Is Owning A Home Profitable?

In the last post, we looked at the math behind renting and taking a mortgage, and ended with the note that until you pay off your mortgage you are either a money renter or a home renter, not a home owner. Today we evaluate the common arguments in favour of taking a mortgage. These posts are designed to educate you as you make your home ownership plan, to ensure that you make the best decision. Ultimately, individual circumstances determine your investment decision, and where in doubt, it always pays to consult an investment adviser.

Taking a mortgage has several financial advantages over renting a house.

Predictable repayments: With  a mortgage, you are able to predict with reasonable accuracy, what your monthly home repayments will be for years, especially if interest rates do not change significantly. If you decide on a fixed rate mortgage like what Barclays have on offer, then you are certain that your repayments will remain constant for at least 3 years, and you can plan your finances accordingly.

When you rent, you are at the mercy of your landlord and market forces. Most landlords increase the rent annually or every two years, and there’s no regulation on how high the rent can go. In the example we looked at in the previous post, we assumed that the person renting a home has the opportunity to invest his savings and earn 10% return. This is not guaranteed and rates of return (just like interest rates) could swing either upwards or downwards.

Interest rates fluctuate and are unpredictable, but unlike rent, interest rates are regulated by the Central Bank, which makes them relatively stable. That said, things can go terribly wrong like what happened in the US market after deregulated financial institutions decided to get creative with home products.

Appreciation of home value: Most people who consider a home an asset cite this as their justification for buying a home; the fact that your home increases in value, the longer you hold it. If you are in a growing market like Kenya’s middle income housing, then this is is a valid argument. Over the last couple of years, property values have grown consistently by about 20%, to doubling in some years. If your mortgage interest is less than the market appreciation rate, then you’re in the money as far as “money renting” is concerned.

However, this is not always the case. As someone once said “Trees don’t grow to the sky” .  Markets always change direction as we saw in the US,and it is very rare for a sector to grow continuously for 20/30 years without a downturn. That is the natural law of finance. So if you have a 20 year mortgage, make sure it is in a market segment that is insulated from market shifts (if such a market segment exists).

It is also useful to consider that some home ownership costs (land rates, repairs, property taxes) could potentially erode the appreciation of your home.  We will discuss the buy vs build debate in the next post, but if for example you take a mortgage to buy (and not build) a house, you have no control over the fittings and systems (plumbing and electrical) the contractor has put in place, and these sometimes could end up costing you more than the gain in the value of your home.

This post is part of a 4 part series on mortgages sponsored by Barclays Bank. Read the first post on this series here, and the second post.