Renting Vs buying calcs, can you help ?

mubeye

HAMISH_MCTAVISH wrote: »

As far as I know there are no locked in 25 year fixed rates available any more - the last one I heard of was Kent Reliance and that stopped a few years ago?

The way 25 year terms work is a fix of XX years and the balance of years on SVR. You know what today's SVR rate is but not what it will be in XX years.

Ok I see. If nothing else, this was a good education.

Cornucopia

mubeye wrote: »

Ive tried to factor in inflation as best I can but very open to suggestions for better ways to do it.

The easiest way to consider it is to take all your figures at today's values, and apply inflation (only) where it affects the future cost of something. In the most basic analysis, it applies to rent payments and not to mortgage payments or mortgage debt.

The other thing to be wary of is that this is not a zero-sum game. That is: the opportunity to buy a property is generally most attractive between the ages of 25 and 40. Missing that window can have significant consequences.


To go off at a tangent, I find it slightly strange that MSE (and the wider population) has camps for pro-Home renting and anti-Car leasing, when a traditional view of economics would probably suggest the opposite view. You buy a home because it is an appreciating asset, and you lease a car because it is a depreciating asset.

mubeye

Cornucopia wrote: »

The easiest way to consider it is to take all your figures at today's values, and apply inflation (only) where it applies. In the most basic analysis, it applies to rent payments and not to mortgage payments or mortgage debt.

I havn't applied any inflation to mortgage debt. I've just added up the total cost of the mortgage based on a single average interest rate over the term. then added on deposit and some expenses, and divided the total to get an average constant payment each month.

No exactly sophisticated but thought it was a basic way to start.

rent inflation is HPI - 3%. Then totalled up end of term in same fashion of house costs, and divded to get an average constant payment each month for comparison purposes.

upkeep inflation is a proportion of inflated house price. I thought about using average retail inflation instead?

mubeye

Cornucopia wrote: »

To go off at a tangent, I find it slightly strange that MSE (and the wider population) has camps for pro-Home renting and anti-Car leasing, when a traditional view of economics would probably suggest the opposite view. You buy a home because it is an appreciating asset, and you lease a car because it is a depreciating asset.

Yes I think it has something to do with an irrational fear of debt. Cars are more easily bought outright.

But I'm not a bear. I think (as calc shows) HPI will be positive over the long term.

I just have nothing better to do today to be honest! And it has already been educational. No better way to understand something than to try to 'teach' it. And for me trying to explain home ownership via this calc has been eye opening.

getmore4less

mubeye wrote: »

I was hoping to make a half-decent rent vs buy calculator that would work for various scenarios, As none online as far as I can tell that do the 'monthly reinvestment of average balance' stuff.

But perhaps I'm finding out why none already exist

the problem is for long term models small changes make a big difference to the numbers and we humans are not that good at visualizing future value.

When modelling retirement I took the simple approach work in todays numbers and assume the inflation sorts itself out.

eg. Investments grow at 4% over inflation
If I want £20k income in todays money I need a pot of £500k
To get that pot in 20 years I need to save at a rate of £1400pm or start with a pot of £225k now.

If you change that to 3.5% £1,475, 4.5% £1330



the assumption is income grows to cover the inflationary element once saved/invested it looks after itself

mubeye

ilovehouses wrote: »

Only if we're talking about real (inflation adjusted) numbers. This becomes more important as you model further ahead - no reason why your model has to stop at 25 years. What happens after 25 years when the mortgage is paid but the renter still has to pay rent.

In 25 years, if family history is anything to go by, I'll probably have had a heart attack .

If not, the rent should be covered by investment returns presuming returns > inflation + rent.

A big if of course.

mubeye

getmore4less wrote: »

the problem is for long term models small changes make a big difference to the numbers and we humans are not that good at visualizing future value.

When modelling retirement I took the simple approach work in todays numbers and assume the inflation sorts itself out.

eg. Investments grow at 4% over inflation
If I want £20k income in todays money I need a pot of £500k
To get that pot in 20 years I need to save at a rate of £1400pm or start with a pot of £225k now.

If you change that to 3.5% £1,475, 4.5% £1330

the assumption is income grows to cover the inflationary element once saved/invested it looks after itself

Or you could start with 125, and invest 350 a month to get to 500k at 4%

This monthly top up is the key to this calc really. But I have special interest in this concept due to living in an ultra low yeild postcode so I am not surprised most buyers don't even consider this as a potential issue.

To revisit your earlier point, maybe it is not enough to directly compare yeild to mortgage rate, as mortgage rate doesn't include all the extra costs such as upkeep etc that could be reinvested if balance allows. So it is possible yield could > motgage rate, but still allow a renter a positive monthly balance to invest.

However learning that my mortgage rate forecast is probably too high might make all this moot anyway

Cornucopia

ilovehouses wrote: »

You end up comparing apples with oranges after a few years because although you could calculate a future cost it's the future value we're really bothered about.

Isn't it both?

The most basic analysis would be to take inflation out of it altogether and model assumptions from there. i.e. what do we expect rent or HPI to do after inflation.

That's what I'm suggesting.

mubeye

Hmm yeah maybe this calc is not a good way to make a decision. After all, over 25 years even tiny adjustments compound so massively that it is hard to take the results seriously.

Cornucopia

ilovehouses wrote: »

I thought you were suggesting inflation should be applied to rent but not mortgage or debt. If you were talking about rent increases above/ below general inflation then I'd agree.

Yes, I was. If we were all accountants or economists there'd probably be some useful jargon to express this, but the essence of it is that if I borrow £200k today to buy a house then assuming I don't move, I'll never owe (much) more than that £200k at any stage in the future - in fact my repayments will reduce it. The £200k I borrow and repay is, in fact, likely to result in a property at the end of 25 years worth maybe £300k, depending on the effects of HPI. My payments might be £900pm, but that would include capital and interest, and unless rates changed, it would never increase (much).

By comparison, if I rent a home today at £1000pm, the likelihood is of progressive rent rises with inflation, maybe adding £100 to the rent every few years.

The cost of rent increases with inflation in a way that neither mortgage payments or mortgage debt do. (Mortgage payments can increase with mortgage rates, but that's a different thing).