mortgages are dead money!

roswell

All in all the easy way to sum it up is its situation dependant.

For some renting is the route they take and rightly or wrongly its there choice, The same goes for mortgages although as per the comments about interest only mortgages ..... not all mortgages are equal :-)

jonewer

mobile-advice wrote:

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.

Erm... The entire terrace is Grade II Listed and of historical interest, and its not a semi, it just at the end of the terrace.

While I agree that the one for sale is a bit nicer inside, the "garage" is tiny- you wouldnt get a car in there, and there entire plot is already built on. The one for rent does have a roof terrace.

The whole terrace also has small "courtyard gardens" and the one for sale has a much smaller garden than all the others. The one for sale is also right next to a bridge over the river that is chock-full of traffic and pedestrians for most of the day and night.

So no, they are NOT the same, but they are broadly comparable.

Rick62

I think that there is no question that long term buying is better, hopefully you get the mortgage paid off by when you retire and you have stability and you can decorate, fit a new bathroom/kitchen/conservatory etc as you want.

However property prices have always historically gone in cycles, and right now prices are very high. Does that guarantee a crash? No, but it does mean we are more likely to see either a crash or a long period of stagnent prices and at current levels there is no chance of prices rising in the next 5 to 10 years as they have in the last 5 or 10 (if they did the average little terrace house where I live would be nearly £million).

So right now there is little to be lost renting, most people will save often hundreds a month by renting (or live in a house they could not afford to buy) and can then buy in a few years for much the same price, or maybe less if a crash does happen.

Woby_Tide

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.

Sounds brilliant, so basically you rent a house/flat for 25 years, then you get to stay in it for free for the rest of your life? Where do I sign up?

(also not wanting to point out the blindingly obvious but if there is no wage or house price inflation then you won't be getting 4.75% on your savings by a long stretch so it's not a valid comparison at all)

Ian_W

devils_advocate wrote:

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:

You started this silliness - I was merely joining in!! :rolleyes:

mobile-advice

jonewer wrote:

Erm... The entire terrace is Grade II Listed and of historical interest, and its not a semi, it just at the end of the terrace.

While I agree that the one for sale is a bit nicer inside, the "garage" is tiny- you wouldnt get a car in there, and there entire plot is already built on. The one for rent does have a roof terrace.

The whole terrace also has small "courtyard gardens" and the one for sale has a much smaller garden than all the others. The one for sale is also right next to a bridge over the river that is chock-full of traffic and pedestrians for most of the day and night.

So no, they are NOT the same, but they are broadly comparable.

Hardly. The extra garage, bedroom, off street parking and the end of terrace would make a difference to the price; if the 2-bed is really worth £300,000, then the 1-bed should not go over the stamp duty price (£250,000).

Not 'broadly comparable' enough; your calculations are just not realistic.

Why not be more realistic, and run the mortgage figures from a price of £250,000. And, I feel a 100% mortgage at that figure is a bit extreme. Why not allow a deposit on both sides?

Kind of sours what is a good argument, for me.

Jon211

devils_advocate wrote:

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.

As already pointed out though you wouldn't get 4.75% interest on a savings account if we assume that inflation is non-existent.
Also if there is inflation in play the rent on the property would likely increase too.

Over a period of 25 years or more I can't see that renting would ever be better value than buying.
Shorter term then maybe, especially with the hosueing market as it is currently.

Ian_W

F_T_Buyer wrote:

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.

:rotfl: :rotfl: :rotfl:
You have to have been around long enough "old boy" to realise every generation thinks "things are very different now". They are - but seldom in the way folks think they are.

Waldir

Although the OP compares apples with oranges (the 2 properties are far from identical (I'd argue the first one is worth twice as much as the second one) and he conveniently discards house price inflation), the interesting point is that people always tend to do the opposite: They look at the possible value of the house in 10-25 years and how much mortgage interests they would pay, but forget to look at how much interests they would get from their savings if they choose to rent.

Hereward

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.

You have forgotten to remove savings tax (20%) from the interest earned so the actual savings asset is only worth £554,350.31.

Edit: If you are keeping the savings interest rate constant, then you should also keep the inflation rate constant, so using Decembers CPI rate (3%) the house is worth £628,133.38 after 25 years.