Buy or rent (cost comparison)

Pimperne1

Average property price in July 2000 (Land Registry) £84.5k, in July 2005 £158k, in July 2010 (after a fairly significant correction) £167k. The part about the first few years of paying your mortgage being mostly interest would be the same whenever you took out your mortgage. You would bynow be starting to pay off some capital, instead you are, as you say, paying of interest for the next five years.

Eric1

Pimperne1 wrote: »

Average property price in July 2000 (Land Registry) £84.5k, in July 2005 £158k, in July 2010 (after a fairly significant correction) £167k. The part about the first few years of paying your mortgage being mostly interest would be the same whenever you took out your mortgage. You would bynow be starting to pay off some capital, instead you are, as you say, paying of interest for the next five years.

The problem is that the next 10 years may not be the same, especially with regard to one-bed flats (oversupply). In my area, your example is good for family homes, which the OP presumably cannot afford yet.

FATBALLZ

Pimperne1 wrote: »

The part about the first few years of paying your mortgage being mostly interest would be the same whenever you took out your mortgage. You would bynow be starting to pay off some capital, instead you are, as you say, paying of interest for the next five years.

But if I take out a 20 year mortgage, I will be paying off capital at the same rate as if I had bought 5 years ago on a 25 year mortgage, but I will have more equity, and less to pay overall.

Pimperne1

You should have just taken out a 20 year mortgage 5 years ago then.

FATBALLZ

Pimperne1 wrote: »

You should have just taken out a 20 year mortgage 5 years ago then.

Assuming I was in the position to afford a 20 year mortgage 5 years ago, I could take out a 15 year loan now and be better off. The point is I am currently financially in a better position having rented for 5 years rather than buying with a mortgage.

HAMISH_MCTAVISH

FATBALLZ wrote: »

The point is I am currently financially in a better position having rented for 5 years rather than buying with a mortgage.

But many people are not.

Round my way rental yields of between 5% and 8% are common, which is significantly more expensive than mortgage interest.

If you are comparing a buy and rent comparison for like for like places, it is now cheaper to buy than rent in 75% of the UK, based simply on mortgage versus rent costs over the short term.

It is VASTLY cheaper to buy than rent over the long term of course, around one third as much over an adult lifetime even including mortgage interest.

Besides, you'd be in an even better position if you'd purchased at the bottom of the market in early 2009. About £20,000 plus interest better.

HAMISH_MCTAVISH

A handy buy versus rent calculator.....

http://www.timesonline.co.uk/tol/money/calculators/article5771800.ece

mostlycheerful

Pimperne1 : “Incidentally, just because MostlyCheerful disagrees with him it doesn't make him innumerate or misguided.”

Thanks Pimperne1

Fatballz : “It's only towards the end of a mortgage that you are seriously building up equity, so obviously renting eventually loses out…What is always true is that long term, financially, buying is better.”

Yes, indeed, the very point I made, as you now admit.

The issue is about long term, not short term. Whether or not short term renting can sometimes be more viable than a mortgage over the short term is a false comparison as you generally don’t do a mortgage short term, it’s generally for 25 years or thereabouts, not just 5 years, so your comparison is misleading and inappropriate.

Negative equity and when is a better or worse time to enter (and exit) the market is also a separate issue. Yes, by not buying at the top of the market just before the crash and therefore avoiding getting into negative equity you’ve made a good beneficial short term decision, but, again, that’s also irrelevant to the overriding issue that over the long term mortgages and owning are normally lucrative and create a valuable asset whereas renting is money down the drain and you end up with nothing except paying yet more rent indefinitely. Which is the point of this thread and the OP’s original question. Those people you know who are currently in negative equity are nevertheless going to end up owning a valuable asset if they see their mortgages through to the end, aren’t they, whereas renters are going to end up with nothing except more bills, aren’t they. Which is the point, isn’t it.

Your suggestion that renting can be the same cost or cheaper than paying a mortgage is an unusual scenario and not the norm. Normally rents cost more than mortgages which, of course, is why renting is so lucrative and landlords often get rich for little or no effort and get their mortgages paid for them by renters. It’s also why you can get buy to let mortgages. As a rule of thumb most landlords aim for a return of 8%, 10% or 12% and it’s sometimes possible to get even 15% or more whereas mortgages are mostly currently 1% to 7%. Yes, sometimes there’s anomalies and occasionally bargains and exceptions to any rule but that doesn’t mean that the rule isn’t true in most circumstances.

“No but what does make him misguided and innumerate is his belief that paying money to the bank in interest that he will never see again is somehow an investment.”

