Maths of Renting vs Buying

nickmason

wotsthat wrote: »

What is the starting house value we're talking about?

It doesn't matter - I've set the model to work out what the yield is at renting=buying, whatever the amount. As Hamish points out, it's low, but not impossible.

There's a couple of problems with your assumptions. One, there's no way that year one rent is half of the comparable mortgage

I haven't assumed that, I've illustrated that that would be the rent at the breakeven. But again let me point out that two of the last four properties I've rented have had yields where rent was indeed half the comparable mortgage (at 90% of the value and 6% IR) - so I'm not sure of your "no way".

and two, the sums can't be based on year one alone - the buyer is increasing equity with each year that passes. So already we're pulling forward the neutral date significantly.

I haven't based them on year one alone.

With a decent mortgage rate (who pays 6%?)

Fair point - I know that those with large equity are getting a better deal at the moment. Again, I was just using the figures initially posited.

the mortgage owner rapidly gets ahead.

And for those with very low yielding property, the renter rapidly gets ahead.

The danger for the owner is a crash shortly after buying which can make moving difficult and limits access to the best fixed rates in the future.

Indeed

However, let's assume 25 years is financially neutral and you paid off your mortgage at age 55. There's potentially 30 years of living rent free to factor in.

What do you mean? At financially neutral, the renter and buyer both have the same assets (just one as cash, the other as property), so of course the renter could then buy and be in an equivalent position. Or the buyer could then rent. At this point the financial arithmetic is no longer about the mortgage costs, but about whether the cash can be invested at a higher rate than rent increases.

Time is the enemy of the renter.

Most of the time.
The real enemy is complacency, and not saving.

ukcarper

Where I am 2 bed flat up for £155k to £160k or rent £750 to £795 a month.
3 bed semi £275k rent £1300 a month.

Let’s take the semi.

£1675 a month 90% mortgage 6%.

Rent becomes more than mortgage after 10 years and more than mortgage + an initial £2k a year maintenance after 15 years.

At 3% renter deposit becomes £57.5k, renter spends £6.6k less than buyer over the 25 years so if you treble that and add to £57.4k you get £77.2k. Buyer has house worth £275k if no hpi or £400k if hpi half inflation.

If buyer can get a 5% mortgage rent becomes more than mortgage after 5 years or 10 including maintenance. Renter spends £56k more.

3% inflation applied to rent and maintenance

Really2

nickmason wrote: »

Interestingly this website doesn't allow house price inflation to be set to zero.... :rotfl:

Nor does it allow for the accrual of savings. I need to stress that - without it (and I know people don't always save the difference) this is a completely false dichotomy.

I'll say it again - almost anybody who is renting should be saving as well, if they want to keep financial track with the buying option.

Do you think house prices would fall over 25 years? If they did I would argue saving would be the last thing yo would be doing.
The reality is that even the most bearish on UK house prices expects them to rise over 25 years.
A fair few think they will be back to pre crash levels by 2015.

Anyone owning may be saving, I have offset over £30K in the last 3 years.

All that on a house that would be £1000=£1200PM to rent.

So I fail to see how a renter could outperform me, even if rates were not so low.

Also if you predicted price nutrality for the term, the chances are Mortgage rates would be a lot lower than 6% for the period.

Joe_Bloggs

You pay 6% if you have little or no equity or were bounced into fixing in the last interest rate mortgage panic. If you have savings/reserves you can weather interest rate fluctuations and pick and choose when and what to do.

I am sure that quite a few of the 25 year mortgages are prolonged because the mortgage is a cheap source of borrowing for other ventures. The capital exists to pay the mortgage back but it is earning more than the low mortgage rate that was secured when rates were generous.
J_B.

HAMISH_MCTAVISH

nickmason wrote: »

It is for example interesting to see Hamish engaging while others revert to dogma.

:rotfl:

I do hope you're not trying to accuse me of being "rational" there Nick. That would be most disappointing.;)

The maths is clearly not simple.

The maths is actually not particularly difficult, it's the infinite number of variables in the real world that makes it a bit trickier.

In most cases buying is cheaper than renting.

I think everyone accepts that's a given.

The debate is only really around whether "most" refers to 'the overwhelming majority', or 'such an incredibly high percentage that real life exceptions to this rule are staggeringly hard to find'.

As opposed to those who don't think a pot of cash from accrued savings, in some cases worth even more than the house, doesn't 'count' as an asset?

I tend to lean more towards the reality that it's incredibly difficult to construct a real world situation where that is the case, using realistic estimates of costs, for something like 99% of areas.

