mortgages are dead money!

tomstickland

However, if you can buy for the same monthly cost as renting then buying can make sense.
I bought a flat last year for £86K, £76K mortgage at 4.29% £420pcm. Rent on same flats £350-£450.

devils_advocate

So lets accept the OP's figures, and work it out, taking into account other peoples points.

Firstly, buy the flat. If, as 1 poster says, after 25 years the flat is yours. This assumes a repayment mortgage over 25 years at 5.25%. For simplicity's sake, assume 100% mortgage of £300,000. Monthly mortgage payments are therefore £1,797.75.

On the other hand, if you rent, payments are £700 per month. Therefore, if you rent as opposed to pay a repayment mortgage, you have an extra £1,097.75 per month, which you can stick into ING Direct, who pay 4.75% p.a. Assuming this is compounded monthly (cos its easier for me to work out), £1,097.75 per month into an ING savings account will give you a capital sum of £629,862.65 at the end of the 25 years.

So, assuming no wage or house price inflation (which we have to do to make this a valid comparison), the person who buys ends up with an asset worth £300,000, an dthe person who rents ends up with an asset worth £630,000.

Doesn't seem that renting is dead money.

Jon211

devils_advocate wrote:

So lets accept the OP's figures, and work it out, taking into account other peoples points.

Firstly, buy the flat. If, as 1 poster says, after 25 years the flat is yours. This assumes a repayment mortgage over 25 years at 5.25%. For simplicity's sake, assume 100% mortgage of £300,000. Monthly mortgage payments are therefore £1,797.75.

On the other hand, if you rent, payments are £700 per month. Therefore, if you rent as opposed to pay a repayment mortgage, you have an extra £1,097.75 per month, which you can stick into ING Direct, who pay 4.75% p.a. Assuming this is compounded monthly (cos its easier for me to work out), £1,097.75 per month into an ING savings account will give you a capital sum of £629,862.65 at the end of the 25 years.

So, assuming no wage or house price inflation (which we have to do to make this a valid comparison), the person who buys ends up with an asset worth £300,000, an dthe person who rents ends up with an asset worth £630,000.

Doesn't seem that renting is dead money.

The house that costs £300K now will more likely than not be worth a fair bit more that £300K in 25 years time though, even if there is a house price crash in the meantime.

If you assume an average of 4% increase in house prices per year then the £300K house becomes worth around £800K in 25 years.

I agree that renting isn't dead money though. I was thinking about buying somewhere later this year, but will probably rent for a while longer yet. I can afford the prices but I don't know where I'll be living more than a year or two down the line and personally I think buying just to live somewhere for that short period would be a bit foolish just a the minute.
When I come to find somewhere to live long term then I will definitely buy a place.

Ian_W

devils_advocate wrote:

So, assuming no wage or house price inflation (which we have to do to make this a valid comparison), the person who buys ends up with an asset worth £300,000, an dthe person who rents ends up with an asset worth £630,000.

Doesn't seem that renting is dead money.

:rotfl: :rotfl: :rotfl: :rotfl:
Goodness - that's the mother of all assumptions just to prove a point! You're not a lawyer by any chance - are you?

Assuming there is UK HPI on the same scale as the last 25yrs the house will be worth £2,169,045 in 25yrs time or as it's in London maybe £2,644,018.
Of course assuming inflation [or at least the RPI] is the same over the next 25yrs the ING savings will only be worth £207,000 or thereabouts and the more expensive of the house prices about £714,000 in to-days money.

Dependent on your individual circumstances, the state of the property market where you are and lots of other factors there are times when renting is dead money and other times when paying a mortgage is.

It's a facile argument - but do enjoy it.

mobile-advice

I agree with most of what's been said here, but those two properties are not that close in valuation.

First one is a semi-detached, Grade II listed, 'of historical interest' two bedroom with garage to the side; the plot is likely to be as twice as big.
- Planning potential (side extension, may or may not be granted)
- Off Street Parking
- Roof Terrace
- Study Room
- Conservatory

Second one is a one-bed terrace. It has NONE of the things listed above.

No doubt that rental prices are cheaper than the mortgage equivalent, but these two properties are NOT the same.

F_T_Buyer

Jon211 wrote:

The house that costs £300K now will more likely than not be worth a fair bit more that £300K in 25 years time though, even if there is a house price crash in the meantime.

If you assume an average of 4% increase in house prices per year then the £300K house becomes worth around £800K in 25 years.

The problem with this perception that prices will be higher (not that I disagree) is you are trading on future income, i.e. expectations.

