London buying cheaper than renting?

ah6321

Hello all

I've been doing some fag packet calculations and it appears that for our (me + partner) particular set of circumstances, it would be cheaper to buy a house than to rent. Not by a small margin, but a massive amount. Our circumstances are not that unusual (I do have a large amount of savings thanks to an inheritance) and so I wondered whether this was something that is common in the current conditions. Also whether this is specific to London.

I am not familiar with the process so please tell me if/ where I'm going wrong.

So some details:

We currently rent a 1 bed property in London and pay £1200 pcm.
My salary is £30k
My partners salary is £26.5k
We are both in our 20s and are fairly recent graduates.
Combined savings ~£50k
No kids and none on the way any time soon (I hope)
Would be first time buyer, although it's not really something we're looking into seriously atm.

According to sales prices on Zoopla, the one bed flat we are currently living in is worth ~£250k

So would therefore require mortgage of £200k

I quickly whacked our details into moneysupermarket mortgages and it comes up with over 300 mortgages. Whilst I am sure moneysupermarket isn't gospel, it appears that the ratio between our earnings and required loan is agreeable with the providers. That's roughly 3.5 times combined salary, I have no idea whether this is considered 'normal'.

Anyway using a 5 year fixed from the post office for an example and a 30 year term, I put all of this into an amortisation spreadsheet.

The results are that the mortgage would cost £960 pcm and that after 4 years we will have paid off £15k

4 years of our £50k in the bank would make us less than £10k in interest and our monthly housing costs would be £240 cheaper. As it's a block of flats there's a service charge and other stuff which may come to ~£100 pcm max.

Now I haven't allowed for moving costs, set-up fees, stamp duty, the boiler breaking etc. but it appears that even when this was allowed for, there's a large benefit financially.

I also haven't considered things like credit rating or the willingness of banks to lend, I have only been in my job for 6 months for example, we both have student loans, my partner works a fixed term contract etc.

So I guess my questions are, is it often cheaper to buy then rent - on a monthly basis/ overall and even for a relatively short period?

Have I got my sums and assumptions right?

Is this 'unique' to London?

Is the real issue that everything works out on paper, but in reality the banks aren't willing to lend?

Do all the things that I haven't considered, and other things that I haven't realised I haven't considered, mean that actually, buying would cost more?

Thank you for your time

ruggedtoast

No you've got it about right. If you're going to buy in London, buying now while you only need a flat is probably a good idea as it can become impossible later on when you have kids and need a house.

bluedrop

I did a massive spreadsheet to weigh my options. I have an Indian passport, so I have access to fixed deposits paying over 9% in interest for my £60k savings. Buying a house in London is STILL cheaper than renting -even if Mortgage rtes were to increase slightly.

ruggedtoast

If you're holding rupees then your inflation rate is about 10%. I'm getting ten rupees more to the pound than I was a year ago and it's still costing me more each time I go there.

sims01

ah6321 wrote: »

Hello all
Is this 'unique' to London?

No, this is not unique to London, it is like this quite often in many places - although not always.

Really the reason is that in any almost any market, taking more risk comes with the opportunity for more gain. So if you buy, you gain something every month, but have also made a leveraged bet on house prices, so now have the risk of significant losses if prices drop or you can't pay your mortgage at some point.

InMyDreams

You mention short term. There is also the risk of what happens when you want to sell. (Relocate and/or upsize (if that's what you are thinking) or even split up.)

You have an advantage (financial and logistical) as a first time buyer in that you don't have another property to sell. When you come to sell your flat, you may find (for many reasons) that you can't realise what you believe the flat is 'worth'. The equity you think you have is not as easy to get your hands on as your cash savings. If you are envisaging possible short term, this could be quite a big risk and inconvenience. Is it worth the saving over the short term? Is it worth loosing your 'first time buyer' advantage for? This might be something else to include in your considerations.

BitterAndTwisted

Your calculations could do with some modifying to see how the numbers stack up: like a 25 year mortgage rather than 30 years. The difference between those two terms in interest paid will make your eyes water. Of course when you own it's not a straight mortgage versus rent comparison because when you buy a property you always have expenses for repairs and maintenance that your landlord would cover while you're tenants.

Also, if you choose to buy a leasehold rather than a freehold you'll have the service-charge payments and these can be very high indeed. My own feeling is that a freehold is much more desirable even if it means moving to a less favourable area.

The other thing to consider is that renting buys you freedom. At your ages this could be important in the short to medium-term. Lots of employers relocate jobs and maybe yours too at some point.

Notmyrealname

ah6321 wrote: »

Is this 'unique' to London?

Around here rental values are quite reasonably high in comparison to the value of houses.

The house I rent out is valued at 120k. I charge £500 a month rent.

The house I bought at a 75% LTV has a £95k mortgage on it and costs £435 a month on a repayment.

A friend of mine bought a house last October for £100k with a 5% deposit. His monthly repayments on a repayment mortgage are around £650 a month.

If he was to have the house I rent out, it would be cheaper for him to rent than buy.

By the time you take into account repairs, a gas safety check etc which are the LL responsibility, it would be about the same for me to rent my old house compared to buying it.

Only difference is 25 years down the line I'd own it and be mortgage free. However as that is also going to be the time I'm retiring, if I was renting I'd be rent free as well with housing benefit or whatever form it exists in.

michaels

In general buying should be cheaper than renting as there is no landlord needing to make a profit and obviously repairs etc are not part of the mortgage payment if you are only comparing rent and mortgage.

Part of the reason for this is that it is hard for many to buy due to the current deposit requirements.

Notmyrealname

michaels wrote: »

Part of the reason for this is that it is hard for many to buy due to the current deposit requirements.

5%. The same as it was 30 years ago.

hjd

Notmyrealname wrote: »

5%. The same as it was 30 years ago.

I bought my first house in 1979. I needed to have been saving with the building society for a minimum of 2 years and to have 10% deposit.
Interest rates were 15%.

I found it harder than some as a female getting a mortgage as there was definitely sexual discrimination.