Category: Property

Investments

Is Buying a Home an Investment or a Debt?

Buying a home is a big step for anyone. Most people will need to take on a mortgage to buy a home and this makes it an even bigger step as they will be likely to be taking on a 25 year debt. This can be a scary and daunting prospect and is certainly something which needs to be thought about.

Some people consider a home to be a really good investment. They feel that you will eventually own it, after paying the mortgage back over 25 years and then you will have a property that you will be able to live in rent free. This is certainly a great prospect, particularly if your income is likely to drop in retirement, you will not have to worry about affording the rent as well as everything else. House prices also tend to go up over time. This means that what you have bought should go up in value and that is why many consider it to be a good investment. Investments do take time to go up in value though, this is unlikely to happen in the short term, although it can do in a few rare circumstances. Some homes will double in price in ten years and some may do even better and so you will find that the money that you pay for it will be very much less than the value when you have finished paying off the mortgage.

Of course, there are risks with buying a home, like there are with all investments, but if you have a mortgage there are higher risks. There will be a risk that the property will not increase in value or in fact may even decrease. The risk is small as historically property will increase in value over the long term. However, certain locations may become less desirable and this could mean the value goes down. Therefore there is a risk and it is not always easy to know whether this will happen or not. There are lots of reasons for an area becoming less desirable, such as crime, type of house, risk of flood or subsidence and it is not usually easy to predict these things. People who bought river side properties twenty years ago had no idea they would have a risk of flooding in the future, for example.

As well as the risk of the change in house price, there is a risk with borrowing money as well. The repayments need to be made every month or else there is a risk that the lender can reclaim the property. They are likely to give you some chances to miss repayments, but they will want to make sure that they get their money back and if they feel that there is a risk that they won’t then they will eventually repossess the house. This does not happen often, but there is a risk and then you will have paid in all that money for nothing, although if you had not been paying it, you will have had to pay rent instead, which in many cases is dearer.

A house is an odd sort of investment though, because you will always want somewhere to live. If it is the family home that you are living in, that is being referred to then the owner will not normally be able to take advantage of the investment. In many cases they will buy a home, pay off the mortgage and live in it until they die and so the value contained within it will go to whoever inherits form them, rather than them taking advantage of it. However, some people do things a bit differently. They will climb the property ladder, by moving to larger houses when they can afford it. Taking advantage of the increase in value of their home as well as increases in salary they will borrow more money. Then when they retire they can move to a smaller and cheaper home and use the difference in cost to live off. However, retirement homes can be a lot more expensive than regular homes and so it may be that the whole value of the home is needed to buy a smaller place, with added retirement facilities.

I suppose the conclusion to the question as to whether owning a home is an investment or a debt will depend. If you are using a mortgage to pay for it then it is both until the mortgage is paid off and then it becomes an investment. In both circumstances there is some risk involved as you could find yourself in the situation where you cannot pay back the loan and you may also find that the property decreases in value. However, in most cases the worth of the investment outweighs the risk and this is why many people do decide to buy homes with a mortgage.