how many REALLY think there'll be a crash rather than a stabilisation ?

mr.broderick

My mate just been given 2 months notice by his landlord due to the fact he's selling it. Real bummer renting in my opinion, i'm a str by the way.

franklee

Melissa177 wrote: »

Because the interest is going to eventually net you a house that you own 100% of in 25 years time?

This is not the case. The interest is just allowing you to borrow the money, it does not go towards paying off the loan. I was careful to say the interest on the mortgage payments is more than the rent.

If you have a repayment mortgage (rather than interest only) then you are paying off the loan but that costs even more per month. The renter can easily save this money and get a return on it, easily 6% in just a deposit account.

Melissa177 wrote: »

If you rent for 25 years, at the end of the 25 years, you still don't have an asset.

Who said anything about renting for that long? I'm going to rent until either house prices go down or I'm convinced that won't happen. Meanwhile for the reasons explained above I'm saving more month by month than I could if I brought.

But I can see you're not convinced, some figures would help. Can you post your sums? How about:

House price 250K.
House buying deposit 25K.
Rent 825pcm.
Interest rate in savings 6%.
Interest rate on mortgage 6%.

Renting costs: 825-100 (interest on 25K deposit £100pcm net of basic rate tax). So that's 725pcm.

Buying interest only costs: Mortgage 225K at 6% interest only £1,125pcm.

Comparing the interest only mortgage with the rent the renter is 400pcm. better off.

Buying with a repayment mortgage costs: Mortgage 225K at 6%, 25 years repayment, £1,449pcm.

That's 324pcm more than the interest only mortgage and is more money the renter can save so the renter will be saving 724pcm.

Those savings can be used to save towards eventually buying a house. That's 8,688 per year. If interest rates go up that tips things more in favour of the renter. So the renter can afford to wait and see what house prices do.

Buying only makes sense to me if the house price is going up and up each year and won't come back down. Obviously it has been going up in recent years although not round here recently, but buying with the expectation of it continuing I am happy to wait and see what happens

PS. There's a mortgage calculator here: http://www.fool.co.uk/mortgages/CalculatorRepay.aspx

keeperbear

franklee wrote: »

If interest rates go up that tips things more in favour of the renter. So the renter can afford to wait and see what house prices do.

Your calculations implicitly assume that rental costs will not increase yearly. If interest rates go up to curb inflation, your landlord will want to increase your rental costs.

franklee

keeperbear wrote: »

Your calculations implicitly assume that rental costs will not increase yearly. If interest rates go up to curb inflation, your landlord will want to increase your rental costs.

I'm assuming that short term rents will stay pretty much the same (just as they have been doing in recent years).

Yes the landlord may want to increase the rent to cover interest rate rises but will the rental market stand it? I think not.

1. There is an oversupply of properties to rent.

2. Landlords who purchased years ago and therefore have smaller mortgages (and smaller increased costs due to interest rate rises) will be able to undercut the newer landlords to attract and keep good tenants. This will help keep market rents down.

3. Rents are set by what tenants can afford and if they are not getting much in the way of pay rises then they won't be able or willing to pay more rent. This is especially relevant for landlords that use companies like Letsure for tenant referencing and rent insurance. The rent should be less than 40% of the tenant's gross annual income to pass on affordability.

http://forums.moneysavingexpert.com/showthread.html?p=5724216&highlight=insurance#post5724216

4. Even if the tenant accepts a rent rise they may not be able to keep up with the payments with all the other costs that are rising like council tax, fuel bills etc. So they will either move somewhere cheaper or fall into rent arrears meaning the landlord will have a loss of rent while he changes tenants.

5. Newer landlords needing the rent to pay the mortgage will be wary of losing good tenants by asking for a rent increase. If they have even a few months without a tenant they may at worse case be looking at repossession.

I will certainly be arguing against any proposed rent increase. Last time I did this and got a small decrease to compensate for the hassle as I had found somewhere else (but not put any money down).

Melissa177

franklee wrote: »

This is not the case. The interest is just allowing you to borrow the money, it does not go towards paying off the loan. I was careful to say the interest on the mortgage payments is more than the rent.

