The word house-proud needs no hyphen

Last Sunday, I read a fascinating article about house-proud renters who love DIY. The subheading says it all: Clever hacks to make a property really feel like a place you can call home.

When it comes to renting, expending effort to spruce the place up makes sense. I mean, who doesn't love a Swedish flat weave area rug in the living room, or a well-curated forest of candles on the mantle? What? Just me?

That said, investing to improve the place itself seems illogical. Why be house-proud if you don't own the house? Or, is it enough that the house "really feels" like your own place?

As I type, my editing software, Grammarly, subtly suggests deleting the adverb "really" as if to ask: if you rent the place is it your home? Really? Is it?

Number Twenty: Over-hyphenated

This series of articles addresses ways homebuyers can design the terms of the financing package. There are profound lifestyle implications at stake here. Mortgage banks produce expensive ads that allude to the connection between hearth and heart.?In truth, the banks typically extend a preliminary mortgage offer before the aspiring home buyer has selected the house – making it impossible for the features of the home you subsequently buy to influence the terms of the loan.

The Guardian piece itself appears in the lifestyle section of the Observer, which makes it a useful point of departure to think about the intersection between lifestyle and financing. At bottom, what does being house-proud mean? And what on earth has this got to do with a home loan?

Breaking it down, we understand the second word: pride – the good sort of pride – not the deadly sin. Dictionary.com gives a pithy definition: Taking pride in one's house and housekeeping. This dictionary definition does not resolve that nagging question. Is a rented property your place, your house, or your home? The word "house" is a noun that forms part of a compound adjective only when tethered to the word proud by the hyphen. What does this word say about people who occupy homes untethered to its financial value?

Nobody questions why owner-occupiers expend time, and effort, looking after their homes. We notice things. We procrastinate, at least I do. When we finally knuckle down, doing little jobs around the house turns out to be strangely satisfying. There’s nobility in honest work. Catharsis dovetails with the improvement in the value of our homes. It's about more than money, but money plays an important role.

So, why do renters take pleasure in painting, plastering, and planting in someone else’s garden?? Sure, potting plants on the patio makes sense. You can take them with you.?We have a weeping Japanese maple that turns a violent shade of red in autumn. We grew it in a pot while living in two rented homes in two different countries, first Luxembourg, and then Belgium. Subsequently, we planted it in deep soil when we eventually bought a house in Brussels. We also bought and planted several trees, all growing nicely, that we can't take with us but will improve the value of the home if and when we choose to sell.

Irrational exuberance

But what motivates people to improve properties they will never own??In one conversation about our purchase plans – leases with a guaranteed route to ownership – one renter confided that she regularly dipped into her pocket to maintain her landlord's house. As she had lived there for twelve years, this "investment" added up to a lot of money for a woman with a non-medical career in the NHS. It was also quite a windfall for her landlord.

This renter, and doubtless millions like her, considered this money a good investment, or at least a necessary one. She and her partner were in their mid-forties. Banks considered them too old to get a mortgage as they would retire long before it could be repaid in full. Best she rent, lest the equity in her home decades later proved insufficient to protect the bank from the rare but non-zero risk of an asteroid strike, rendering their collateral uninhabitable.

That, right there, is a clear impact of financial product design that somebody in a tall building earnestly believed protects the bank in important ways. I take a different view. It can be hard to see how people live in the suburbs from way up there.

Let's do the maths

One becomes eligible for the state pension at age sixty-six and (on my reading of the actuarial tables) life expectancy given age sixty-six exceeds twenty years for a healthy British woman. Old men die earlier but life is never entirely fair.

If you pay a thousand pounds a month for two hundred and forty months, you're out roughly a quarter of a million pounds in retirement assuming your landlord doesn't put the rent up for a couple of decades. If you're really lucky, you'll live on and continue paying rent for another ten, fifteen, twenty years. You can put your pencils down now.

As for our renter, her partner had a daughter. That house was the only home this child had ever known. Do or DIY.

The alignment problem

On paper, renting severs the owner's interest from that of the occupier. This misalignment is most acute when significant sums of money are involved. Extensive renovations, or interventions to make a house carbon and energy-efficient, for example, cost the owner ten, fifteen, twenty thousand pounds upfront but might save the occupiers far more than that in reduced energy bills in the long run. However, very few renters and landlords get together to decide how to take advantage of free energy from the sun. Banks can play a role in addressing this problem but that's a story for another day.

The same is not true for minor, decorative changes. Apparently, tenants enjoy reaching into their pockets to tweak the decor. An economic connection to the property – the hyphen in this analogy – appears to matter far less than is popularly supposed.

Driven by aesthetics, decor can be deeply personal for the occupant whose sojourn may be short. There's no telling how these improvements affect the sale or rental value; making it hard for landlords to raise the rent to recoup a small investment. The Guardian article is strangely silent about these issues.