This happened during the dot com bust, people traded shares on the expectation of future profits. Of course, it all came crashing down and companies went bankrupt, and people lost alot of money. However, if you had invested near the peak around 2000AD, you would be close to back to where you started now (amost). In 5,10,15 years I expect it to rise further.

Although, that's not a reason for investing in the FTSE during the last peak, especially with hindsight.


For all those that can keep hold of their shirts in the years ahead, you will be fine in the long run. But, many will lose their shirts, and those that will and those that are going head first into the market today, and being encourages, advised, pushed into from their parents, peers, media...

Ian_W wrote:

Assuming there is UK HPI on the same scale as the last 25yrs the house will be worth £2,169,045 in 25yrs time or as it's in London maybe £2,644,018.
Of course assuming inflation [or at least the RPI] is the same over the next 25yrs the ING savings will only be worth £207,000 or thereabouts and the more expensive of the house prices about £714,000 in to-days money.

We can all extrapolate dear boy. I should be 20foot tall by now.

Ian_W

F_T_Buyer wrote:

We can all extrapolate dear boy. I should be 20foot tall by now.

You can do what you want in the privacy of your own home!

But if you want to make arguments about monetary values over a 25yr period you are foolish in the extreme to ignore inflation, whether that be house price, wage or the the cost of living variety. In the early 90's people were being mis-sold private pensions on the basis that 7-9% per annum growth would give them what then seemed a staggeringly large pension pot of £2-250K when they retired 30yrs hence. That's still a large sum now but not sufficient in pension terms and in another 10 years will be woefully inadequate.

Just because we've had 10yrs of relatively low inflation doesn't mean it will continue - any more than the fact we've had fairly high HPI means that will continue - an argument I'm sure YOU'LL buy into! :rolleyes:

F_T_Buyer

Ian W,

Things are very different now compared to the past, interest rates are set independently by the Bank of England, not a politician for political gain.

If inflation rises, as you suggest and is happening, interest rates will rise which they have done. If we head towards serious like the past inflation, the BoE should raise interest rates to stop it.

What ever happens, real interest rates will always be positive, therefore giving a positive gain to holding sterling. They are arguments against cash, in that you pay tax and home ownership capital gains isn't taxed.

However, although renting is good at the present, i'm by no means saying rent for the next 25+ years. The question people should ask themselves, is now a good time to buy. If not, ask yourself the question in a years time. This only works on a financial level tho, as they are other reasons to buy at not a good time.

franklee

What puzzles me in these rent vs buy arguments is why so many of the examples are over a 25 year time period.

It's seems blindly obvious that any sane person would switch from renting to buying and back depending on their needs and the current circumstances. Five years ago I would not have rented, today I rent, in a few years time I will buy. There is no need to stick to one policy.

As for house prices, I am sure they will be higher than they are now in 25 years time, but that isn't an argument for buying now for those of us who think prices will drop before rising again. If I can buy a bigger better place after a drop then I'll gain even more from the subsequent rise and get to live somewhere better in the meantime

Oh and please can we all remember that an interest only mortgage doesn't buy the house, it just pays the interest on the debt leaving the original debt still owed! I am sure all money savers know that!

devils_advocate

The house that costs £300K now will more likely than not be worth a fair bit more that £300K in 25 years time though, even if there is a house price crash in the meantime.

If you assume an average of 4% increase in house prices per year then the £300K house becomes worth around £800K in 25 years.

That's why I was ignoring house price inflation and wage inflation. On the basis of your scenario, the house is worth more. But if wage inflation increases at the same amount, the person paying rent will have the choice of either putting more away in the investment account, which is also subject ot compounding, and which will also become a greater capital amount. The alternative is not to save the extra from the increase in wages but to spend it on cars, holidays etc. A bit like MEWing the increase in capital value of the house, so that the equity remaining stays constant at £300k.

Assuming there is UK HPI on the same scale as the last 25yrs the house will be worth £2,169,045 in 25yrs time or as it's in London maybe £2,644,018.
Of course assuming inflation [or at least the RPI] is the same over the next 25yrs the ING savings will only be worth £207,000 or thereabouts and the more expensive of the house prices about £714,000 in to-days money.

So to prove your point, you take the future value of the house, use it as an absolute number. You then take the future value of the investment, which is on a more conservative basis, and discount it back to today's value. Hey presto - the house value is a bigger number! And before that, I'm accused of using the mother of all assumptions by using the same basis for my comparison?:rotfl: :rotfl: :rotfl:

there are times when renting is dead money and other times when paying a mortgage is.

Agreed. It's a shame that when one has been the case, people assume that it will always be so.