Part 292: House Prices and Index Valuations

Hello and welcome back to Mortgage Advisor on FIRE.  This week, I discuss house prices and lender index valuations. Also, thoughts on withdrawal rates, and a busy week.

Weekly Update

I had the first part of the week off work with the bank holiday, and because I booked the Tuesday off to help my Dad move home.  For the last couple of years, he has lived in the same apartment complex as us, but he was renting, and he wanted to be a homeowner once again.  

After a few false starts and hurdles to overcome, he got a deal over the line for an apartment just across the river.  I can stand on our balcony and, if he pops his head out of the window, we can wave to each other.

Moving day was busy and stressful.  The removal firm was on the scene first thing and quickly emptied his flat.  There was then a delay of several hours whilst we waited for something to be completed with the solicitors and estate agents.  After some lunch at ours, and roughly five hours after the removal company had emptied his old place, my Dad was told he could collect the keys to the new place.

After a quick cab journey to the agent and back, he had the keys and was able to give the go-ahead to the guys to start unloading the van.  

Whilst this was happening, I walked over to a local locksmith and home security company to see about getting someone out to change his locks.  It was an extremely frustrating experience.  

Bizarre Service

I asked if they change locks on residential properties.  This question seemed to confuse them from the off.  I explained that my Dad had just bought a new apartment across the river and wanted the locks changed.  He wanted someone to come out and complete the job for him.  The guy serving me said it was easy to do yourself, and started asking what type of lock it was.  I didn’t have much clue, but I showed him a picture of the lock mechanism.  He dithered around for a while trying to decide if it was something they could do or not.  Eventually, he said they knew the type of lock it was, and again, that I could do it myself.

Once more, I explained that we would rather have someone come and do it who knew what they were doing.  Reluctantly, the guy went into the back and came back with a woman who was carrying some sort of diary.  She said she could get someone out next Thursday.  My exact words were, “Thank you, but I’ll leave it.” and I walked out.  I’d spent the best part of half an hour trying to get something relatively simple organised.

I went on Google and looked up emergency locksmiths and dialled the first hit.  A woman answered and took the details.  A few minutes later, the locksmith called and said he’d be there in 30-60 minutes.  

Great Service

Pretty much bang on time, the guy arrived, and I went down to meet him.  I recognised his accent as Romanian, so we got chatting about the country and all the places I’ve visited.  Eventually, we made it up the stairs, which was my sixth or seventh time that day, climbing all three flights.  This guy was great.  He got to work and explained clearly all the different options.  He had the work done and dusted in less time than I spent in the other place.  If I’d caught his name, I’d give him a shout-out.  The contrast in service between the two businesses was like night and day.  

It’s going to suck not having my Dad in the same building as the three of us would often hang out and shoot the shit, but I’m happy for him as he’s wanted his own place for a few years now.

“We’re going to see the shelves!”

We have a ritual whereby each time we go to Ikea, I have to exclaim this, much to Oana’s frustration.  What can I say, my sense of humour is too sophisticated for some people.

This week we’ve had to hit Ikea three times.  Do I like Ikea?  I’ll let Bilbo Baggins answer:

It seems that every time we go, we end up surrounded by people who’ve seemingly never been inside a shop before, and they don’t understand that blocking the way and letting their crotch goblins run wild is not conducive to a positive shopping experience.  

Canal Walk

On Saturday, Oana and I walked from Kelham Island to Ikea along the canal.  It’s a nice walk and we always enjoy it.  We took plenty of bird seed and stopped to feed the geese and ducks.  About two-thirds of the way there, we encountered a pigeon sitting in the canal next to the grassy bank.  We approached it slowly and offered it some seeds, but it got scared and tried to get away, and then we noticed it was injured.  It couldn’t get onto the bank, and it couldn’t fly despite flapping its wings.  I suspect its feathers were too wet.

One thing Oana and I can’t do is ignore an injured animal.  We tried to figure out how to rescue it, because it was not going to survive forever in the water.  The problem was that each time we tried to approach it, the poor thing panicked.  We had some snacks in a food bag, and we emptied the contents into my backpack and then Oana tried to use the bag as a glove to try and pick the bird up.  It didn’t work.  

Reinforcements Arrived

After a few minutes, a group of people walked up to us to see what we were doing.  They then gave us another bag, and Oana was able to pick up the pigeon and place it away from the water.  We left some of the seeds and let it be.  I hope it’s ok, but there wasn’t anything else we could do.  I doubt that, where we were, any animal charity would come out for a pigeon.  

Anyone who thinks, “it’s just an animal” can fuck right off.  As Gandhi was believed to have said; 

“The greatness of a nation and its moral progress can be judged by the way its animals are treated.”

If we had left the pigeon as it was, it would have died.  Maybe we saved it, but at least we tried.

