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Safe as houses

When I was young the standard dinner party line was… son… whatever you do…. get onto the property ladder.  The old adage was if you stretch yourself over time (but still only within what you can afford) inflation should eat away at the debt, coupled with house price appreciation will mean your loan to value is reduced and you will probably be able to remortgage at better, possibly lower rates.  This framework may have worked for a time when we saw positive inflation and interest rates that were coming down from double digit levels.  It seemed like a one way bet and we all experienced it and believed that as such it was true.  For quite a while house prices only moved in one direction.  Consider the position we are in now.  Interest rates at rock bottom levels and asset prices arguably at elevated levels.  What could happen now if you follow that old advice and stretch yourself when buying a property?  In the UK at the moment most mortgages are fixed for a short period of time, so it is hard to budget long term.

Imagine a situation where house prices drop by 5% over the next two years and interest rates increase.  Those home ‘owners’ that stretched themselves previously are likely to see their loan to value reduce as well as their mortgage payment increase.  This would be acutely felt in the monthly cash flows and in a rising interest rate environment where house price appreciation doesn’t materialise the notion of stretching oneself seems frankly unwise with hindsight.  They could also be in a position where they cannot remortgage because the loan to value is too high.  Maybe one should have considered more about what one needs than what one wants when buying the forever home.