Leverage at home

Buying your home on credit is often the biggest leveraged deal of a lifetime. Even if nobody calls it that.

Leverage means controlling an asset worth much more than what you put in yourself.

Say a home worth two hundred and fifty thousand euros. You put down twenty-five thousand euros, the bank lends the rest.

You put in ten per cent. But you carry one hundred per cent of the price changes.

The price rises ten per cent? Your share goes from twenty-five thousand to fifty thousand euros. It has doubled.

It falls ten per cent? Your share drops to zero. The home is worth exactly what you owe.

For the example, we leave out fees and repayments. But the mechanism is there: the deposit decides the leverage.

With fifty thousand euros down, the same fall leaves you twenty-five thousand euros. Less leverage, more margin.

Second choice: the rate. Fixed, the payment never moves. Variable, it follows market rates.

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Say two hundred and twenty-five thousand euros over twenty-five years, at three point five per cent. Monthly payment: one thousand one hundred and twenty-six euros.

If the rate is variable and goes to six point five per cent after two years, it climbs to one thousand four hundred and ninety-one.

Three hundred and sixty-five euros more, every month. The salary has not moved.

In the United States, many loans had a low rate for two years, then a variable one. Around two thousand seven, payments jumped.

Millions of households could no longer pay. In France, the vast majority of home loans are at a fixed rate.

Third risk: repossession. It comes when you can no longer pay. And it hurts when the home is worth less than the debt.

Back to our example. A year after buying, you still have about two hundred and nineteen thousand euros to repay.

If prices have fallen twenty per cent, the home is worth two hundred thousand euros. More than nineteen thousand less than the debt.

Selling is not enough to repay. In France, the difference is still owed. You lose the home, and keep a debt.

One last number, the one people look at least: the total cost of the loan.

One thousand one hundred and twenty-six euros for three hundred months. That makes one hundred and twelve thousand nine hundred and twenty-one euros of interest.

More than four times the deposit. And without counting insurance or arrangement fees.

Three questions before signing. How much am I putting down? Fixed or variable? And how much does all this cost me, in total?

Leverage makes you win fast when prices rise. It makes you lose fast when they fall. It does not choose.