If you have a repayment mortgage (rather than interest only) then you are paying off the loan but that costs even more per month. The renter can easily save this money and get a return on it, easily 6% in just a deposit account.



Who said anything about renting for that long? I'm going to rent until either house prices go down or I'm convinced that won't happen. Meanwhile for the reasons explained above I'm saving more month by month than I could if I brought.

But I can see you're not convinced, some figures would help. Can you post your sums? How about:

House price 250K.
House buying deposit 25K.
Rent 825pcm.
Interest rate in savings 6%.
Interest rate on mortgage 6%.

Renting costs: 825-100 (interest on 25K deposit £100pcm net of basic rate tax). So that's 725pcm.

Buying interest only costs: Mortgage 225K at 6% interest only £1,125pcm.

Comparing the interest only mortgage with the rent the renter is 400pcm. better off.

Buying with a repayment mortgage costs: Mortgage 225K at 6%, 25 years repayment, £1,449pcm.

That's 324pcm more than the interest only mortgage and is more money the renter can save so the renter will be saving 724pcm.

Those savings can be used to save towards eventually buying a house. That's 8,688 per year. If interest rates go up that tips things more in favour of the renter. So the renter can afford to wait and see what house prices do.

Buying only makes sense to me if the house price is going up and up each year and won't come back down. Obviously it has been going up in recent years although not round here recently, but buying with the expectation of it continuing I am happy to wait and see what happens

PS. There's a mortgage calculator here: http://www.fool.co.uk/mortgages/CalculatorRepay.aspx

I think there is fundamental difference to our assumptions - I think house prices will continue to rise where I am (in Battersea), although I might think differently if I was in Cumbria, say.

In three years, by the time you have saved a deposit for your property, that 250K will be closer to 300K (at around a 6% year increase in the price). That's a problem. Let's say you had an IO mortgage on it, and had bought from the start - you wouldn't have your 24K of savings now, but you would have 50K of equity. If you think, on the other hand, there is going to be a crash, then your strategy makes more sense. We're both gambling on house prices moving one way or the other effectively

I'm also not entirely sure that rents are that low (in London, anyway). I used to rent a house with a friend that was worth about 250K in Docklands. We paid 1200 a month in rent between us. That's not 825pcm. That said, a 250K house in my home village not far from Hull rents for about 550pcm tops - a definite "saving".

Incidentally, my IO strategy is as follows:
- pay my IO mortgage
- put extra money away (the money I would have put into the repayment mortgage) in a HIGHER interest account than I'm paying on the IO mortgage. I was lucky, I got my mortgage before the past three rate hikes. My flat has also gone up by around 40K in price since I bought it in February :eek: (I've put about 5K into it mind).

Melissa177

Incidentally, do you think it's realistic for a renter to save 700pcm per month? I doubt any renter is putting away the difference between their rent and a repayment mortgage, which is why I went with the IO example.

m00m00

keeperbear wrote: »

Your calculations implicitly assume that rental costs will not increase yearly. If interest rates go up to curb inflation, your landlord will want to increase your rental costs.

and you make the assumption that interest rates on mortgages remain constant too.

Melissa177

m00m00 wrote: »

and you make the assumption that interest rates on mortgages remain constant too.

You can make that assumption - because you can fix your interest rate.

It's rarely possible to fix your rent

Orion_3

Melissa177 wrote: »

I'm also not entirely sure that rents are that low (in London, anyway). I used to rent a house with a friend that was worth about 250K in Docklands. We paid 1200 a month in rent between us. That's not 825pcm. That said, a 250K house in my home village not far from Hull rents for.

I rent for £800 a flat in Lewisham that my landlady is advertising for £260,000

Guy_Montag

Round my part of the world I pleased to report, thanks to an oversupply of new builds and a new student hall, rents in my part of the world are dropping.

£650-£700 gets what £800 got you three years ago (that's for new builds). Interestingly there was a lag between the rental cost of new builds dropping and those of estabnlished properties, but now it looks like they are starting to drop too. Of course this is in a small, very studenty town, not London.