Buying vs Renting (warning long post)

jamesmorgan

Cornucopia wrote: »

I think another factor not considered in the model is the flexibility of payments when buying rather than renting.

A renter cannot "over-pay" to any advantage. However, because of the way compound interest works, ANY over-payment for a buyer is advantageous - ultimately leading to early complete ownership of a property.

It is a good point, although worth noting that a renter can 'over-pay' more money into their ISA account and then have the benefit of compound interest on their investment returns.

Cornucopia

Yes... Though interest rates will be higher for the mortgage than the savings, and there are tax advantages to reducing costs rather than collecting interest. (Assuming that the overpayment took you over the ISA allowance, or that the ISA was already being used for another purpose).

It all goes to support the "gut feel" notion that in relatively sensible times, buying is always financially better than renting. The only issue becomes: what if the times are not sensible?

Slinky

Nobody has mentioned another issue of renting is being 'moved on' whether you want to move or not. Assumptions that you can rent a particular home for as long as you require it are a bit naive.

jamesmorgan

Cornucopia wrote: »

Yes... Though interest rates will be higher for the mortgage than the savings, and there are tax advantages to reducing costs rather than collecting interest. (Assuming that the overpayment took you over the ISA allowance, or that the ISA was already being used for another purpose).

It all goes to support the "gut feel" notion that in relatively sensible times, buying is always financially better than renting. The only issue becomes: what if the times are not sensible?

I would be disappointed if investing in a FTSE tracker over 20 years delivered less than mortgage rates. The past 20 years have been pretty poor for equities but total return for the FTSE100 has still been 6.4%. Over a 20 year period you wouldn't want to be investing in cash accounts.

I accept your last point - all the modeling is based on typical returns from the past, tweaked a bit for some guesstimates for the future. However, 20 years is a long time. I do have some concerns about over-population and potential conflicts that could arise from this. A major world war would certainly through a spanner in lots of my assumptions!

mike_the_bike_2

I bought my first place when I was 23. I am now 53 with mortgage paid off and basically I work now when I want to as opposed to being forced to continue on the treadmill..

Very lucky situation to be in granted but at 23 I was not running a virtually new car on finance, eating out twice a week, 4 holidays a year or paying for an Iphone for obvious reasons..

Do I feel smug..not really because a few years later I was paying a mortgage at 15% had lost my job but managed to scrape through repossession etc to keep the property.

On balance buying that property at 23 was the best financial thing I managed to do.

One serious question..what exactly is "generation rent" going to do when they can no longer work?

paddyrg

At every step in my earning career, the first rung has always been out of reach. This means I've always rented. In some ways it's a winner, others a loser - depends if you value your life entirely monetarily or other factors.

Thanks to renting, I've been able to stay in some great properties in some key locations - locations where the properties never come up for private sale as they're owned by institutions. For instance, Oxford University colleges own a HEAP of properties in the city, and staying 20 seconds walk from the Thames, the Canal and the train station was viable - meaning my commuting time was maybe 45-60 mins/day shorter. In Bath, a friend is renting one of the glorious regency apartments in The Circus for a very sensible price.

I can also move wherever with minimal notice and planning - when I was a contractor and following the work, that was very handy. We've also been able to long-lease places without issue - current one is coming up 7 years now, previously it's generally been us that decided to move on, not the getting kicked along every 6 months that lots of people imagine.

It's also meant when we decided to go off overseas for several months at a time, we were able to pack up and go with no return date planned. Impossible if I was mortgaged, that freedom to go off and learn to fly in NZ was a real bonus I'd never have had otherwise.

I would like to paint my own walls and play at changing houses around a bit one day, but in the meantime some of the intangible benefits have meant it has not been so bad. Buyers might have more notional wealth in their equity in their properties, but certainly I've had experiences I couldn't have otherwise had, shorter commutes, moved and tried different towns, cities, countryside, cottages and grand mansions, etc. I couldn't price those.

Lord_Baltimore

paddyrg wrote: »

At every step .......

Aaaah very dreamy, almost poetic:). So you're a hippy with no children. I'm right aren't I?

Cornucopia

jamesmorgan wrote: »

I would be disappointed if investing in a FTSE tracker over 20 years delivered less than mortgage rates. The past 20 years have been pretty poor for equities but total return for the FTSE100 has still been 6.4%. Over a 20 year period you wouldn't want to be investing in cash accounts.

If the mortgage is the same or less than the rent, then it's the buyer who has the greater opportunity to exploit these investments.

And won't it often be that way... because the rental price originates with the cost of a BTL mortgage + reasonable return on LL deposit.

paddyrg

Lord_Baltimore wrote: »

Aaaah very dreamy, almost poetic:). So you're a hippy with no children. I'm right aren't I?

Uncanny - what colour are my eyes and kids names?? ;-)

jamesmorgan

Cornucopia wrote: »

If the mortgage is the same or less than the rent, then it's the buyer who has the greater opportunity to exploit these investments.

And won't it often be that way... because the rental price originates with the cost of a BTL mortgage + reasonable return on LL deposit.

If mortgage rates are 5% and maintenance costs are 1%, then mortgage interest + maintenance = (roughly) rental costs (at 6% yield). The buyer is also paying off capital and has higher moving costs. This means for the early years, the renter pays less each year than the buyer so can contribute to savings. It is only once the buyer has paid off some of their capital, do annual costs for the buyer become less than the renter (in my model this is after approx 8 years). By this point the renter has already saved approx £50K. Even though in later years, the buyer's annual costs are less then the renter, the buyer never gains ground on the savings of the renter.