I accept it's theoretically possible.... I just think it's so rare as to be irrelevant to the wider debate.

the_flying_pig

HAMISH_MCTAVISH wrote: »

:rotfl:

I do hope you're not trying to accuse me of being "rational" there Nick. That would be most disappointing.;)



The maths is actually not particularly difficult, it's the infinite number of variables in the real world that makes it a bit trickier.



I think everyone accepts that's a given.

The debate is only really around whether "most" refers to 'the overwhelming majority', or 'such an incredibly high percentage that real life exceptions to this rule are staggeringly hard to find'.



I tend to lean more towards the reality that it's incredibly difficult to construct a real world situation where that is the case, using realistic estimates of costs, for something like 99% of areas.

I accept it's theoretically possible.... I just think it's so rare as to be irrelevant to the wider debate.

you don't half talk some proper rubbish, H.

HAMISH_MCTAVISH

the_flying_pig wrote: »

you don't half talk some proper rubbish, H.

By your standards piglet, that was actually an intelligent addition to the debate.

Well done.:)

wotsthat

nickmason wrote: »

What do you mean? At financially neutral, the renter and buyer both have the same assets (just one as cash, the other as property), so of course the renter could then buy and be in an equivalent position. Or the buyer could then rent. At this point the financial arithmetic is no longer about the mortgage costs, but about whether the cash can be invested at a higher rate than rent increases.

I've only ever seen worked calculations on here to show that buying is cheaper because it doesn't stack up the other way round. If I wanted to show that renting were cheaper I'd do it like this..

Round my way the average rent for a 3-bed is £472 with the average buying price being £146,900.

Our mug buyer is going to stump up £32,380 deposit and take a 25 year mortgage at Nationwide at 3.94%. At the end of 25 years this chump has paid out £179,000 and owns a home worth £146,900. His housing costs are £32,000 plus he's got to shell out a fortune for maintenance, fees, other house moves etc.

Our canny renter on the other hand is going to pay £472/ month for 25 years and, because he's so thrifty, he just happens to have saved up the equivalent deposit of £32,380 which he's going to save at 3.1%. In addition he's going to save the difference between the rent and the mortgage. At the end of 25 years he's only paid £141,600 in rent but his 'deposit' has grown to £69,461 and his monthly savings £54,969. His comparable housing costs are £17,170.

Therefore renting is cheaper than buying.

However, I'm going to remain an owner because buying is cheaper. Surely not you might say as I've just proved the opposite - the calculations (I hope) are correct so where are the multiple flaws?

wastedtalent

wotsthat wrote: »

However, I'm going to remain an owner because buying is cheaper. Surely not you might say as I've just proved the opposite - the calculations (I hope) are correct so where are the multiple flaws?

Rental prices will increase and mortgage payments will stay reasonably steady over 25 years?

House prices will increase as well over time.

Mortgage payments cease.

Batchy

wotsthat wrote: »

I've only ever seen worked calculations on here to show that buying is cheaper because it doesn't stack up the other way round. If I wanted to show that renting were cheaper I'd do it like this..

Round my way the average rent for a 3-bed is £472 with the average buying price being £146,900.

Our mug buyer is going to stump up £32,380 deposit and take a 25 year mortgage at Nationwide at 3.94%. At the end of 25 years this chump has paid out £179,000 and owns a home worth £146,900. His housing costs are £32,000 plus he's got to shell out a fortune for maintenance, fees, other house moves etc.

Our canny renter on the other hand is going to pay £472/ month for 25 years and, because he's so thrifty, he just happens to have saved up the equivalent deposit of £32,380 which he's going to save at 3.1%. In addition he's going to save the difference between the rent and the mortgage. At the end of 25 years he's only paid £141,600 in rent but his 'deposit' has grown to £69,461 and his monthly savings £54,969. His comparable housing costs are £17,170.

Therefore renting is cheaper than buying.

However, I'm going to remain an owner because buying is cheaper. Surely not you might say as I've just proved the opposite - the calculations (I hope) are correct so where are the multiple flaws?

Interest less tax on bank interest... where do you get your 3.1% NET?
RPI increases in RENT not factored in, yet you factor in increases in savings at 3.1%
I dont know any house around my way worth 146k, renting for 470 per month... Try 650pm to 700pm to start with
Rental could have stopped after 6 month contract, which means moving again and costs, Buying... your in control, so might/should not have too.
In 25 years time your savings ... wont probably buy a house... meaning whole process starts again... house owner, no more mortgage payments. Like 4 like... NO...
Deposit cash flow... £1k less from savings