Renting Vs buying calcs, can you help ?

mubeye

I' trying to figure out the average monthly cost of buying over a 25 year period, using historical averages.

I AGREE BUYING IS BETTER. But just wary of underestimating costs so want to refine my model.

Specifically

- I'm wondering if it is fair to use long term average mortgage rates or is it possible to maintain teaser rates?
- Is 5% average mortgage rate over 25 years very pessimistic given ZIRP policies?
- Is 0.5% of adjusted house price fair for upkeep?

If you add up all costs of ownership, and average them, the monthly cost of ownership rises quite a bit, from 1600 to 2400 in the below example. Is this bad method?

Here are my workings: http://!!!!!!/2zEbCAj

Property Price: 400000
period in years: 25
average house price inflation per year: 6%
average mortgage rate over 25 year term: 5%
deposit: 125000

Legal costs % 0.5
other costs % 0.5
annual upkeep as % of inflated house price 0.5%

total borrowed 275000
mortgage payment 1,608

*Total Costs*

total cost of mortgage 482287
stamp duty 10000
legal costs 2000
other costs 2000
total upkeep over whole term 109729
deposit 125000

total cost of buying 731016
average monthly 2437.

Here are my workings: http://!!!!!!/2zEbCAj

HAMISH_MCTAVISH

Several things here....

- Mortgage interest cost over term is highly unlikely to be as high as 5%, you can fix out to 10 years today for 2.4% and overpay the balance as if it were 5% thereby reducing term and total cost of finance/purchase. In your case that's about £450 a month in overpayments....

- To put that level of overpayment in perspective by year 10 you'd have cleared an additional 60K from the debt, which you're then not paying interest on for the remainder of term, and that's a chunky amount of savings off the total purchase cost.

- 1% for maintenance is almost certainly too high unless you're buying a wreck and rebuilding it! I'm now in year 10 of ownership on the current house and have spent less than 0.35% a year on average. That includes a new boiler, some roof works, and optional decorative and landscape upgrades.

- Your rental yield looks unrealistically low at sub 3%

- Investment returns look unrealistically high at just under 8% compounded

- Your time frame for comparison is too short - a mortgage is 25 years or less, rent costs are for life...

- I don't see a cost of moving under the rent costs. The average renter moves every 2 years or so. The cost for that when you're young and carefree is peanuts. The cost in time, money and disruption when you're older, with kids and their friendship circles, more possessions, and school catchments to worry about, is a lot higher...

As always with these things nobody knows what the future will bring.

But there's a lot of folks elsewhere on the web who trotted out the same spreadsheets 10 years ago and not buying has since cost them a fortune...

mubeye

All good points, thanks. I've adjusted the defaults based on those suggestions.

Though I think rental yield was already 4% (my area), I think the 3% you saw was annual rental inflation. which I saw a figure as 3% but no idea what future projections for this are.



Investment returns based on 50 year average rate, but I've knocked it down a bit .

chucknorris

HAMISH_MCTAVISH wrote: »

I'm now in year 10 of ownership on the current house and have spent less than 0.35% a year on average. T

That I believe highlights the most significant error that the some housing bears make, they tend to look at year 1, when they should be looking far into the future.

mubeye

I've knocked upkeep down to 0.5% (it should update live)

Not sure I get the point about year 1. Do you mean upkeep should always be a percentage of original purchase price not the inflated price?

I'm no bear, I think/have conceded that all assets will grow over long term. But just trying to get a handle on likely costs.

getmore4less

Like for Like you start with renting the money(interest only) not repayment

I think the key is rent will tend to rise with inflation/wages/HPI

The interest cost are on a fixed amount(not escalating with HPI) that you can reduce by overpaying(actually investing in equity) to zero if necessary.

Buying does have overheads but then renting can as well

Short term there can be a case for renting being cheaper, stagnant/high market with rental yield on the low side.

long term buying always wins,

once in the costs of switching out and back are high so risky to play the market.


Typically gross rental yields have always been higher than mortgage rates so even before the HPI factor you have your margin for maintenance when buying.

in simple terms if the only change is house price doubles typical rent will double while the mortgage interest only stays the same.

mubeye

yes I agree buying is better, not really debating any of that stuff or trying to time markets, I just want to get the cost model accurate as possible vs what HSBC mortgage guy tells me...

Rent inflation is already included as 3% in the calc, but open to new suggestions on this

Ive added a rental overhead currently set to 0.5 months a year, currently not inflated, but will get round to that...

What would be people's predictions for the average mortgage rate, without overpayments next 25 years?

I'm happy with the 4% rental yield, though I understand this is controversial

Prothet_of_Doom

In 19 years I have spent MORE on repairs, and decoration and improvements than the house cost in the first place.

If I take off the cost of the Loft conversion, I have spent 2/3rd what it cost us to buy.

If I list what needs doing right now, I think I need about £4K and 4 weeks to make it 'right'

If you are asking about mortgages, in the last 30 years (and 3 houses) I have paid as High as 15.5% and as low as 4.6% (although that was on a 10 year fixed rate when I could have got 2.5% on a 3 year fixed rate)

I also own a rental property which is worth about £140K which I have budgeted £1000 a year on repairs.

HAMISH_MCTAVISH

mubeye wrote: »

yes I agree buying is better, I'm just trying to predict the actual monthly costs vs what HSBC mortgage guy tells me...

Fair enough.

Rent inflation is 3% in the calc, but open to new suggestions on this

Probably about right.

Ive added a rental overhead currently set to 0.5 months a year

Also fair enough.

What would be people's predictions for the average mortgage rate, without overpayments next 25 years?

25 years is too far out to predict, but as rates today can be fixed for so long at such a low level, the average mortgage rate over a 25 year term will almost certainly skew downwards from historical averages.

I reckon it's unlikely we'll see base rates over 2.0% in the next 10 years so a tracker wouldn't worry me, but as you can fix for 10 years at 2.4% today, that'd be a pretty tempting option as well.

I'm happy with the 4% rental yield, though I understand this is controversial

Fair enough - large house, rural area up north, it's possible I guess.

Most places would be closer to 6%.

getmore4less

mubeye wrote: »

yes I agree buying is better, I'm just trying to predict the actual monthly costs vs what HSBC mortgage guy tells me...

Rent inflation is 3% in the calc, but open to new suggestions on this

Ive added a rental overhead currently set to 0.5 months a year

Not trying to time the market Just trying to estimate costs. I'm in process of buying now.

What would be people's predictions for the average mortgage rate, without overpayments next 25 years?

I'm happy with the 4% rental yield, though I understand this is controversial

traditionally rental yield would be 10% it is only low interest rates that make 5% a sensible low entry point.

I added to my previous post.

typically gross rental yields have always been higher than the interest rates(except for the short periods when interest rates peaked)

You have rental yield lower than interest rate

I would put at least a 2.5% margin between average interest rate and gross yields.

mubeye

I'v found it hard to get historical data on average UK rental yields. Makes sense there were higher in past with higher rates, sure.

But if anyone can link to any formal data from (vagely) official sources I'd be very grateful. (ie not Zoopla)

Especially going back more than 15 years, i've found estimating the historical average to be tricky.

Yeild varies with region and house type massively, but averages would definitely help me adjust my model.

+2.5% avg rate vs yield seems a bit high for my area. ( house is rural, very north)