The rent or buy decision - appraisal

thepelican

EDIT: I realise now that some the comments this post and my other posts below are incorrect / inaccurate. Please disregard my posts in this thread!

[Post removed]

neas

I studied maths and am a systems engineers so use stats and maths daily but i'm not sure where you've picked the calculations from?

Surely isnt this a gross over simplification. Also I'm not sure what the comparison is providing?

For example:


Rate of return = Savings rate** – Gross rental yield

Is gross rental yield a 'rate' or is it a value... otherwise by my first view understanding your taking a percentage (rate) and removing a value from it.. which makes no sense whatsoever... units have to be same.

Just confused by post :P can you explain more...

[edit] : I believe you are comparing whether to rent or buy comparing similar mortgage rates and hence costs correct?, hence the mortgage repayments don't factor into it.

To work out the overall 'investment return' you'd need to factor in this though. Alot of people believe buying a property will fuel their pension but the actual return after paying a bank 7% interest is less than a pension could pay (at least thats what i heard on tv)

neas

I'm still not sure what this proves... Comparing whether to live in a property vs rent one provides statistics (if done correctly) but... where are you going to live? Its a mute discussion.. as you'd have to pay rent on someone elses property... if you didn't live in any property.

Is this

1. Buying vs renting a house (your primary residence)
2. Living in a House you own vs Renting out the same house to someone else

If its 1 then Mortgage rates do apply... as paying 6% interest to the bank equates to a large chunk of your mortgage repayments. For example I pay 495 rent at the moment I'f i moved to a 2 bedroom house I'd pay 600 pound interest back and about 50-100 pound repayment. I'm paying 100 pound a month more to the bank... while the gain of the house is negative. Its a no brainer.

If houses are losing 20 quid a day say... then over 1 month I'd save 600 pound.... which more than covers the expense of renting..

silvercar

How about thinking of houses as homes?

The rent or buy decision - appraisal

Rent

positive

Fixed monthly outgoings.

No maintenance costs.

Ability to move at short notice.

negative

Restrictions on decor / pets/ residents/ pictures etc

landlord / letting agent to contend with.

Forced to move with little notice.

owning

positives

do what you like in your own home.

choice of decor furnishings

no risk of moving hassle every 6 months.

negatives

maintenance costs

mortgage rates

potential difficulty in selling.

neas

I just figured spending all the effort creating formulas and calculations... when they are not requird.

At the moment houses will be a bad option for 4-8 years to come. Investment wise. If your seekinig it as a home then obviously its different.

My point:

1. Buying vs renting a house (your primary residence)
2. Living in a House you own vs Renting out the same house to someone else

1. Buying a House to LIVE int... or Renting a House to Live in (no Mortgage at all just paying a fixed amount per month)

2. Buying a House to LIVE in... versus renting out the SAME house o someone (a Comparison of the gain of just sitting inside the house vs renting the house as well).

If its 1 then you are comparing a Mortgage rate of 6% with monthly outgoings of 600 pound just for the interest with a Mortgage rate of 0% with monthly outgoings of 500 pound to Rent. can you adequately add the increased variability of the mortgage rate?

A mortgage is your 'rent' payed to the bank. Its a very important factor in scenario one... because short term and thats what most of us are looking at here... Renting in a declining market is a no brainer because the loses on a house will be greater than the money you spend per month on renting. Hence you live freeer, less stressed and able to save more of a deposit if there is a diff between the mortgage and rent (in my case there is).

This is why people have sold their houses to rent...

Just like to add that over the course of 5 years of a mortgage you pay off very little equity... i most deals... as its an exponentially decreasing realationship as you pay a fixed amount per month.

neas

thepelican wrote: »

I think that as house prices are falling, the capital growth value is likely to be negative; but, I think that the interest payments should be considered separately and are only relevant to the question of affordability / attitude towards gearing etc.

Please explain why a 6% interest rate on 150k would not be relevant? oO

You do realise that when you buy a house 90-95% of the monthly repayment is pure interest... something if you were renting goes to 0% :P.

neas

it truly depends on how much % capital you put down originally.

If you only put down 5% deposit i.e 5k on a 100k house then your calculation while useful wouldn't need to be complicated because 95% of the value would be a loan.

I'm still not sure i follow your logic though... in the compare to rent scenario.

I would come up with this formula for myself:

Mortgage Interest rate (month)= 0.54% (equates to approx 6.1% per annum)
Savings interest rate (month) =0.45% (equates to 5% per annum)
Loan=90k
Deposit=10k
Repayment capital per month: 100 quid... so you are paying 0.54% interest +100 pound off the loan value a month
Rental Cost = 495 pound constant

Comparing over a short term period of 2 years:

Buying (per month) Cost (Rough figures not taking into account reduction of interest due to repayment)

Interest paid = Mortgage Interest rate *loan
Deposit savings 'lost'= deposit *Savings interest rate
House Price increase = -1% (1 % drop per month)
House capital loss = House price increase* (Mortgage+Deposit) = -1%*100k = 1k

Therefore total 'cost' is : Interest Paid + Deposit Savings 'lost' + House capital loss = £1,530

Renting:

Cost of Renting: £495
In general unless a house costs sub-70-80k in this market it is wiser to wait to buy. For my scenario in the short term 1-2 years where the repayment capital is only 2-3k off the original loan the interest rate/cost to you drops slightly. If you were analysing over a longer period you'd have to take into account compound interest

NB: these are the way i make my decision to stay in rented for a couple of years... because short term im saving cash and in terms of my example a house in my area is 130k.. so the difference between paying interest on a mortgage and cost of renting is about 100 pounds for me.

Im not sure about a cash purchase. in general you'd have to take into account risk as any business does.

I.e risk repair such as roof, chimney needs doing + enhanced costs of owning a house (building insurance etc).