If renting is dead money what's this

neas

Riq you could always house share... in plymouth i would pay 275 a month all in (Bills/rent) wasnt that much more than board would be... and you live with other professionals.. kinda like student house but less partying and more tv watching :P. helped me save deposit and have my own life.

cupid_s

youngmoney wrote: »

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 may be missing something here (it happens quite often), but you don't seem to be taking into account lost interest on the almost 50k that would be tied up in the house.

If she was renting a property at £575 a month, she would be getting interest on almost 50k, and then interest on the interest every year after that so after 25 years that 50k is approximately 130k. Assuming interest is 4% throughout (and you could probably get much higher than that even allowing for tax to be paid on the interest).

minimike2

Assuming that the £50k came from a cash deposit and not equity....

I suspect its the latter.

Markyt

Riq wrote: »

Renting maybe dead money, but I live at home with my parents and I'm 24.

I moved out at 28. Average age for a first time buyer is 32. Chill, you're ahead of the curve :-)

mitchaa

cupid_s wrote: »

I may be missing something here (it happens quite often), but you don't seem to be taking into account lost interest on the almost 50k that would be tied up in the house.

If she was renting a property at £575 a month, she would be getting interest on almost 50k, and then interest on the interest every year after that so after 25 years that 50k is approximately 130k. Assuming interest is 4% throughout (and you could probably get much higher than that even allowing for tax to be paid on the interest).

It works both ways

Do you think £575 rent in 2008 will still be £575 rent in 2033 25yrs later?

Or do you perhaps think it will grow say 5% per year

bonnie_2

My rent is 91.80 a week for a house conversion in a victorian mansion. It is a 3 bed house. I do not have to pay insurances or repairs. Rent from an HA.

Her house is ex council valued at £189 on an estate well surely that can't be a fair price.
She sold her other house and got a mortgage for the difference.

Will she not end up in negative equity. She's already put about £20,000 debts on the mortgage and is in a debt management plan for another £25000

Riq

Markyt wrote: »

I moved out at 28. Average age for a first time buyer is 32. Chill, you're ahead of the curve :-)

They obviously never had my parents!!! lol

cupid_s

mitchaa wrote: »

It works both ways

Do you think £575 rent in 2008 will still be £575 rent in 2033 25yrs later?

Or do you perhaps think it will grow say 5% per year

See I said I must be missing something!
Thanks

youngmoney_2

mitchaa wrote: »

It works both ways

Do you think £575 rent in 2008 will still be £575 rent in 2033 25yrs later?

Or do you perhaps think it will grow say 5% per year

Presactly. I did say I made a huge number of assumptions. The two cancelling each other out was one. Just forgot to mention it!! good spot cupid!

poppy10_2

youngmoney wrote: »

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).

This is so disingenuous. :rolleyes: