To buy now or not? A reminder of how to compare cost of buying vs renting using a spreadsheet

SouthLondonUser

I see lots of questions on whether to buy now or not, but not many answers suggesting one should run some numbers to try to understand what conditions would make renting cheaper than buying or viceversa.

Simplifying:

• The cost of buying will be: mortgage interest + upfront costs +- house appreciation/depreciation
  
• The cost of renting will be: the rent itself - the interest you gain on the deposit you would have used to buy a house

I do not have the time to put together and share a full spreadsheet, but the following should work on any spreadsheet, including google sheets, which is free. Note that it is of course a simplification, there are many unknowns etc, but at least it's a starting point to try to quantify things. Saying "after 5 years I'll be fine even if house prices go down" doesn't mean anything unless you have actually tried to run some numbers - in some cases that would be true, in other cases it would be very false. Do you know where you stand?
Note that I am not saying buy or don't buy, I am simply saying people should run some numbers to understand what their situation really is like. Now for an example:

• say you are buying a £300k property, have a 10% deposit, and a 25-year mortgage at 2.2% fixed for 5 years
• The stamp duty on £300k is zero
• Say you pay £20k among solicitors, removal company and some furniture
• the interest you will pay over those 5 years will be =-CUMIPMT(2.2%/12,25*12,270000,1,60,0)  = 27,400 where
• 2.2% needs to be divided by 12 because it is an annual rate but the instalments are monthly
• 25*12 is the number of months the mortgage lasts
• 270000 is the amount you are borrowing
• 1 and 60 are the months you are considering - you are calculating the interest for the first 5 years, ie between months 1 and 60
• 0 means you pay at the end of each period 
• So if house prices stay flat after 5 years, then the cost of buying will have been £27,400 + £20,000 = £47,400
• If you pay £800 per month in rent, and can invest those £30k at 1% net of tax, then the cost of renting will be £800*60 - 30,000*1.01^5 + 30,000 = £46,470, ie buying and renting cost roughly the same
• If, after 5 years, house prices are 10% down, then buying a house will have cost you £30k more than renting. If they are 10% up, buying will have cost you £30k less than renting
• Whether you put those £30k in the bank or as deposit for a house, in theory you still have £30k of wealth, but, in practice, the money in the bank is liquid and accessible, the equity in a house is much harder to access - something to bear in mind if you end up[ struggling financially and needing those £30k to pay for bills etc
• If they are 10% down and you only had a 10% deposit to begin with, then it means that, in theory, you won't be able to remortgage and you will be stuck on the higher SVR rate of your lender. In practice, many banks often let existing customers change to a new mortgage product without re-underwriting them, as long as they are current on their payments. Will this continue? Will this change if the house market is 10% down in 5 years? Your guess is as good as mine.

AdrianIsabel

I made a similar calculation and decided to go with a 89% LTV mortgage, instead of 84% or lower; but I can only go ahead with this because some lenders still lend with a higher income rate (>4.5). If lenders make a move and decide to reduce this, then I'll need to go with a 84% LTV or lower and my savings will be nearly nil. IMHO I don't think, taking into account the numbers above and my own calculations, that it is now a good time to buy and leave your accounts empty. It could lead to an unmanageable situations.

Note: I'm currently renting and started a house buying process some days ago but now everything is a bit on hold or slow. Got a AIP but lender now taken out products and currently waiting to hear from another lender. If this one delay or stop the application then I'll not go crazy and stop the process telling to the seller about the situation but ensuring them that I'm still interested in the property.

PasturesNew

I am a cash buyer. I have £X. Every month I pay rent that £X reduces by the rent amount..... as I have £0 income. 

AdrianC

Now remember that your rent includes buildings insurance, repairs and maintenance. If it's a leasehold property, then it includes ground rent and service charges. Then there's the flexibility of renting compared to owning.

Thrugelmir

Maintenance costs on a property should not be underestimated in the longer term. Putting a small amount aside every month to build a reserve to call on. Will avoid the neccessity to borrow on credit cards or take out a loan. 

MobileSaver

SouthLondonUser said:

Note that I am not saying buy or don't buy, I am simply saying people should run some numbers to understand what their situation really is like.

The flawed assumption being that financials are the only consideration in buying a home...

AdrianC said:

Then there's the flexibility of renting compared to owning.

