You want to pay off your mortgage, uh?
You work hard, save even harder and keep dreaming about all the stuff you want!
You want a house.
You want a car.
You want a summer house overseas.
…a skiing chalet.
…a beach house.
…a private jet.
Unlike our means to satisfy them, our desires a limitless.
Deep down though, you know that it doesn’t matter how hard you work and save you’ll never manage to own most of the things you dream of.
Okay, you may manage to pay the mortgage off. You may also buy a car and pay off the loan.
Still, is there another way?
I have to say that I don’t want most of these things. I still want to own our house completely.
And I want a Range Rover Evoque. If you haven’t seen one, this is what they look like.
And I really want a chalet in the mountains.
Thing is, every time I mention buying a chalet in the mountains or an Evoque, John transforms from a mild mannered, loving husband into a contrary, patronising git.
And he accuses me in being far too emotional about money; which he is probably right about.
I like to feel secure and one of the ways to achieve this is to own things.
This is why I want to pay off the mortgage; this is why I want to buy an Evoque.
Does it make sense?
Well, I don’t think the mortgage situation needs to be laboured. At the moment lenders are fighting to offer mortgage deals at 2% interest. This is so good that rushing to pay off your mortgage is about as sensible as taking a night time walk through the doggy parts of Mexico City. (You should use the money to invest, mind; not spend it on silliness. And talking about investing, it doesn’t have to be fancy; my Nutmeg ISA has been returning about 7% annually.)
Whether to buy or hire an Evoque, however, is not that straight forward.
Let’s check these numbers then…
Now, conventional personal finance wisdom is clear on this matter: buy, buy for cash and buy used.
I’ll take issue with ‘buying used’ first.
When I was learning to drive – about 20 years ago because I learned late – I bought myself little Fiat 126. It was old and cheap but I though it will do me for some time.
My first Fiat lasted six weeks – when we took it for its MOT it turned out that the steering is going wrong; this is serious stuff.
We bought my second Fiat, second hand from a garage. It was a disaster. I never knew whether I’ll get where I’m going or I’ll end up on the back of a delivery truck. You don’t believe me? I think the AA guys in Manchester still remember me: I used to phone and they knew my name.
After that I drive new cars; not expensive ones but new. It’s great for my sanity, good for the environment and not that bad for my wallet. Except the Smart Fortwo but this was a mistake to begin with.
Buying used cars is not always wise and it isn’t necessarily prudent.
Getting back to the Evoque, let’s assume it’ll be new and see what happens if you buy it and what if you contract hire it.
To buy a Range Rover Evoque 2.2 SD4 Pure will cost £35,305.
I can hire the same car for £273 per month (£3,276 per year).
Now start paying attention.
If you decide to buy the Evoque you’ll most likely:
- Pay deposit of approximately £7,000;
- Borrow the rest at 6.9% per annum interest;
- In three years have a car for which you paid over £40,000 and the guaranteed value of which is slightly over £18,000.
If, on the other hand, you decide to contract hire the same car, you’ll pay £3,276 per year. If you have the £35,000 (the cost of a new Evoque) and invest it at 7%, it’ll be making £2,450 per year.
Which actually means that you’ll be driving a brand new Range Rover Evoque for £826 per year (£69 per month) and have the choice to give back the key at the end of three years.
What do you think is the sensible thing to do: to buy or to hire?
Thought so. Now I understand that it is not John who becomes a patronising git when I want to pay cash for an Evoque; it is I who becomes a consumer guided by her feelings.
Hiring vs owning
Now that we’ve dealt with the matter of cost – and seen that contract hire is not necessarily more expensive or wasteful than purchase – let’s turn to the advantages of contract hire and ownership as I see them.
Contract hire/renting offers:
- Flexibility: Using contract hire and renting keeps people very flexible. You could move to live in another city, or even another country, with ease and without the hustle of selling, putting in storage and preserving possessions. You just have to cancel the lease.
- Versatility. When you contract hire or rent it is easy to change and upgrade. If the apartment you are renting becomes small you find another one; if you are disappointed in the car you contract hire you can change to another model. Sometimes this change incurs penalties (so be careful to check the conditions of the contract before you sign) but these are usually less than the cost of buying the wrong item.
- Hassle free use. Usually contract hire and renting go with hassle free use. What do I mean? If you own a house and the shower leaks this is your responsibility; if you rent and the shower leaks this the landlord’s responsibility. If you contract hire a car, the contract may include service and maintenance; and you can walk away in three years (or however long the contract is).
- No depreciation costs. Remember the example with the Range Rover Evoque I used? Well, this is what I’m talking about.
- Capital flexibility. Contract hire and rent increase monthly expenses and decrease cash flow. This in turn can reduce the level at which you save assuming that you haven’t taken measures to increase your income. However, purchasing a large, expensive and depreciating item upfront reduces your capital. In my book, capital is more important than cash flow.
- You can afford more than if you buy. This is generally true although the wisdom of using more with little regard for the future can be questioned.
Ownership offers some advantages as well. These are:
- Stability. If contact hire and renting offer flexibility, ownership provides stability. If you own s house, you’d always have a home; if you own your car it’ll be yours never mind what.
- Security. Ownership offers security in the knowledge that you can never find yourself in a desperate situation.
- Discretion of use. Ownership usually afford unlimited discretion over the items you use. You can paint your bedroom black, hammer nails in the walls and scratch the name of your lover on the bumper of your car. Well, you could; I never said that these actions make sense.
How to decide whether to own or the hire
Decisions as to whether to own or contract hire particular item are very personal and would depend on the individual situation and preference.
Still, there are four questions that can help you decide whether to select ownership or contract hire/rent. These are:
- What is the item? It is quite clear that contract hire/rent is not appropriate for all items we need and use in our everyday lives. I, for instance, will never hire clothes, shoes and other personal items. At the same time, I fail to see the harm in hiring cars, boats, gardening tools, other tools that are not used often like carpet cleaners, sanding machines and the like. Thinking about it, I am not averse to hiring some obscenely expensive jewellery for an occasion (yep, and you can call me shallow if you wish).
- What stage of life are you in? We always need a level of flexibility and stability in our lives. It is just that the ratio changes with age: the younger we are, the more flexibility we are likely to need.
- How secure is your income? Contract hire/renting makes more sense the higher your income security is. If, on the other hand, you are not very secure in your future income (all of it is from a job, for instance) it’d be better to choose ownership.
- Is exclusivity important for you? Well, some people are really keen on exclusive use of space and gadgets. If you are one of them contract hire and renting may not be appropriate for you.
The decision to own or hire/rent the large, expensive items in life (like houses, cars, boats and equipment) is not a straight forward one and depends on personal circumstance and preference.
Don’t discard contract hire and renting as waste of money; in many cases purchase can be more wasteful than contract hire.
As to us, we will keep our house; for now. We have been contract hiring our car for about a decade now; and it is working out okay.