mortgage, or should you invest your money. Here is my story, of my first home purchase 42 years ago.
This blog was inspired by one of Lukestokes posts. He took two jobs and paid off his mortgage early. He learned the damaging impact of compound interest, did the maths and formulated a plan to defeat it. Well done!
42 years ago I was working two jobs to finance my first one-bedroom flat. It cost GBP 13'000. My first salary, as a beginner banker in the City of London was £900 a year. My second job was an evenig job. The salary, as a nightime bingo-caller was £1'250. The bank rules didn't permit me to have a second job, but there was no way they could have found out. Back then it was so hard to get on the housing ladder. You had to really struggle, make a lot of sacrifices and compromises. Two jobs and a taking a lodger were necessary if you wanted to pay mortgage interest.
Some people today say house prices are too expensive for the ordinary guy. This just makes me laugh. They feel they have a sense of entitlement, and won't make sacrifices. Smart-phone or house. Netflix or a second job. Lodger or space. They won't make the tough decision.
In 1975 the interest rate on my mortgage was 12%, so all of my second salary went in mortgage payments.
I had nothing left to live on. I spent nothing, not even a TV. I couldn't afford meat. I lived on dried beans and rice. I moved in a girlfriend and got her to pay some of the mortgage interest instead of rent. Having a girl in my bed was good, but apart from that it was annoying with two people living in such a small space. As you can see I made many sacrifices to buy my first home, especially the two jobs which was a killer.
I sold the flat two and a half years later as part of my strategy of separation from the annoying live-in girlfriend.
I made a good profit when I sold the flat. I sold the flat for £23'000 after owning it less than 3 years. Nearly doubled my purchase price and made tenfold my equity. I learned that borrowing money can leverage your profit.
From 1975 to 1985, inflation was very high and it seemed like house prices were guaranteed to rise forever.
Roll forward to 2015. My bank was closing so I had to re-mortgage. I thought of paying off the mortgage in full. I had the assets - in investments. With interest rates below 1%, I figured the 3 % dividend yield would more than cover the mortgage interest.
6 banks bid to lend me the money. Finally I took out a 100% mortgage, (yes, I know that's illegal for the bank - but they are salesmen, and they need to do the deal, so we bent the rules a bit here, and a bit there to get to the 100%). I split the loan into 6 tranches with fixed maturities of 0 years (Libor float) to 5 years, all slices at fixed rates below 1%. My average interest rate was 0.89%.
Since then, a couple of the slices have matured, and I have rolled the maturing slices for 5 years at a new fixed rate. The interest rate on most the recent slice rollover was fixed for five years at 0.99%, so my average rate stll remains below 1% per annum.
It makes sense for me to have the mortgage split into fixed rates for 1,2,3,4, and 5 years, as any changes in interest rates will be averaged on me slowly over 6 years.
As far as I am concerned, this is free money. Anyone should be able to make long term returns well in excess of 1% a year. That's why I didn't pay off my mortgage.
I have more exciting investments to make. Sure, the leverage could go the wrong way - house prices could fall, equities might fall, gold somtimes falls, bitcoin plummets and rockets and interest rates could rise. It's a risk I'm willing to take.
I might not retire so early if it goes wrong. Meanwhile, I am gradually increasing my bitcoin exposure, aiming for the 5% to 10% range. Could get there faster than expected if the price continues to rise.