Should I Buy or Should I Rent?
A regularly asked question is “is it better to rent your house or to buy it?”. Very often this question actually translates into “is it cheaper to buy than to rent?” The fact is that these are different questions and the answer could therefore be different.
The starting point normally is – can I afford a mortgage on a property or will I have to rent? This is usually answered in terms of a comparison of the rent with the monthly mortgage payments. But is that all there is to it or should people consider other issues as well?
There is much more to it and other areas that should be considered are:
Other Costs
Changes in cost
Changes in property prices
Other Costs
When renting a property you can either rent an un-furnished property or a furnished property. A furnished property will cost more than an un-furnished property but you won’t incur the expense of buying the furnishings (in effect you are renting them as well).
If you rent an un-furnished property then you will have to buy all the same things that you would have to buy if you bought the property – all rental property that lets successfully comes with carpets, curtains, electrical fittings, fully fitted kitchens and attractive bathrooms – so its bedroom furniture, suite for the lounge, tv etc that we are talking about here.
It is likely that the costs of electricity, water, council tax etc will be the same whether you rent or buy. Buildings insurance (as opposed to contents insurance) will be a cost bourne by the landlord but one that you will have to pay yourself if you buy the property.
As a home owner, you have to pay for repairs and maintenance. Minor repairs can be relatively cheap and you may be able to do some of the work yourself, but some problems (such as repairs to a roof or a heating system) can be very expensive. Some repairs may be covered by buildings insurance, but most will not.
If you purchase a house you will have a series of fees to pay at outset – solicitor fees, fees that the lender charges and possibly stamp duty. The lenders fees and solicitor fees can sometimes be added to the mortgage but that means you will pay interest on them. Stamp duty is payable when you purchase a property over £125,000. This is dependent upon the value of the property and can be as much as 4% of the property value.
Changes In Cost
The initial comparison of the rent with the mortgage payments is not the end of the story. Your rental agreement may well include the right for the landlord to increase the rent after a period of time (perhaps every three years). It is unlikely that it will include a provision for the rent to reduce. If you have a mortgage, the mortgage payments can go up or down in line with interest rates generally. It is important that you work out whether you can afford mortgage payments if they do increase and that you have an idea of what might happen to your rental payments at a rent review.
Changes in Property Prices
In the past 20 years or more this has been one of the drivers for people wanting to won their own home. Apart from the emotional desire to own their own property many people want to do this because they have seen that owning a property is, in theory at least, a good way of making money. However, this is based the belief that property prices will continue to increase as they have done over the past twenty years. For example an average UK property with a value of £50,000 in 1987 would now be worth in excess of £211,000.
But there have been price crashes – the last meaningful one was in the late 1989 through to 1991 when prices fell by more than 15%. This occurred after a sharp increase in interest rate s from 7.4% to around 15% and whilst that may not happen again in the foreseeable future it does highlight that house price movements are not a one way bet.
That said, property prices in the UK have risen over time. But does that mean that you are better off than you would have been had you rented? Not necessarily so. The increase in the value of your property is only notional until you sell it. If you do sell it, then what do you do? If you buy a property of the same size then you will presumably need the same size of mortgage. The only way to get “value” out of the property is to downsize, move to a cheaper location or move to rented accommodation.
What can you do to help you get on the property ladder?
If you do not have a deposit, you can take out a 100% mortgage. Obviously this will mean higher interest payments and you should ensure that you can afford these, particularly if they increase.
You could take out a mortgage on a “part interest only, part repayment” basis. This would mean that the payments on the interest only part of your mortgage would be lower as you are not repaying any capital. You could make the whole mortgage interest only but as a colleague once said to me, this is a bit like renting from the lender!
Alternatively you could take out a mortgage with a friend or family member – sometimes known as a “shared-ownership” mortgage.
