Actually cheaper to keep renting??!

Tixy

StuC75 wrote: »

Negative equity only comes into affect when needing to sell. Heck that much of a drop and buyers market could easily swallow up the extra 5% anyway, then where do you draw the line..

Where I would draw the line is 15% - but thats why I said for me personally. I know of a couple of acquaintances where that 5% would have made quite a big difference to their situations, when they did need to sell. And it is also the amount my own house value has dropped from the peak of the market to today.

I did buy my first property with a 10% deposit (at a time when 100% mortgages were readily available) but wouldn't personally want to do so again. Even though I was fortunate in that I had 15% equity in the property within a year, and well over 50% by the time house prices started to drop.

JimmyTheWig

Rich__101 wrote: »

I'd say the calculation is more simple than that. The two important figures are:

1. Your monthly Rent at £695.
2. The monthly interest payable on the mortgage (effectively the rent you pay the bank to live in your own home).

At the point where 2 is less then 1 then it is worth buying the house before that you are better of renting.

This is correct, but the other important part of the equation is the costs of moving and how long you will live there for.

You've mentioned £10k for costs, which sounds reasonable though probably on the high side just for a purchase.
If you stay there for 5 years then that's £2k a year you need to add on to the mortgage interest payments that you make each year to be able to compare it.
If, on the other hand, you only stay there for 2 years then that's £5k a year. Etc.

Though having said all of that, monthly rent is £695 while monthly mortgage interest on £180,000 at 5.3% is £795. So you might be better off staying where you are for now, anyway!

kidmugsy

martinsurrey wrote: »

A simple way to look at it.

Dont worry about the next 25 years, look at the next 1-2 years

with a £20k deposit you are looking at a 90% LTV mortgage, which is around 3.5% (just for ease of calc)

on a £200k home, 180k mortgage interest at inception is £6,300 a year, or £525 a month.

so you are better off by £170 a month buying over renting right now (ignoring fees and other costs), since mortgage interest is akin to rent

but you'll lose around £40-50 a month interest on your £20k cash by buying (asuming 2.5% after tax), so your down to £120 a month better off, less maintanance fees and so on, and you are probably still better off buying now over renting but not by much, in year one, but by year 4-5 when you have reduced your LTV through savings, you will be significantly better off.

But home ownership is about more than money, its about a home, its about being able to paint the walls, and no fear of a S21 dropping through the letter box, and its about never having to speak to a letting agent ever again (wihc is worth more than you think!

And it's about all the unpredictable costs.

dtsazza

andy.m wrote: »

We are surely at a tipping point whereby it is close to being to cheaper to rent rather than buy when you consider the 25 years of interest paid out to own the asset outright...

I'd be surprised if that were the case, given that (as a sweeping summary) rents have increased in the last few years while interest rates have fallen. Both of these make buying more financially favourable, so to be at a tipping point now implies that renting would have been unquestionably better before, which doesn't feel like it's true.

Besides, looking at my own case, rent is £1300 for a two-bed terraced house. At 4% interest rates (easy to obtain even at 90% LTV), that's equivalent to a £390k mortgage, and the place isn't worth anywhere near that. It's more like £250k-300k; and if we assume £280k with a £30k deposit, the interest costs on a mortgage (i.e. the "rent to the bank) are £833/month.

So even from the first month, the financing costs are lower. And it's more favourable for mortgages from there, because any overpayments earn an equivalent gross interest of 6.66% for higher-rate taxpayers - bringing the mortgage interest payment down much faster that you can bring rent down.

Plus the mortage payments are locked in, in notional terms. So if you assume that rents stay stable in real terms, they're still increasing at (inflation)% relative to the mortgage interest.

Ditto house prices - while the actual up and down moves are a matter for speculation, their mean baseline will also grow with inflation. So all things being equal, you can expect nominal house price increases in line with inflation. (Which is another way of saying that inflation reduces the real cost of the mortgage debt, so you pay back less capital than you borrowed in real terms. It's the same effect viewed from different ends).


I don't have any particular vested interest either way, but it seems fairly clear to me that the financial fundamentals are strongly in favour of mortgaging over renting. The only risks I can see that would invalidate this is if you see rents falling significantly and permanently in the near future; interest rates rising significantly in the near future; or house prices falling significantly, and not recovering before you want/need to sell. (And given the initial gap, by "significantly" I'm talking about more like 50% than 10%). I just don't think there's a realistic probability of those things happening.

JimmyTheWig

dtsazza wrote: »

I'd be surprised if that were the case...

So would I, but by the OP's figures (see the end of my post #33) it looks like renting is better value where the OP is.

I believe I've heard that buying is cheaper in 90% of the country. Which suggests that you and I live in part of that 90%. But the OP lives in part of the other 10%.