The news article in question foregrounds an enterprising young woman. Medina Grillowho is the hero of a story describing her efforts to spruce up the several homes she has rented in Birmingham over the years. She moves from one rented home to another, spending money to do them up then moving on. Ms Grillowho came to the attention of the Guardian as she documented her life hacks on-line and has developed quite a following. If her seemingly odd behaviour is irrational, she is not alone.

I can see why. She has good taste. I am particularly drawn to the shelving in the image above. There's no guarantee it will fit her next home. Ms Grillowho's decorative scheme might owe more to a love of order than a love of reading. Who knows? But I can understand her motivations. Having lived on the continent for many years, I recognise the pleasure one takes in arranging books into groups with similar shapes and colours. If you peruse interior decorating magazines you will see images of homes on the continent – in France in particular – where the books are uniformly beige. British publishers choose to design books with an eclectic mish-mash of colours on the spine making it hard for book lovers like Ms Grillowho to arrange books by subject or author.

Cruel but not unusual policies

Bringing the conversation back to home finance. Banks insist that young buyers arrive at their new home with nothing in their bank account. According to the English Household Survey, almost ninety percent of first-time buyers fund the purchase, in part or in whole, with their savings. Almost forty percent needed support from family, implying the deposit exceeded their life savings. Images of young people opening cardboard packing boxes in an empty room are immediately recognisable clichés that signify homeownership at a glance. What social purpose this insistence on subsistence serves is beyond me, but that's a story for another day.

People often ask how our daysrent? plans differ from a mortgage. Well, our process starts when applicants use our platform to identify homes we can finance worth considerably more than banks are willing to lend. The quantum of the financing is important.

We make deposits optional. Yes, this opens a route to ownership for people with no savings but that's only the beginning of the financial innovation. By lifting the arbitrary loan-to-income cap that banks hold so dear, applicants can walk down streets surrounded by homes they can afford to rent but which banks deem they are too poor to buy. This innovation requires us to evaluate the applicant, their spending patterns, and their ability to sustain the budget they nominate.

In talking to potential investors much time is spent asking about the "property dimension" of the purchase plan – something that has only a modest impact on our business model. We care about the value of the property – of course – but so does the occupant. They are, in the main, proud of their homes. The ability to select the best home available to them and the exuberance people bring to looking after their homes is a better way of protecting the interests of the finance provider than insisting on deposits and ignoring the data that suggest renters care about their homes and are awfully reluctant to be evicted for lack of payment.

Very few investors ask how, profitably, we address the most important consumer pain point – their ability to live in that house on Prince Consort Road; the one the bank insists is too expensive, and their ability to move in with money left in their bank account. The answer lies in the fact that rental yields dwarf mortgage rates – the numbers are not close and the data hides in plain sight.

Price elasticity

We map out options within the applicant's monthly budget, each option constrained by our yield targets. By saving one or two properties to favourites, the applicant makes aesthetic and financial decisions simultaneously and probably subliminally. With a regular rental landlords need to be sensitive to a renter's response to headline rental prices. With a regular purchase, the vendor needs to be sensitive to a buyer's response to the asking price. With a conventional mortgage, the lender needs to be sensitive to their competitors' headline mortgage rates as borrowers consult brokers to make side-by-side comparisons.

Our process starts when the applicant glances at an image of the house and compares it to all the other options we present. Each house costs the same amount per day but the more expensive places cost the buyer a higher number of daysrent? points. Thus we need to be sensitive to the applicant's response to the aesthetics of the house and the intersection of that subjective reaction to the relative length of the pathway to ownership – a behavioural science challenge with hundreds of thousands of pounds at stake and no mortgage broking advice to guide the buyer. Our plans are not mortgages. They are really different, even if Grammarly hints that the word "really is grammatically superfluous.

No deposit? No problem

Here's how the optional deposit addresses a blizzard of issues mortgage banks ignore. Applicants with savings can opt to change the carpet or replace the curtains. They can use those savings to contribute an amount upfront, keep their financial powder dry, or drip-feed these savings into their home by making discretionary over-payments along the way. They can use their savings in part or in whole giving them myriad ways to customise their lived experience.

Our calculation and planning tools help them evaluate the aggregate cost of each decision, focused on the value of the buyer's equity at that future date when they plan to sell. These are profound improvements to the way homes are financed, not incremental changes at the margin. Take out the wrong loan and you'll live in the wrong home. As most people occupy their first home until their kids complete secondary school, better financial service design may have a profound influence on your lifestyle.

In 2011, we rented a townhouse in Brussels to showcase midcentury furniture in a gallery of design objects. The image above shows a wall-mounted installation by French artist, Cathy Co?z, for an exhibition of contemporary ceramics. It's a unique work comprising almost two hundred hand-made ceramic pieces that Cathy painstakingly mounted on thin nails she tapped into the wall over several hours.

When we demounted the installation, two months later, we had to replaster and repaint the wall. We didn't own that wall but it was a labour of love nonetheless.

People affected by these issues should feel free to reach out.

Ike Udechuku | Cofounder | CEO | The Pathway Club

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