Is renting really more expensive than buying?

IronWolf

Batchy wrote: »

Hang on, Hang on!

Lets not go into accounting concepts and principles and management accounting drivel! Management accountants were to blame for the Mini not being a success, as they priced its costs WRONG, and throughtout most of its life they were not even breaking even on the damn model.

If you have a 60k mortgage for 10 years from 88 to 98 one your mortgage would now be down to 35k and 2 your wages would most likely have risen to double if not more during that period, and also interest rates would have dropped from 12% to more like 6%...It was hardly the worst period in the world to own as an end result. But more to the point, in 10 years, you never lost any money! And you had a roof over your head.

move onto to 2008 that 60k property from 1998 would probably now be worth best part of 200k.

The LONG RUN average of property is keeping in line with inflation 1987/88 was a bubble just like 2004/07 lets not lose track of what I am arguing.

Please show me evidence of a negative 10 year era, and ill support your argument gladly! But unfortunately, its going to be difficult, even through wars, and recessions to find that result as a trend.

eh? Im not talking accounting, Im just talking common sense. For a 10 year example period look at 88-98. Stagnation in house prices and real terms decreases in value, and at the same time the stock market went through the roof. We're in a similar situation now as it was in about 1990, just after a big fall in house prices.

Now on opportunity cost, lets say someone bought a house in 2007, average price for £170k, on mortgage lets say he pays £1000 a month, and will pay it off in 25 years. Another person rents a place, for say £600 a month. Now say person 2 buys a similar house in 2011, for £150k, he gets a mortgage which will finish at the same time as person 1. Also, he has saved up a deposit over those 4 years, of say £30,000.

Now if my calculations are correct, with a £120k mortgage, he could pay about £790 a month, and be cleared in 18 years (around the same time as person 1). and that is assuming the same interest rates as person 1, with a deposit it could be even lower!

Now he has paid £29,000 in rent in those 4 years, but, over the next 18 years he will pay £45,000 less on his mortgage, and be left with a house of the same value as the first person.

So you can see that its not as black and white as house price always goes up long term, because by buying early you could be paying more than you should have.

RenovationMan

IronWolf wrote: »

Now on opportunity cost, lets say someone bought a house in 2007, average price for £170k, on mortgage lets say he pays £1000 a month, and will pay it off in 25 years. Another person rents a place, for say £600 a month. Now say person 2 buys a similar house in 2011, for £150k, he gets a mortgage which will finish at the same time as person 1. Also, he has saved up a deposit over those 4 years, of say £30,000.

I love these totally skewed examples, such great fun .

The question I would ask is why, when the difference between renting and buying is £400pm (£4800 pa), is the renter managing to save £7500 pa (£30k / 4 years) in the example?

This equates to an additional £225 per month that the renter is whistling out of thin air, so lets say that the owner occupier also whistles up £225 pm and overpays it onto his mortgage.

Over the 4 years that the renter lets his flat, and the owner occupier lives in his house, the OO pays his mortgage down by £10800. The OO now has a mortgage of £159,200.

This means that after 4 years years of renting, the tenant buys the same house for £9200 less than the owner occupier paid four years ago. I guess its now upto the individual to decide if they think a saving of £9200 is worth 4 years of waiting?

The only other question I would ask is what sort of interest rate the owner occupier was paying in order for his £170k to equate to £1000pm? I assume he has a 100% LTV interest only mortgage (they always do in these examples), so in the BBC mortgage calculator £170k over 25 years needed an interest rate of 7.06% which is rather steep, is it not? :eek:

LilacPixie

In my area I really do think renting is more expensive. Flat i just sold was valued at 100k and I accepted 93k. A few flats in that street are rented and going rate is 500-550 a month last time I saw one advertised.

The house I have bought I can't find any rental examples, its a 3 bed semi though. In a street that I can basically see from my back garden a 3 bed flat going rate is £750. Now my 25 year repayment mortgage is less than that and I did not have a huge deposit so just under 85% LTV. Personally I think 2 universities keeps the rental rates high.

IronWolf

RenovationMan wrote: »

I love these totally skewed examples, such great fun .