Cornucopia

JimmyTheWig wrote: »

So would I, but by the OP's figures (see the end of my post #33) it looks like renting is better value where the OP is.

I believe I've heard that buying is cheaper in 90% of the country. Which suggests that you and I live in part of that 90%. But the OP lives in part of the other 10%.

No. The OP's spreadsheet is not a like-for-like comparison.

The only area I can think of where renting is consistently cheaper than owning is in the very high value central London area. Typically because the rents are constrained by different market forces to the purchase prices (which are up in the £millions).

marathonic

Cheapest Rent: £600
House Price: £115,000
Professional Fees: £1,500
Stamp Duty: £0
Deposit %: 25%
Deposit: £28,750
Mortgage: £86,250
Mortgage Rate: 2.90%
ISA Savings Rate: 2.80%

Annual Cost of Buying:
Lost Savings Interest: £847
Mortgage Interest: £2,501
Furniture : £1,140
Maintenance: £1,150
Buildings Insurance: £100
Council Tax (Rates in NI): £1,200
Total £6,938

Annual Cost of Renting: £7,200

Difference: £262


The rent includes rates at £7,200 whilst I'd have to pay them myself in buying.

The lost savings interest would be what I'd get if I put my deposit and professional fees (mortgage and solicitors fee) into the current best buy ISA.


The furniture figure is based on the fact that the rental comes pre-furnished. It's based on buying used furtniture at £5,000 and the need for replacement after 5 years (I've also included an element of interest here as you'd be able to put the £5,000 spent on furniture in a savings account if you rented).


Maintenance is set to 1% of the houses value.


With the above figures, you'd be slightly better off buying. In reality, you could buy used furniture (comparable to a rental) for much less than £5,000 and it's doubtful that a landlord would replace everything every 5 years.


The maintenance includes things such as boiler servicing, replacement of white goods, about 1-2 callouts to tradesmen annually and repainting every few years.


The figures may skew towards renting when interest rates rise as rents are unlikely to rise as much as the interest bill will in the coming years so the focus is to reduce the LTV to 60% and see what sort of 5-year fixes are available.

This skew towards rental would assume no capital appreciation in the property. At the end of the day, the long-term rise in rent prices and property prices should, in theory, rise with inflation with no upper ceiling. There will be an upper ceiling to the rise in interest rates (probably close to the long-term average of 4% base rate). At the moment, 10 year fixed rates are available at 4.19%.

JimmyTheWig

Cornucopia wrote: »

No. The OP's spreadsheet is not a like-for-like comparison.

I'm not using the OP's spreadsheet. I'm using the fact that, for the OP, monthly rent is £695 while monthly mortgage interest on £180,000 at 5.3% is £795.

If the OP can get a better mortgage rate than 5.3% then this would change things. But I'm guessing that he knows more about what he can get than I do.

franklee

Rich__101 wrote: »

I'd say the calculation is more simple than that. The two important figures are:

1. Your monthly Rent at £695.
2. The monthly interest payable on the mortgage (effectively the rent you pay the bank to live in your own home).

At the point where 2 is less then 1 then it is worth buying the house before that you are better of renting.

That ignores the loss of income on any deposit when you buy. I realise savings rates are low at the moment but a modest return on the deposit money should be achievable and if the OP hasn't got enough to get full ISAs each year when buying he'd be missing out on getting tax free savings that may last him years.

Plus repairs, say if the boiler breaks down etc.

Also the costs of selling and buying a property are higher than moving rentals. The OP wrote" "Starter homes in our area are £200k, our rent is £695". If he can save and then buy a property at the next level up he will save himself the full costs of moving once, that's a few thousand given estate agent's fees, solicitor, stamp duty etc.

Also renting he will retain flexibility should he need to move for work or whatever. I'd suggest skipping the starter home and buying the longer term home.

ukcarper

franklee wrote: »

That ignores the loss of income on any deposit when you buy. I realise savings rates are low at the moment but a modest return on the deposit money should be achievable and if the OP hasn't got enough to get full ISAs each year when buying he'd be missing out on getting tax free savings that may last him years.

Plus repairs, say if the boiler breaks down etc.

Also the costs of selling and buying a property are higher than moving rentals. The OP wrote" "Starter homes in our area are £200k, our rent is £695". If he can save and then buy a property at the next level up he will save himself the full costs of moving once, that's a few thousand given estate agent's fees, solicitor, stamp duty etc.

Also renting he will retain flexibility should he need to move for work or whatever. I'd suggest skipping the starter home and buying the longer term home.

He did say later that he could get a 3 bed house for £200k .

It all depends on mortgage rate he can get if it is the 5.3%in the short term he would be better off renting as mortgage interest is more than rent. If he could get a lower rate say the average rate of 3.7% the interest would be £555. THe interest he could get on his £20k deposit + £2k fees would be about £660 a year.