BOE Base = 2%

neverdespairgirl

Kenny4315 wrote: »

I have spent about £8k when complete, this year, on revamping my flats.

That's one expensive widget ... £300 must have seen the guy coming.

I can't remember what sort of widget it was. It meant we had no hot water or heating, though. The heating didn't matter at all, as it was in the summer, but the no-hot-water was a pain.

neverdespairgirl

Dithering_Dad wrote: »

Didn't some bloke on here have a 5 year BTL fix at something like 3%?

I'm certainly not an expert, but I'd imagine that fixed rate mortgages have lower rates during periods where the BoE rate is low than those arranged when the BoE rate is high?

At the moment, though, fixed rates aren't terribly low. Certainly, they are pretty high compared with the B of E rates.

IveSeenTheLight

smartn wrote: »

Can't get my head around this, surely the very basic calculation (lets exclude maintenance even though I still think it is very relevant) is as follows :-

Option 1 - Buy 100K house, no rent to pay, house price drops 10 percent, left with an asset of 90k value.

Option 2 - Rent @ 850 per month. Invest money (even at a low 2%).

100K - 10.2k Rent + 2K interest earned = 91.8K therfore better off having rented (even with a very low interest rate on savings and ignoring maintenance).

you need to make your calculations a little more in depth i.e.
interest would not be generated on the 10k throughout the year.
When are the interest payments credited i.e. monthly or once a year

Dithering_Dad

Really2 wrote: »

Would the rent not be paid by wages like the money saved in option 1.

If so they work out the same.;)

But these same wages, when not used to pay rent money can therefore be used to save up (or even better, overpay the mortgage). Therefore in the example given, option 1 works out better.

Over a 5 year period, this could be a quite large amount, especially given compound interest.

smartn

Dithering_Dad wrote: »

In your example, the renter is spending £10.2k of his own money in rent and also has the £100k in a deposit account making £2k interest.

To make it a fair comparison, both the home owner and the renter should have this £10.2k to spend each year. As the person in option 1 does not have to spend his £10.2k on rent, he saves it instead. So...

Option 1 - Buy 100K house, no rent to pay, house price drops 10 percent, left with an asset of 90k value. Puts away £10.2k he's not paying in rent into savings account. Left with assets of £100.2k (plus interest on his savings).

Option 2 - Rent @ 850 per month. Invest money (even at a low 2%). 100K - 10.2k Rent + 2K interest earned = 91.8K

Therefore worse off by having put £100k in bank account and paying £850pm rent than having bought a house outright and put the £850pm in the bank.

In my example all costs are funded out of the original 100K. In your example you have given him an extra £850 month.

chewmylegoff

Dithering_Dad wrote: »

If we take your example, if a house cost £100k one year and you have £100k saved. If you buy it that year then you will be mortgage free and have no financial outlay to put a roof over your head.

If instead you wait a year and rent a place for £850pm = 12 months x £850pm = £10,200. You are therefore £200 worse off by buying a year later, even though the house price has fallen.

no you aren't because you earned interest on your capital, and you were sensible enough to lock it in at 6% so you earned £6,000 interest. Even if you were a 40% tax payer you would have a net return of £3,600, so you would be £3,400 better off if you had rented and bought a year later at a 10% discount.

Dithering_Dad

neverdespairgirl wrote: »

At the moment, though, fixed rates aren't terribly low. Certainly, they are pretty high compared with the B of E rates.

Well the latest rate drop only happened a couple of hours ago. Plus if interest rates go up to 8% in 3 years time (due to !!!!!!'s hyper inflation), then fixed rates will increase by a proportionate amount (i.e. they could be 12%).

Surely you can't argue against the fact that you are better off arranging a 10 year fixed rate mortgage when BoE rates are at 2% than when BoE rates are at 8/9 or 10%?

smartn

Dithering_Dad wrote: »

In order to fund his £850 rent plus £2k interest return from his £100k capital he would have to get an annual return of £12,200 (£850x12 + £2000). On £100k, he would have to get an interest rate of 12.2%!

Good luck with getting that when the Boe is at 2%!

The rent is being funded directly by his capital + interest hence he ends the year with only 91.8K! It's still more than his 90K house and I'm only assuming he makes 2 percent interest!! I refer you to my original calculations :-


Option 1 - Buy 100K house, no rent to pay, house price drops 10 percent, left with an asset of 90k value.

Option 2 - Rent @ 850 per month. Invest money (even at a low 2%).

100K - 10.2k Rent + 2K interest earned = 91.8K therfore better off having rented (even with a very low interest rate on savings and ignoring maintenance).

Cannon_Fodder

Dithering_Dad wrote: »

In your example, the renter is spending £10.2k of his own money in rent and also has the £100k in a deposit account making £2k interest.

To make it a fair comparison, both the home owner and the renter should have this £10.2k to spend each year. As the person in option 1 does not have to spend his £10.2k on rent, he saves it instead. So...

Option 1 - Buy 100K house, no rent to pay, house price drops 10 percent, left with an asset of 90k value. Puts away £10.2k he's not paying in rent into savings account. Left with assets of £100.2k (plus interest on his savings).

Option 2 - Rent @ 850 per month. Invest money (even at a low 2%). 100K - 10.2k Rent + 2K interest earned = 91.8K

Therefore worse off by having put £100k in bank account and paying £850pm rent than having bought a house outright and put the £850pm in the bank.

Quite right to remember the money paying the rent. Though to be fair £850 sounds like high rent while a STR is trying to save up...

I'd feel a little happier to consider a slight revision to the figures, although acknowledge its swings and roundabouts and every needs to do their own calculations.

Option 1 - Buy 100K house, no rent to pay, house price drops 15 percent, left with an asset of 85k value. Puts away £9.6k he's not paying in rent into savings account. Left with assets of £94,792 (4% interest on drip feed basis used).

Option 2 - Rent @ 800 per month. Invest money (at a 4% for whole year, still plenty at the moment). 100K - 9.6k Rent + 4K interest earned = £94,600.



Of course the real saving that should be factored in, should you wish to take it to the nth degree, is that Option 2 can now go and buy Option 1's house for £85K, so adds about £9K to his savings pot, after buying.

Then Option 1 takes his £95K and buys a house that was £111.7K !!

MSE enough for everyone?

BiggaThanBen

smartn wrote: »

Option 1 - Buy 100K house

Option 2 - Rent @ 850 per month.

And a 850pcm house will be likely much better than a 100K one ..