Buying a house to save on rent

helen20201

Hi,
I realise everyone's situation is different, and based on their specific finances, but I have what I hope is a more general question about house buying. 
I am considering buying a house. There is a very strong possibiloity that I will need to sell the house in five years' time. People are advising me to not buy, as you really should own a house for longer than five years for it to be a worthwhile investment, and I risk only breaking even if I sell after five years.
However, unless I'm missing something here, surely breaking even would be fine, as I'd also have saved myself 5 years of rent payments? Unless I'm missing something? 
I understand that there are lots of costs, but surely if after everything was accounted for, breaking even is a positive compared to renting?

Comms69

How do you risk breaking even after 5 years? Dont understand what you / they mean?

But housing is a terrible investment. 

hazyjo

You're forgetting mortgage interest, risk of prices dropping, and the cost of moving. My last move cost nearly £20k what with solicitors, stampduty, EA, removals, etc.

Not to mention upkeep. If renting and the boiler breaks or the roof needs fixing or replacing, it won't cost you a penny. Own the house, and it comes out of your pocket.

helen20201

Comms69 said:

How do you risk breaking even after 5 years? Dont understand what you / they mean?

But housing is a terrible investment. 

Thank you.
To clarify - I've been told to not buy a property if I am not going to live in it for a long time, as the longer I own it the more it will potentially grow in value, and the more equity I will build up. I've been told that if I plan to sell after five years, I might only break even and make no profit.
Which I think is fine - even making a small loss after selling would be fine - because I would have had somewhere to live and not have had to pay rent for five years. 

princeofpounds

Yes you are missing something. Plenty actually. 

Probably the quickest way to get this across: A mortgage is basically renting the money to buy a house, instead of renting the house itself.

In the early years of a mortgage, almost all the money you pay will be interest payments, which are as much 'dead money' as rent itself is. 

Over time, the equity in the property builds up as you repay principal, and the speed at which it builds up compounds faster as the balance between interest and principal repayments shifts. 

The other factor that may work in your favour over time is house price inflation. In fact in the 'good' times, this is normally the way that people build up the most equity. We have had an unprecedented 30 year boom in house prices, on and off, but it does not always have to be that way. However the longer you hold a property, the more likely it is that you will come out with positive credit on that score. 

Furthermore, there are additional costs that are often underestimated.

If you have an expensive property, stamp duty can be a big bill, one not worth paying if you are only occupying for a couple of years.

If you have a cheap property, costs like maintenance, selling fees, legal fees, building insurance and so on can actually be a significant cost relative to what an equivalent rental would be, which can almost mean it's not worth paying if you are only occupying for a couple of years. 

You also lose the opportunity to invest the money you put into the purchase deposit and continue building up in the principal repayments over time. OK, interest rates aren't high right now, but at points in history this could have really mattered. 

Generally speaking in the UK, late 20th and 21st century history, buying has been a better deal than renting. There have been a small handful of years where it could have been disastrous though. Pick any e.g. 2 year period and you have no idea whether you will win, break even or lose money. The dice may be weighted in your favour, but you are still rolling them.

Personally I think when you get to 5 years territory, that's a long enough term to consider buying.

RelievedSheff

Buying a house to save money on the rent isn't really the way to look at it. You buy a house to make it your home.

You will not have paid much off the mortgage in 5 years as the payments are largely interest in the early years.

There are a lot of costs associated with buying a house. Don't under estimate how much it costs to buy and sell a property.

I would call a five year plan a long term plan and I would suspect that the property would be worth at least as much as you paid for it if you came to sell it in five years, if not a little bit more, but you wouldn't hope for any great increases in value over that time period. Of course those gains in value, if any, could easily be wiped out with the costs of selling it again. 

And then you have to factor in maintenance costs to keep the property in good condition.

All that said you can't beat the feeling of owning your own home and being able to do as you please with it. We would never go back to renting.

hazyjo

PS after saying what I did, I was just answering your question.

If you asked me if I would buy if only for 5 years, I would say yes, probably.

Once I broke even after around 6 years. Another time, I nearly doubled my money in 3.

It's property - always unpredictable!

In my experience, a hell of a lot changes in 5 years. Too much to make too many plans! You may still be there in 10!

grumiofoundation

princeofpounds said:

In the early years of a mortgage, almost all the money you pay will be interest payments, which are as much 'dead money' as rent itself is. 

This is a big of an exaggeration with interest rates as low as they are. On a 25 year 100k mortgage @ 2% (424 per month) in the first year will pay 2000 in interest (167 per month), 3088 in repayments (257 per month). 

FreeBear

Comms69 said: But housing is a terrible investment. 

Historically, property has (nearly) always been a worthwhile long term investment. One may have to wait 10-15 years to see the value increase by any significant amount, but then, home buying is not about profit. Most people buy a house to call home and not as something to make money on.

grumiofoundation

helen20201 said:

Hi,
I realise everyone's situation is different, and based on their specific finances, but I have what I hope is a more general question about house buying. 
I am considering buying a house. There is a very strong possibiloity that I will need to sell the house in five years' time. People are advising me to not buy, as you really should own a house for longer than five years for it to be a worthwhile investment, and I risk only breaking even if I sell after five years.
However, unless I'm missing something here, surely breaking even would be fine, as I'd also have saved myself 5 years of rent payments? Unless I'm missing something? 
I understand that there are lots of costs, but surely if after everything was accounted for, breaking even is a positive compared to renting?

You will save 5 years of rent payments but (as mentioned above) the interest portion of mortgage repayment is not paying off the mortgage.

So rather than comparing rent as lost money vs mortgage as all profit you need to factor in the interest as a cost to calculate your 'profit' per year. Also factor in interest you would receive on the deposit (despite rates being generally low). 

You then need to consider upfront costs of buying. Fees, stamp duty etc.
If you were to sell property A to move to property B (as opposed to renting then just moving to property B directly) there is also the cost of selling property A  (~1% of selling price). 

(Assuming you are a first time buyer) there are benefits to staying as one. You can save £4000 per year in lifetime ISA which government will top up by £1000 per year (if use on property up to £450000). You can also get first time buyer stamp duty relief of up to £5000 (max. saving if property price greater than £350,000).

So calculation would be  (comparing difference in buying property A then buying to move to property B as opposed to renting and then buying property B directly)

PROFIT/LOSS =  [Price sold for*0.99 - Price paid] + [profit per year x number of years in property] - [upfront costs] - [5000] 

where profit per year = Annual rent - annual mortgage interest  - 1000 (LISA bonus) - interest on deposit would receive in bank 

Have assumed 1% cost for selling. And selling that Property B is a 350000+ property in england. 

You can obviously look at how much you would make if house prices go up but personally I would also recommend doing the calculation assuming the house does not go up in value at all & if you had to sell at a 5% discount & if you had to sell at a 10% discount and see where you come out. 

One thing to consider when calculating the profit the money going repayments are counted as profit - but obviously this money is not accessible - so if your mortgage was more per month than rent although you are 'making money' each month you will have less in your bank account.


There are obviously other things to consider - would you be able to live in a nicer property buy buying not renting (5 years is a long time) e.g. bigger garden, can more easily keep pets etc (Edit:) And whether you will change your lifestyle and end up spending much more on furniture etc and concentrating less on saving because you are now on the housing ladder, which obviously will then cause problems if you want to move to a more expensive house (as some of my friends are now doing...!). 

SpiderLegs

All this scaremongering about maintenance costs. Honestly how many people ever had to have their roof replaced.

maybe cost of having to pay for bits of maintenance outweighs living in a dump where the LL is responsible but doesn’t bother.

maybe the cost of buying once but having a guaranteed home is better than the cost of moving rental every year.

very simply OP, what you do if you know that you’ll be selling up in five years is not buy an old one that is more likely to have higher maintenance costs. It’s not rocket science.