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If renting is dead money what's this
Comments
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What worries me more is that your friend has had a mortgage for 22 years and now has a mortgage for an additional 25 years. All mortgages should be set up to be paid off at the end of their term, so the fact she will have a mortgage for 47 years in total slightly worrying. If she didn't initially get her mortgage at 18, it means her mortgage would continue in to retirement (18 plus 47 years), and if she doesn't have means to pay it off, she could be in trouble.
To give you an idea of renting vs buying on that particular house:
Buying
First off, the best deal from Woolwich for a 10 year fix is currently 5.59% fixed, not a 4.49% fixed (as far as I'm aware). Also, the illustration your friend will have been given will assume that after 10 years, she stays with Woolwich and reverts on to their standard variable rate (which will have changed by that time anyway) so that figure is completely irrelevant. If we assume nothing changes and she does continue with Woolwich after that time, the figures are below. Finally, if she did get this good rate, she would have had to have a 60% LTV, which means her property is currently worth at least £123,333.
Property Value = 123,333
Total Mortgage = 74,000
Total to Pay over 25 years = 137,000
Total interest paid = 63,000
Looking at historical house prices, if we conservatively say a growth of 150% over 25 years (much less than the previous 25 years) then when the mortgage is paid off, the property will be worth £308,000.
Therefore £308,000 - £63,000 = £245,000 in profit (I have ignored what she may have paid so far for the mortgage, so let's just guess at about 90k) so total profit = £155,000 over 25 years.
Renting
Assuming that the property is worth £123,333, I will also assume it is a 2 bedroom house. The average rent for a 2 bedroom house is currently about £575 per month for England (based on the RRPI).
Therefore;
25 (years) x 12 (months) = 300. 300 x £575 = £172,500 spent in rent.
Total to pay on mortgage = £137,000 + £90,000 = £227000.
Total money left to invest over 25 years = 227000-172500 = £54500 = £2180 to invest per year.
Assuming £2180 saved per year at a compound rate of 6% per year and not being taxed (I'm being generous!) the total amount in the savings account would be £125,889.28.
So you've spent 172500 and you've saved 125,889 so you lose £46,611 in total.
Summary
Spending that money on a house = + £155,000
Spending that money on renting = - £46,611
I have made a huge number of assumptions, but assuming that property prices increase in the long term, it makes absolutely no sense to rent.
Phew!!
I am a Mortgage Adviser. You should note that this site doesn't check my status as a Mortgage Adviser, so you need to take my word for it. This signature is here as I follow MSE's Mortgage Adviser Code of Conduct. Any posts on here are for information and discussion purposes only and shouldn't be seen as financial advice.0 -
Long term buying a house is a better solution, its your own, you own it at the end, nice asset ohave when you retire.
However, the comparison vs renting and buying in shorter period of times... based on my calcs (see house prices subforum would loose around 300 pound a year.
I pay 495 rent.. mortgage would be 650-700 quid a month on a 100k property. Comparing a 5.5% interest deal with a 5% savings rate account I'd loose 600 quid over the 2 year initial period.
This is if house prices stayed the same... as I'd pay off 600 quid more capital than what the interest would have earned me.
Short term saving for a deposit while houses are the same price is a good idea.... While houses are dropping its the best idea :P.
Waiting 2 years... renting is not dead money its the wisest thing you can do at this time... everybody is starting to realise this especially the beloved FTBers.. who have took the power back... by not entering the chains.
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My friend got a 10 year fixed rate from the woolwich today i think it was 4.49%.
£74000
total payable £137000
So your almost paying for the house twice it says that for every pound you pay they take an extra 83p.
considering shes had a mortgage for 22 years and still has another 25 to go how much interest is it long term.
As has been said, every single penny you ''waste'' in mortgage interest you will get back and more at the end of the term through property growth. Mortgage interest is not dead, rent is however.
A £125,000 house may well cost you £250,000 in real terms but when the house is worth £500,000 at the end of 25 yrs, that £500,000 is yours to do as you please.
Sell up and buy a caravan and profit the remainder or plough that money back into further properties. Upto you, but still that £500k is there and would not have been if you had been renting.
In some circumstances where rent would cost say £750, but the mortgage equivelant may cost you £1500 then it does make sense to rent short term as you can invest the remainder £750 and make £££ that way.
Still, mortgage interest is definitely not wasted as many people think as you'll get it all back in the LONG TERM.0 -
youngmoney wrote: »
Buying
First off, the best deal from Woolwich for a 10 year fix is currently 5.59% fixed, not a 4.49% fixed (as far as I'm aware). Also, the illustration your friend will have been given will assume that after 10 years, she stays with Woolwich and reverts on to their standard variable rate (which will have changed by that time anyway) so that figure is completely irrelevant. If we assume nothing changes and she does continue with Woolwich after that time, the figures are below. Finally, if she did get this good rate, she would have had to have a 60% LTV, which means her property is currently worth at least £123,333.
Property Value = 123,333
Total Mortgage = 74,000
Total to Pay over 25 years = 137,000
Total interest paid = 63,000
Looking at historical house prices, if we conservatively say a growth of 150% over 25 years (much less than the previous 25 years) then when the mortgage is paid off, the property will be worth £308,000.
Therefore £308,000 - £63,000 = £245,000 in profit (I have ignored what she may have paid so far for the mortgage, so let's just guess at about 90k) so total profit = £155,000 over 25 years.
You need to factor in all repair costs if you buy a property, If you rent all repairs are included in the rental.
Moneysaver0 -
In the current climate Renting IS NOT dead money lol, far from it. The FTBers renting will be laughing all the way to the bank as their first homes get reduced by ncie 30-40k drops... yuumy yummy for my tummy.
Thats the funny thing about systems... this is like a control system... The response to an overpriced market will be an overcorrected response... see the last crash... the prices went well below the 'trend' they went below what the average growth was and didnt recover for a long time.
We are facing tought time ahead, recession potentially. I just hope i can survive it to a nice FTB 3 bedroom house instead of a 2 bedroom shithole :P. Muahah0 -
Blimey, who do i need to kill to get a 4.49% rate for 10 years fixed? Seriously, where was this offered?
A house is an appreciating asset - it's value will go up in time.
Personally I've got an interest only mortgage - i appreciate that i'm only paying interest. It's cheaper than renting and i will eventually change to repayments when i can afford to.0 -
If renting is not dead money, can someone give me the average return on say £600 / month invested in rent?
Ta.0 -
Its funny nobody is acknowledging that renting isnt dead money in the current climate..
Yes lets get a mortgage for 100k when you can get a mortgage for 60k in 2 years time... oO0 -
Renting maybe dead money, but I live at home with my parents and I'm 24. I need to move out and get my own space and for that reason alone it is priceless. I moved away to go to uni and then moved back after uni. I really should never have done that as I am 'stuck'.
Granted I have a nice deposit for a house making interest at the bank and have the capital available for matched betting which I wouldn't otherwise. But still, it is worth the cost of renting & bills to get my own life."I'm not from around here, I have my own customs"
For confirmation: No, I'm not a 40 year old woman, I'm a 26 year old bloke!0 -
moneysaver wrote: »You need to factor in all repair costs if you buy a property, If you rent all repairs are included in the rental.
Moneysaver
Very true, chances are though that they won't come to about £200,000 you would hope!!.
I am a Mortgage Adviser. You should note that this site doesn't check my status as a Mortgage Adviser, so you need to take my word for it. This signature is here as I follow MSE's Mortgage Adviser Code of Conduct. Any posts on here are for information and discussion purposes only and shouldn't be seen as financial advice.0
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