Which has to be balanced against the security of knowing you will still be in the same home in two/five/ten years time if you own, all other things being equal.

dimbo61

To Rent or Buy that is the question !
Some people will always rent and be very happy to rent ( In many countries this is the case)
While other people would never dream of renting and live with parents until they can afford to buy a Home.
Buying at the moment could be a BIG problem 

SouthLondonUser

PasturesNew said:

I am a cash buyer. I have £X. Every month I pay rent that £X reduces by the rent amount..... as I have £0 income. 

That's only part of the story. You cannot approach the problem like this. You need to take into account the cost of buying vs renting, as I tried to highlight in what is of course a very simplified example. As I tried to explain, there can be many situations where the housing market suffers and you will be worse off if you buy. To be clear, I am not saying don't buy, I am saying: try to look at the whole picture, try to run some numbers, don't be ideological.

Not to mention: how much savings will you have left if you buy now? If you lose your job (and surely you will agree that the virus increases the risk of losing one's job, if not for you certainly for many people), how long will the savings last you if you haven't used them for a house deposit?

SouthLondonUser

MobileSaver said:

SouthLondonUser said:

Note that I am not saying buy or don't buy, I am simply saying people should run some numbers to understand what their situation really is like.

The flawed assumption being that financials are the only consideration in buying a home...

AdrianC said:

Then there's the flexibility of renting compared to owning.

Which has to be balanced against the security of knowing you will still be in the same home in two/five/ten years time if you own, all other things being equal.

Nope, I am not making any "flawed assumptions". I never said nor implied that those calculations are the only factors that should drive a decision; if I gave this impression, I certainly didn't mean it. It goes without saying that there are a gazillion other non-financial considerations that also play a role. I commented on the financial ones because they seem to be discussed and quantified much less.

For me (but it's very subjective), a big factor behind buying was having the security that we wouldn't be kicked out at the whims of a landlord (which is OK when you're in your 20s, but can be a huge hassle when you have a family, kids going to school etc), especially because English law is so much more pro-landlord than in many other countries and longer-term tenancies are almost non-existent.

That you will still be in the same house all other things being equal is also a big assumption, to be honest. In a unique historical moment like this, I'd be terrified of what can happen to house prices. If I had a 40% deposit, a safe job, and decent savings even after buying I wouldn't be too worried, but in any other scenario yes, big time. If you buy with a 10% deposit, it is not inconceivable that house prices will be 10% down in 3-5 years. What then? Will you be able to remortgage? Will you be forced to switch to a punitively high SVR rate? To be clear, I am not saying this is bound to happen, nor am I saying I can quantify the likelihood - no one can, of course. I am just saying I'd be worried. But that's me - it's a big world out there, and horses for courses, as they say.

AdrianC

MobileSaver said:

AdrianC said:

Then there's the flexibility of renting compared to owning.

Which has to be balanced against the security of knowing you will still be in the same home in two/five/ten years time if you own, all other things being equal.

Which could well become "Even if you don't want to be."

Life changes. People's relationships change. People's employment changes.

After 2008, there was a lot of people who wished they weren't tied to a property in heavy negative equity, often because their employment situation had changed massively. For many parts of the country, they were only just getting to a point where that was changing. It wouldn't surprise me at all if we were starting another cycle like that.

MobileSaver

SouthLondonUser said:

That you will still be in the same house all other things being equal is also a big assumption, to be honest.

No it's not, that's what "all other things being equal" means. Typically if you cannot afford to pay a mortgage then you cannot afford to pay rent so you'd be kicked out of your home either way.

As you yourself admitted, one of the reasons people want to own and not buy is the security of being in control of their own destiny regarding where they live rather than at the whim of a landlord.

SouthLondonUser said:

I'd be terrified of what can happen to house prices. ... in 3-5 years. What then? Will you be able to remortgage? Will you be forced to switch to a punitively high SVR rate?

The vast majority of purchasers won't care much about what happens to house prices in the future - they'll just enjoy living in their own home; for anyone that is "terrified" like you they can easily fix now at as little as 3.1% for 15 years! I do not think even the most rabid HPCers think house prices will be less than they are now in fifteen years time.

You seem to be making a big issue of scaremongering about finance problems for which there are already solutions while at the same time admitting you yourself bought a home mainly for non-financial reasons; seems like a mixed message to me.