when does renting become cheaper?

want2bmortgage3

Generally people say buying is a better deal than renting, however in London it's well known that renting is cheaper, due to the extortionate property prices.

For example, my friend rents a 1 bedroom flat for around £1300 a month, to buy the same place would cost over £400k. That would mean a £40k deposit and a £2k+ repayment.

Where I live, it's different, you can buy a flat for £150k that would rent for £800 a month, a much closer comparison. Interest on a mortgage for that property would be £550 a month, cheaper than the rent. So does the cost of maintenance, and less freedom to move, make up for the £250 the renter pays on top?

buglawton

In London people buy property and hold it as a repository of value, like gold. London property is a highly visible market place to international buyers. A recent statistic was that 7 out of 10 central London properties are being bought from abroad.
http://www.dailymail.co.uk/news/article-2384034/3-4-new-London-homes-sold-abroad-advertised-UK.html

This has a knock on effect that spreads out across the capital. So people are buying to hold-and-let, or just to hold. The usual 6% yield that governs UK property prices does not seem to apply to London.

There are other capitals of the world in a similar situation where the landlord's yield is a low as 1.5% for similar reasons.

Many European capitals have special rules that prevent buy to let and property investment taking over the housing market.
E.g. Paris
http://www.independent.co.uk/money/mortgages/its-a-great-time-to-buy-in-parisbonne-chance-1953426.html

We in the UK vote in governments that want a hands off policy regarding such rules.

Best thing to do is avoid settling in London.

ihatemyhouse

renting is better if you have a brand new council house, like down here 3 beds are 90 a week,

SailorSam

Isn't renting dead money though ?
Op you've said it's cheaper to rent the same flat in London than it would cost to buy it, but in the long term you'll never get all that rent you've paid back again, but if the time comes that you want to move house and you've been buying hopefully you'll get all your payments back again. And a lot more as well if the property has risen in value.

want2bmortgage3

sailor you are forgetting that the majority of a mortgage payment is interest, which is the same as rent. So, all that is dead money too. I'm not sure property prices will rise as much as they have in the last 10 years either. I'm wondering how much % would you pay extra in rent, considering you will not have to worry about maintenance costs and also you still have flexibility to move if you want?

buglawton

Exactly, interest payments on a mortgage are also dead money. In effect, interest is rent.

Pixie5740

It also depends on how long you intend to live in a property. For example if you only need to the property for 1-2 years it could work out cheaper to rent as you wouldn't need to pay out for stamp duty, solicitor's fees etc. however if you planned on being somewhere for longer then buying could be a cheaper option.

HAMISH_MCTAVISH

want2bmortgage3 wrote: »

Generally people say buying is a better deal than renting, however in London it's well known that renting is cheaper, due to the extortionate property prices.

For example, my friend rents a 1 bedroom flat for around £1300 a month, to buy the same place would cost over £400k. That would mean a £40k deposit and a £2k+ repayment.

London is, as you point out, a very different beast to most places in the UK.

But even in London it still makes more sense to buy than rent over the long term.

Because when you buy you're locking in the cost price of a house at a level lower than it will be in 25 years.

And even though you may pay more in mortgage payments today than you do in rent, 10 years or so from now rents will have risen to the same as mortgage payments, and by the end of the mortgage rents could be double or triple the mortgage payment.

This is where inflation is your friend.

Mortgages are inflated away over time but rents keep rising relentlessly.

And at the end of a mortgage term, even in London, the buyer will have paid out less than the renter, but will own a house free and clear at the end of it.

The renter may be able to save a bit in the first few years versus the buyer, but rising rents will end that soon enough, and then he's paying far more than the buyer in the later years eradicating all of those early gains.

Where I live, it's different, you can buy a flat for £150k that would rent for £800 a month, a much closer comparison. Interest on a mortgage for that property would be £550 a month, cheaper than the rent.

So does the cost of maintenance, and less freedom to move, make up for the £250 the renter pays on top?

It would be financially catastrophic over the long term not to buy in that situation.

Here's a comparison, using 10% deposit, 5% mortgage rate, with both prices and rents increasing at 3% a year which about right for rent but is actually significantly less than the long term average for HPI.



You'd be over £419,000 worse off renting than buying over the term of that mortgage.

People can play around with their own calculations here.....

http://www.greengem.co.uk/Rent_V_Buy/rent_v_buy.php

And change the fields for assumptions as you see fit.

That calculator is a bit simplistic, there are more complicated ones that include savings interest on deposit, maintenance, insurance, etc, but even including these things doesn't change the main result that buying is much, much cheaper than renting over the long term.

Cornucopia

buglawton wrote: »

Exactly, interest payments on a mortgage are also dead money. In effect, interest is rent.

This is a common misconception.

There are two reasons why rent and mortgage interest are not the same:-

1. Because as Hamish points out, mortgage payments are locked in at the outset (subject to interest rate changes, which can be hedged against). Rent is free to rise with inflation.

2. Mortgage interest is a necessary commitment to enable home ownership. It's an expense incurred to achieve something beyond just a roof over one's head. Rent is an expense solely to achieve a roof over one's head.

edit: In answer to the OP's question, the "London" effect is very centralised. I own a property in Zone 2, which has "normal" rental yield (about 5%).

NowRetired

I bought my house 30 years ago, my brother is living in a council house.


We are both retired and have approx. the same income and outgoings except for one thing.


I don't pay rent and my mortgage was paid off 3 years ago.


I can go on more holidays than him.

HAMISH_MCTAVISH

want2bmortgage3 wrote: »

the majority of a mortgage payment is interest,

No, that's not correct.

Here's the amortisation schedule for that 135K mortgage on a 150K house at 5% over 25 years, courtesy of this website.



http://www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator#result

Now here's the same mortgage including taking £200 a month extra from your savings versus renting towards overpayments.



It is true to say that in the early years interest makes up a higher component of the payments than it does in later years, but you're still taking a chunk off the capital even in years one to five.

Particularly with even small overpayments.

Buying wins over renting hands down, even at todays prices, even if prices don't rise much from here, even if prices fall a bit from here, and even if interest rates rise.

There is just no realistic scenario under which renting beats buying.