Rent or Buy equation

ag359

I know people don't like the never-ending house prices debate, and I'm not trying to start it here. However, I labelled the thread clearly, so that those who don't like it can steer clear.

Basically I'd be really grateful if somebody could set out for me mathematically the equation(s) I should use when trying to work out whether I am better to buy or rent at the moment.

I would just like something fairly objective, (i.e. not an attempt to justify predictions on house prices) because thinking about it too much is making my head explode.

As far as I can tell, if the rent you pay is the same as the interest on your mortgage (e.g. 100k mortgage at 5% is the same as 5,000 per year rent). In this case, the decisive factor is whether the value of the house goes up or down during the ownership period. Am I right?

ioscorpio

No, because whether the value of the house goes up or down, you still have an asset that is worth x amount of money, whereas however much rent you have paid is dead money. Unless you are in a transient period and only want to be in a certain place for a short time, then rent, but long term you are always better off buying in my humble opinion.

JC67

I don't think it is as simple as saying that you are always better off buying as the timing and what type of property you buy can be critical.

In 1989 my partner and I were saving to buy a property but couldn't see a way to afford it. Friends of ours stretched their finances to buy a flat but we waited a while and by summer 1991 we managed to buy a 3 bedroom house. Prices had begun to slump and not long afterwards their flat was too small for them and they were in massive negative equity. It was only through their parents helping them that they managed to eventually get a house.

N9eav

I don't know if there is an equation as such. There are lots of factors such as, whether council tax etc is included in the rent. Cost of home insurance, water rates etc. Plus you don't have to maintain and repair a rented house as much.

A typical 3 bed house in our part of Cornwall is about £160,000 if you are lucky.

Mortgage over 25 years would be about £983. per month full amount. (Of course you would have to earn about £40,000 a year to get this in the first place)

Rent would be £600-£650.

You could try this calculator and figure out what a mortgage may cost...

nrsql

>> As far as I can tell, if the rent you pay is the same as the interest on your mortgage (e.g. 100k mortgage at 5% is the same as 5,000 per year rent).

Not really. If you own the house then you will have other expenses for it's upkeep which the landlord would pay if you are renting.
If it is a repayment mortgage then you are buying equity in the house - you need to compare interest only mortgages for this.

Owning your own house means that you can do whatever you want to it withing reason - i.e. decorate it how you wish, live how you want, make long term plans... without being worried about upsettiong a landlord. That's often the deciding factor as to whether it is worthwhile buying.

Mr_Proctalgia

This is a difficult question to answer, my gaff is on the market and I am pondering the ins and outs of it too.

Lets say my rent is around £500 pcm (typical for around here) then you have to remember the deposit which is lost interest. I consider that Gas, Water, Electric, Council Tax to be about the same whether you are buying or renting. The difference between contents only insurance and a combined bricks and sticks + contents is pretty minimal............

So you think you have the big picture then you start pondering the rest of it! House buying costs are much lower than selling costs but you will have to stump up for arrangement fees and and surveys etc. It is very difficult, rent the house or rent the money, for me I would rent the money and own the house. (Here they are still rising slowly - playing catch up I think) If you are planning on stopping for 10 years or so it is a no-brainer, but if you are in an area where they are falling it is a case of guessing what the loss could be against your rent minus what you can get in interest from the bank. Everyone will have different circumstances, so this might not be correct for you.

devils_advocate

There is no mathematical formula. What you can do is 3 things -

i) work out the costs of buying versus renting. For a quick 'n' dirty calculation, you can put the rent on one side versus the costs of an interest only mortgage on the other. If you are say getting 4.75% interest on your deposit before purchase by putting it in ING direct, you should adjust ONE side of the calculation only by either taking it off the rent you pay, or adding it on to the cost of the mortgage.

Also, if you do buy, by splitting out the cost of rent v. I/O mortgage, you are reducuing the potential capital growth/ capital loss to a more manageable question. The essence of this is that you are in effect going to the bookies and placing a large bet on the direction of house prices over your time horizon. Don't forget its more like a financial instrument as you can lose more than your initial stake (the deposit) if it all goes horribly wrong, but if it goes right you can make many multiples of your stake. Its this gearing factor that people should be very wary of, as if you put a tenner on a horse at 10/1, your quids in if it wins, but you dont expect the bookie to come after you for another £90 if it loses.

Nobody can give you the answer to this one, as to how it will work out. My view, FWIW, is that timing is everything and I would hesitate to get into the market at the moment unless everthing else was extremely positive in my favour.

ii) cost out the unpredictables like repairs, over the period which you wish to look at the numbers. Nobody can give you the right answer to this, as no-one knows what repairs are going to be necessary on a house in the future. You can have a good guess, though, depending on the look of the house.

iii) work out the emotional factors, like reduction in flexibility of decorating, for example if you are renting, versus the flexibility in being able to move quickly if you wish should your circumstances change. This is just a value judgement depending on personal circumstances. Don't let any of the other factors influence you here.

At the end of the day, having separated out all these value judgements, its all going to come down to gut feel. But hopefully a more informed gut feel than if you hadn't done the evaluation.

Don't forget that if you decide to look at a 10 year time horizon for this exercise, there's nothing wrong in redoing the exercise in one or two years to see if you still come to the same conclusion.

Have fun!

hobbesandco

You can try the link below. It's a calculator which tells you if it's worth buying or renting depending on the length of time you stay in the property, etc:

http://www.themovechannel.com/sitefeatures/calculators/buy_or_rent.asp

Hope this helps!

lapat

buy buy buy
how can you go wrong.if you rent your just paying for your landlords property
if you buy its all your even if you dont like it after say two years sell it there will be some profit there regardless of what the threads on here are saying.and if you go back to renting then this would go back into your pocket.all the other expenses are the same i.e council tax,insurance and bills
and if your worrying about having work to do on your property but a new or nearley new one then it will be covered for 10 years under the nhbc scheme,plus its a fact that new houses are rising faster than older ones especially if bought of plan

ag359

lapat wrote:

buy buy buy
how can you go wrong.if you rent your just paying for your landlords property
if you buy its all your even if you dont like it after say two years sell it there will be some profit there regardless of what the threads on here are saying.and if you go back to renting then this would go back into your pocket.all the other expenses are the same i.e council tax,insurance and bills
and if your worrying about having work to do on your property but a new or nearley new one then it will be covered for 10 years under the nhbc scheme,plus its a fact that new houses are rising faster than older ones especially if bought of plan

I'm sorry but it's just not as simple as that, especially if (like most people) you need a mortgage. If you pay rent then you're not having to pay x% interest on the money that you would borrow under the mortgage. This makes the equation very finely balanced.

After all, if it wasn't finely balanced, then market forces would dictate that landlords could not get away with charging as much rent, and rent prices would fall until a balance between renting and buying was reached.

lapat

dont you think you are paying the landlords mortgate
do you think he will take £500 of you a month then top it up with £200 of his own money
no he needs to cover his mortgage plus at least 10% to cover all his other associated costs.i.e build insurance and possible agency fees at least plus his yearley gas and electric tests