Yet again, you’re missing the point and misunderstanding this. By paying the interest on a repayments mortgage you eventually get to the point of paying the capital and getting relatively rich as a result so the interest is not in isolation or lost, as you mistakenly state, on the contrary, it’s a valid useful means to an end and eventually creates a lot of equity. And in fact you contradict yourself and admit this truth when you say “It's only towards the end of a mortgage that you are seriously building up equity”. Yes, it’s worth paying interest at the start on a repayments mortgage cos when you get to the end it creates a lot of wealth and you’re loaded! Innit. Got it?

sonastin

mostlycheerful wrote: »

Yet again, you’re missing the point and misunderstanding this. By paying the interest on a repayments mortgage you eventually get to the point of paying the capital and getting relatively rich as a result so the interest is not in isolation or lost, as you mistakenly state, on the contrary, it’s a valid useful means to an end and eventually creates a lot of equity. And in fact you contradict yourself and admit this truth when you say “It's only towards the end of a mortgage that you are seriously building up equity”. Yes, it’s worth paying interest at the start on a repayments mortgage cos when you get to the end it creates a lot of wealth and you’re loaded! Innit. Got it?

Let me see if I can help you understand it better...

On a repayment mortgage, a part of the monthly mortgage payment is used to repay the capital of the mortgage and the remainder of the payment is interest on the capital. The following month, because you have paid of a bit of the capital, the amount of interest charged is reduced so a bigger proportion of the mortgage payment repays the capital and less goes to pay off the interest charges. Repeat until the whole of the capital is paid off.

At no point in this process is the interest portion of the repayment invested on behalf of the home-owner. The interest is what goes into the banks coffers in return for loaning the capital. Its a lot like what goes into the landlords coffers for lending you the flat - what is usually called rent.

If the OP is paying the same in interest & service charge as he would be in rent, there is no repayment being invested into the property. As a 1-bed flat is (very often) a short-term option, in the current market it makes more sense in this circumstance to rent. If it was a long term home, or an obviously rising market, it would be less attractive to rent.

Eric1

mostlycheerful wrote: »

Fatballz : “It's only towards the end of a mortgage that you are seriously building up equity, so obviously renting eventually loses out…What is always true is that long term, financially, buying is better.”

Yes, indeed, the very point I made, as you now admit.

I also admit that owning a house (or a car) is better than renting one

mostlycheerful wrote: »

The issue is about long term, not short term. Whether or not short term renting can sometimes be more viable than a mortgage over the short term is a false comparison as you generally don’t do a mortgage short term, it’s generally for 25 years or thereabouts, not just 5 years, so your comparison is misleading and inappropriate.

Negative equity and when is a better or worse time to enter (and exit) the market is also a separate issue. Yes, by not buying at the top of the market just before the crash and therefore avoiding getting into negative equity you’ve made a good beneficial short term decision, but, again, that’s also irrelevant to the overriding issue that over the long term mortgages and owning are normally lucrative and create a valuable asset whereas renting is money down the drain and you end up with nothing except paying yet more rent indefinitely. Which is the point of this thread and the OP’s original question. Those people you know who are currently in negative equity are nevertheless going to end up owning a valuable asset if they see their mortgages through to the end, aren’t they,

but some of them may not enjoy being stuck in a 1-bed flat

mostlycheerful wrote: »

whereas renters are going to end up with nothing except more bills, aren’t they. Which is the point, isn’t it.

Your suggestion that renting can be the same cost or cheaper than paying a mortgage is an unusual scenario and not the norm. Normally rents cost more than mortgages which, of course, is why renting is so lucrative and landlords often get rich for little or no effort and get their mortgages paid for them by renters. It’s also why you can get buy to let mortgages. As a rule of thumb most landlords aim for a return of 8%, 10% or 12% and it’s sometimes possible to get even 15% or more whereas mortgages are mostly currently 1% to 7%.

I'm afraid that "get rich for little" time may be over, because returns depend on the purchase price.

mostlycheerful wrote: »

Yes, sometimes there’s anomalies and occasionally bargains and exceptions to any rule but that doesn’t mean that the rule isn’t true in most circumstances.

“No but what does make him misguided and innumerate is his belief that paying money to the bank in interest that he will never see again is somehow an investment.”

Yet again, you’re missing the point and misunderstanding this. By paying the interest on a repayments mortgage you eventually get to the point of paying the capital and getting relatively rich as a result so the interest is not in isolation or lost, as you mistakenly state, on the contrary, it’s a valid useful means to an end and eventually creates a lot of equity. And in fact you contradict yourself and admit this truth when you say “It's only towards the end of a mortgage that you are seriously building up equity”. Yes, it’s worth paying interest at the start on a repayments mortgage cos when you get to the end it creates a lot of wealth and you’re loaded! Innit. Got it?

In my area, it is not worth paying interest on a 1-bed flat, again because of the current prices. Better to save a bigger deposit and buy something worth staying there for 20+ years.