Cost of rental vs interest on a mortgage - how to compare?

blunt_crayon

Hi all,

This might seem like a silly question but...

People on this board often say to compare the cost of renting (a.k.a. 'dead money') to the amount of interest you would pay on a mortgage (dead money?).

Does this mean I should compare average annual interest over the life of the mortgage? e.g. 100k @ 5% over 25 years = £173,441 = £73,441 paid in interest, divided by 25 = £2938 a year, £245 a month, much cheaper than my current rent...

But in the first few years of a mortgage you pay much more interest...using the above example in the first year I'd pay £5,000 in interest, £417 a month, a lot more like my current rent...

Which am I supposed to compare??

ILW

Looking over the long term you need to base your calculations on around about 8%.

MORPH3US

blunt_crayon wrote: »

(a.k.a. 'dead money')

Run for cover NOW.... save yourself....

pinkshoes

Use an excel spreadsheet to work it out, and don't forget to include the reducing mortgage each year, depending on how fast you're repaying it.

blunt_crayon

MORPH3US wrote: »

Run for cover NOW.... save yourself....

lol... was trying to apply some form of not-taking-it-seriously with the little '' ''s :rolleyes:
re ILW I just used 5% 'cos it was easy to work out... so are you saying that I should base my calculations on total interest over the life of the mortgage, divided by 25, to compare with my annual rent?

mlz1413

I think to compare to rent you need to take Interest Only so
£100k @ 5% = £5000pa or £417pm which is £125,000 in 25 years

So if you pay similar rent to IO then its up to you if you want to become responsible for your homes costs ie buying.

If you pay more in rent than an IO mortgage its definately worth looking into a mortgage as you can definately afford the IO (which is the minimum a mortgage can cost you) and probably afford the repayment option which is the best way of knowing you own the property in 25 years.

franklee

The thing that always puzzles me in these cases is why on earth do people insist on doing the calculation over 25 years?

You will still need housing after the 25 years (I hope).

You can switch from renting to owning to renting to owning as often as you need to over the years.

Moving as an owner costs much more than a renter and most people do move, possibly several times. Renters probably have to move much more often, Owners have to pay out to maintain the property.

House prices go up and they go down.

When you buy you have to put in a substantial deposit that as a renter can be invested (returns are low now but that will be picking up).

Interest rates will go up.

Rents on the whole go up, but have been static or falling recently.

So why not do the calculation on a much shorter term basis? I'm doing mine over the next two years as that's when I expect to buy if prices have bottomed out by then.

You can't possibly do a calculation now and have that last for 25 years

Oh and don't forget compounding, and to include the return on where else you put the extra cash saved.

Radiantsoul

At the moment the idea of dead money is rather irrelevant as house prices are still falling and will continue to do so. Buying is the dead money as you are leveraging into a lose making asset, never good.

blunt_crayon

Radiantsoul wrote: »

At the moment the idea of dead money is rather irrelevant as house prices are still falling and will continue to do so. Buying is the dead money as you are leveraging into a lose making asset, never good.

Agree, I don't personally feel that rent is dead money, no maintenance, more freedom etc although I know it's a point of contention for many on here...

blunt_crayon

thanks for the very useful quote frank although it hurts my brain to think of all that maths i wasn't going to go for a 25 year calculation, i was just wondering on what basis people 'normally' work it out and i think mlz is correct when he/she says it's usually based on interest-only...

ukcarper

franklee wrote: »

The thing that always puzzles me in these cases is why on earth do people insist on doing the calculation over 25 years?

You will still need housing after the 25 years (I hope).

You can switch from renting to owning to renting to owning as often as you need to over the years.

Moving as an owner costs much more than a renter and most people do move, possibly several times. Renters probably have to move much more often, Owners have to pay out to maintain the property.

House prices go up and they go down.

When you buy you have to put in a substantial deposit that as a renter can be invested (returns are low now but that will be picking up).

Interest rates will go up.

Rents on the whole go up, but have been static or falling recently.

So why not do the calculation on a much shorter term basis? I'm doing mine over the next two years as that's when I expect to buy if prices have bottomed out by then.

You can't possibly do a calculation now and have that last for 25 years

Oh and don't forget compounding, and to include the return on where else you put the extra cash saved.

Why not use a longer timescale once the mortgage is paid off you will be living rent free