The question I would ask is why, when the difference between renting and buying is £400pm (£4800 pa), is the renter managing to save £7500 pa (£30k / 4 years) in the example?

This equates to an additional £225 per month that the renter is whistling out of thin air, so lets say that the owner occupier also whistles up £225 pm and overpays it onto his mortgage.

Over the 4 years that the renter lets his flat, and the owner occupier lives in his house, the OO pays his mortgage down by £10800. The OO now has a mortgage of £159,200.

This means that after 4 years years of renting, the tenant buys the same house for £9200 less than the owner occupier paid four years ago. I guess its now upto the individual to decide if they think a saving of £9200 is worth 4 years of waiting?

The only other question I would ask is what sort of interest rate the owner occupier was paying in order for his £170k to equate to £1000pm? I assume he has a 100% LTV interest only mortgage (they always do in these examples), so in the BBC mortgage calculator £170k over 25 years needed an interest rate of 7.06% which is rather steep, is it not? :eek:

even £9k is worth it, renters have a lot more flexibility, they can move around, and have no expenses to pay on building maintenance/repairs

also the difference is not just in upfront price difference, there is also the interest saved on what would have been a loan. The interest on £30k + £9k over 25 years is not insignificant.

RenovationMan

IronWolf wrote: »

even £9k is worth it, renters have a lot more flexibility, they can move around, and have no expenses to pay on building maintenance/repairs

also the difference is not just in upfront price difference, there is also the interest saved on what would have been a loan. The interest on £30k + £9k over 25 years is not insignificant.

Interest works both ways. With compound interest on the overpayments (i.e. each month you pay down the capital by £225, you reduce the interest payments on the capital and leave yourself more money to make overpayments) your looking at more like saving £7.8k.

You never answered the second part of my question about interest rates the owner occupier would be paying. If you did a more real-world example you would see a huge diffrence with your figures.

For example, I have a £270k interest only mortgage from when I bought my home in May this year. I am currently paying £574 per month on my mortgage. I own a 5 bed stone farm house with attached granny flat, and other out building. The monthly rent on this place would be at a complete guess £2000?

By buying, I am 'saving' £1426.25 a month by owning rather than buying. HUrrah!!! I'm rich!!

Batchy

RenovationMan wrote: »

I love these totally skewed examples, such great fun .

The question I would ask is why, when the difference between renting and buying is £400pm (£4800 pa), is the renter managing to save £7500 pa (£30k / 4 years) in the example?

This equates to an additional £225 per month that the renter is whistling out of thin air, so lets say that the owner occupier also whistles up £225 pm and overpays it onto his mortgage.

Over the 4 years that the renter lets his flat, and the owner occupier lives in his house, the OO pays his mortgage down by £10800. The OO now has a mortgage of £159,200.

This means that after 4 years years of renting, the tenant buys the same house for £9200 less than the owner occupier paid four years ago. I guess its now upto the individual to decide if they think a saving of £9200 is worth 4 years of waiting?

The only other question I would ask is what sort of interest rate the owner occupier was paying in order for his £170k to equate to £1000pm? I assume he has a 100% LTV interest only mortgage (they always do in these examples), so in the BBC mortgage calculator £170k over 25 years needed an interest rate of 7.06% which is rather steep, is it not? :eek:

sorry to question your figures RM... but your assuming interest only i believe.

if we assume repayment

The after 4 years the balance would be 155.7k less the 10800 you mention about that the OO can drum up like the renter with the same income.

So thats a outstanding balance of 145k... the Renter would have a mortgage of 120k but only have 21 years left to pay, at what ever marginal rates are available at the time. Assuming the Margin on 80% mortgage is around 2% higher than it was 4 years before, as they are now in 2011, the we assume the 5% repayment from 2007 would still be 1000 pm
The new 2011 mortgage at 7% which IMO is a reasonable comparison is now 917pm.

So there would be a 83 per month saving. This 83 pm is so marginal, can it really justify waiting 4 years and the risk associated with doing so, the mortgage at the same payment level of 1000pm would also knock just over 3 years off the repayment.

The discounts would need to be higher IMO

If you all looked at my anecdotal, the saving from 2007 was substantially higher than 170 to 150.

