The most important point is having the right mindset around your family home. Once you understand that buying a house is a liability, not an asset, you can plan your finances accordingly.
There’s no need to rush into buying a property unless it would improve your quality of life. If you are ready to buy, look for something that meets your needs. Don’t stretch your budget to the absolute max, thinking that it’s a good ‘investment’.
Now that we’ve established that your property cost is a lifestyle expense, we can consider a strategy that will grow your net worth and your investable assets.
Say you were considering buying a property for around £750,000, and it would be your first home. Maybe you’ve decided to stretch yourself a bit because whilst you don’t have kids now, you want an extra bedroom for the future just in case.
Firstly, you’d need to get together a 10% deposit of £75,000, plus an additional £27,500 to cover the stamp duty. All in all, that’s £102,500 in cash you need to put down for the place. If you get a mortgage for the rest, that’s going to run you around £2,850 a month.
Then you need to budget for all the outgoings on the property, plus factor in repairs, maintenance and updates over the long term. Oh, and if you ever want to move, it’s going to cost you tens of thousands of pounds and probably take you over six months.
Now instead, imagine you’re living in a great flat, in a perfect location and the rent costs £2,300 per month, because you don’t need the extra bedroom just yet. You don’t have to worry about any unexpected costs and you can up and move if you get a great job opportunity or the property just isn’t right for you anymore.
You also haven’t had to hand over £102,500 in cash.
So now, you have the opportunity to invest £102,500 plus the extra £550 a month you can save with the rent being less than the mortgage repayment. Over the next 10 years, that investment pot could grow to £275,000, assuming an annual return of 6%. Importantly, that’s liquid, usable wealth that you can then use, as opposed to paper wealth you’d gain from buying the property.
This will keep your debt ratio within safe limits and give you greater control over your finances.