On a more positive note, a little further along the river, we came across two dogs: a collie and an older dog that was possibly a lurcher.  They were splashing about in the water and having lots of fun.  In the distance, we saw a woman walking towards us, and we got chatting.  These were her dogs, and they were out for walkies.  The collie loves playing with sticks and asking people to throw them.  Sure enough, for the next half an hour or so, as we walked, the dogs followed us, and the collie was asking us to throw the stick.  We would, and she’d come racing back and drop the stick in front of us for another throw.

We didn’t catch the lady’s name, but she obviously loved her dogs.  They were rescues, and she was living on a barge.  We parted company when she got back to her boat with her third dog waiting for her.  

What I’m Doing

Listening: Sum of Us: A History of the UK in Data by Georgina Sturge.

Watching: Daredevil: Born Again.

We have just finished Daredevil: Born Again, and for the most part, I enjoyed it.  It helps that the main cast all absolutely know their characters inside and out.  There are some differences from the original Daredevil show that ran for three seasons on Netflix, and some of them land better than others.  

The new intro theme is great.  It’s an evolution from the previous one, but it’s still similar enough to be the same show.  The style of filming and directing is different.  There’s an almost animated quality to some shots, and there is much more gore.

I also liked the little nods and winks to the wider MCU.  It didn’t feel forced and added to the feel that this all takes place inside a wider world.  That being said, if you live by the sword, you die by the sword.  You can’t have links to the wider MCU and not mention what other heroes are doing whilst the events of Daredevil are going down in New York.

It was left on a cliffhanger, and the second season is due out in March 2026.  I’ve read that there’s a Punisher show or film in the works as well, which I hope is good.  Jon Bernthal was born to play Frank Castle.

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Financial Update

Assets

Premium Bonds: £19,000.00.

Stocks and Shares ISA: £112,013.63.

Fuck It Fund: £100.00.

Pensions: £94,459.89.

Residential Property Value: £239,368.00. 

Total Assets: £464,941.52.

Debts

Residential Mortgage: £178,228.08. 

Total Debts: £178,228.08.

Total Wealth: £286,713.44.

My total wealth is inching closer and closer to £300k.  It’s insane to think that in late 2019, I only had £6k in my ISA.  Six years later, and it’s over £110k, and that doesn’t include the thousands I’ve taken out of the ISA during that time.  Investing in the stock market, using index trackers, might not be flashy or exciting, but it’s a solid way to build long-term wealth.  

Withdrawal Rates

I was sent an interesting article about withdrawal rates and the 4% rule by a good friend who is also following a FI plan.  We discuss the 4% rule often, and both believe it to be too cautious for our circumstances.  This led to the idea, discussed in the article to some degree, that your withdrawal rate can be broken down to account for different areas of spending.

We all have different categories of spending.  There are some expenses which are necessary, such as utility bills, food shopping, and potentially rent or mortgage costs.  Then, there are expenses which are not necessary but desirable.  I’m thinking about things like Netflix or a gym membership.  Following this are luxuries, like holidays or expensive Lego sets.  What if you create a withdrawal rate for each category?

Breaking it down…

I had a look at how Oana and I spend money.  We are currently a one-income household.  I broke it down into four categories: debts, investments, household/bills, and spending money.  I then created a pie chart, because we all love pie charts, to show what percentage of our income goes to each category, both now and for when Oana is back in work.

Some calculations seem obvious, but then there are some which make you pause for a second.  I was thinking about what our finances will look like when Oana is back working, and just assumed that our investment category would see double the amount.  I was wrong.  It multiplied by more than four.  

The reason for this is that a double income means the other expenses are halved.  Rather than me paying for our mortgage, food shopping, utilities, and so on, just from my salary.  My contribution to them is halved, which frees that money up to be invested.  It’s one of those things that, when you spend a second to just stop and think, makes perfect sense.  

So, what withdrawal rate could I use to cover my half of these categories, and what pot would be required at that withdrawal rate?

Approximate Annual Spend

Debt (mortgage): £6,000.

Investing: £0 once retired.

Household: £9,600.

Spending: £6,000.

Withdrawal Rate and Required Fund Value

Debt (mortgage): 4% – £150,000

Investing: 0% – £0.00

Household: 4% – £240,000

Spending: 6% – £100,000

Total Fund Value Required: £490,000

The above is, I think, quite conservative still.  The idea is that the spending category can be pulled back when the market is not performing, and increased when the market is surging.  It allows more flexibility.  It also requires a smaller pot of money than if I just assumed 4% for everything; £540,000.

What if I was a little more adventurous?

Debt (mortgage): 5% – £120,000

Investing: 0% – £0.00

Household: 5% – £192,000

Spending: 6.5% – £92,308

Total Fund Value Required: £404,308

These figures hammer home just how close, relatively speaking, we are to FI.  If I were to coast from now until 58 years of age, with an assumed growth rate of 6%, I’d achieve a total fund value between my ISA and pensions of over £500,000.