IronWolf

Also the figures I used where quite a modest depreciation in the value of house prices. In reality it could be even more pronounced and lead to greater savings.

I would not say its a risk to rent and wait, because there is no risk associated with renting except opportunity cost. But buying a house at the wrong time can lead to years of negative equity and even financial ruin if interest rates go high, much more risk with buying imo.

Anyway, my point was, there are possible scenarios where waiting to buy is financially beneficial, and I would say those that in a few years time will be the best time to buy, especially for those who want the freedom to move around.

Batchy

the risk with not buying is never owning. Also the risk with renting is NOT BEING ABLE TO SAVE TO EVENTUALLY BUY. you have to be very diligent, and not get tempted to spend.

I have looked into this a lot and its a lot more expensive to save in a pension to provide enough income to pay for future rent plus RPI, for rent increases and partners pension so they dont have to pay rent with no income of their own, other than their potentially smaller pension. This is an expensive way to pay a pension out at the end, easier to leave them a free property... fully paid up! With a smaller pension for food expenses etc.

If the risk with a mortgage is you cant afford to pay it, then you wouldnt be able to afford to pay the rent and save an amount towards the mortgage/equity anyway, so your still no sooner to buying.

If your made redundant and get say 20k redundancy pay, then if you have 20k in savings, then you have to have less than 16k worth of savings before you get means tested benefits. So no rental housing benefit, no income support etc... wouldnt take long to wipe out your hard earned savings and put you two rungs of the ladder back.

On a house/home... with all savings piled into house mortgage overpayments (not means tested on equity) you wouldnt have much cash reserves to fall back on.
Also the government will also pay mortgage interest payments (up to around 3.6%) Which will cover most mortgages at the moment.

So your redundancy of 20k is mostly safe... keep it to cover shortfall in mortgage interest... to live on until benefits paid, and get job hunting as necessary. Less likely to take an ANYTHING job and more likely to find more suitable appointment.

At the end of the day, its all very well comparing 40k earnings with 40k earnings. But if the economy goes tits up. And you lose your job, regardless of whether your buying or renting your in the DOO DOOO, would you really safely be able to say you could continue living in any house, be it rented or brought, especially if it has significantly more bedrooms than you need. At least with a owned house you can rent a room out, so cover costs, rented is a minefield and needing permissions etc? Its just overall a lot of ball ache.

RenovationMan

IronWolf wrote: »

Also the figures I used where quite a modest depreciation in the value of house prices. In reality it could be even more pronounced and lead to greater savings.

I would not say its a risk to rent and wait, because there is no risk associated with renting except opportunity cost. But buying a house at the wrong time can lead to years of negative equity and even financial ruin if interest rates go high, much more risk with buying imo.

Anyway, my point was, there are possible scenarios where waiting to buy is financially beneficial, and I would say those that in a few years time will be the best time to buy, especially for those who want the freedom to move around.

Unless you buy with cash, there will always be a risk in owning a home. If you lose your job or if your ill and can no longer work, how will you afford to pay the mortgage? If you default on the mortgage, your lender will reposess and sell the house for whatever they can get for it, possibly leaving you with stacks of debt.

If you want freedom to move around, then why would you want to buy a house?

Your arguments seemed to be more aimed at always renting, rather than simply the argument about whether the average Joe is better off renting and saving up than buying now and paying down a mortgage.

LittleMissAspie

Hank_Rearden wrote: »

Last three properties I've been in:
Cottage "in the country" - £650/month. On market for £300k. At 4% that's £1000 on an interest-only mortgage.
3 Bedroom house in NE London - £1500/month. On market for £600k. At 4% that's £2000 on an interest-only mortgage.
2 Bedroom flat in W London - £1350/month. Very similar flat on market for £450k. At 4% that's £1500 on an interest-only mortgage.

Using your method of 4% interest-only on all of the purchase price, our house would be £453 a month. The week we completed there were two houses in our road for rent, same size and layout, for £650 per month.

We put down a large deposit so our repayment over 20 years is still less than £650.

We rented for years while saving our deposit while prices were dropping, so we've benefitted from both renting and buying at different times.