I don’t want to coast, though.  I want FI sooner rather than later.  The next few years are going to be vital, as I’m in a position to potentially earn very well.  If we can hammer our mortgage down, we can cut the total amount needed to retire.  

All of the above figures are just for my half of the expenditure.  To account for Oana as well, it’s not necessarily the case that all costs have to be doubled.  Some things cost the same whether it’s one or more people doing them; building a Lego set, for example, or buying a new book to read or a movie to watch.  I would think that multiplying the figures by 1.75 would be sufficient to account for the two of us.  A total fund value of roughly £857,500 should work for us, assuming we have literally zero income coming in from other sources.  If we were both earning just £500pm, that £857,500 figure drops by a couple of hundred thousand.

House Prices

When you are a mortgage and protection advisor, everyone wants to have a chat about property.  It’s just one of those things.  I was chatting with an acquaintance the other day, and they asked about borrowing more money to do this and that.  They wanted to know how to go about doing this with their mortgage.  Well, the can of worms was opened, and I don’t think they were happy with how the conversation went down.

A major part of mortgage lending is the loan-to-value of the property in question.  The LTV is the debt as a percentage of the property value.  A £50k mortgage against a £100k property has an LTV of 50%.  A mortgage of £86k against a property worth £125,000 has an LTV of 68.8%.

The lower the LTV, the easier it is to get the mortgage, as it is less risky for the lender.  Interest rates are lower, and other eligibility criteria might be more flexible.  The thing to remember here is that house prices are not objective.  Something is worth what someone else is willing to pay.  This is why an estate agent will give a different valuation than a bank, which is more concerned with risk.  All valuations are subjective.

What the lender said…

Anyway, this person had been told by their lender that they estimated the value of their property to be £375,000.  With a mortgage of just over £250,000, their LTV is still quite healthy at 67%.  There’s one major problem with all of this, though.  I have no idea where the lender got the value of £375,000 from.  No disrespect intended to my acquaintance, but I’ve seen their house and I don’t think £375,000 is realistic.  I checked the sold prices for similar houses in the area, and in the last few months, another house on the street with the same spec sold for £298,000.

There is a big difference between £375,000 and £298,000; £77,000 to be precise.  

Let’s assume that my acquaintance, whom I’m going to call Bob, as I’m sick of trying to spell acquaintance, applies to borrow an extra £60,000.  Their new LTV, with the lender’s valuation of £375k, would be 83%.  This is not unrealistic, and I know they’re earning enough to get the mortgage.  However, let’s say that Bob’s wife leaves him, and then Bob loses his job.  Suddenly, he can’t pay the mortgage.  The obvious thing to do would be to sell the house.  However, how does one sell a house when the outstanding debt is £310,000 and people are only paying £298k for houses like this?

Banks have to do better when it comes to valuations on properties.  For most people, much of the time, this will not be a problem.  I do wonder how many people are in this hidden state of negative equity up and down the UK, though.  It’s not an issue if you can pay your mortgage and have no plans to sell, but I can’t help thinking of the phrase, “Man plans, God laughs.”

Do your own research…

I would suggest that everyone with a mortgage look at their lender’s valuation and compare it to sales figures for similar properties in their area.  I wouldn’t look too far back, as prices do change over time.  Just because a lender states you have loads of equity, it doesn’t make it true.  

Decision Making

I want to finish up this week’s post with a little rant about decision-making.  I’m very much a logical, practical thinker.  Sometimes in life, there is no good choice to be made.  Things happen, and you can be left with many bad choices.  Just because the choices are all bad, it doesn’t mean you can just not make a decision.  Doing nothing is still a decision, and doing nothing will probably make the situation worse.  

For example, if you are unable to meet your financial obligations because you have more going out than coming in, burying your head in the sand will not solve the problem.  A decision has to be made because the problem is not going away.  Often, people say they will “think about it.”  What they actually mean, most of the time, is that they will try to forget about it.  

Life can be shitty at times and if you need to take a bit of time to mope or process, that’s understandable.  At some point, you have to face these things head-on and deal with them because financial problems don’t just go away.

If you are struggling financially, please do reach out to one of the great services out there, such as StepChange or MoneyHelper, for which there are links at the end of this post.

That’s all for this week.  Thanks for reading, and I hope you have a great week.

DISCLAIMER

The views and opinions in this blog are my own, and do not represent the views or opinions of my former, current, or future employers, nor should they be considered advice.

If you want personalised financial advice, seek an appropriate professional.  If you are in financial difficulty, seek advice via the resources below:

StepChange

MoneyHelper

Biolink 

You can now find all my social media pages by checking out my Biolink:

bio.link/davidscothern.