Home, Buy or Rent?

Home, Buy or Rent?

Don’t wait to buy property, buy property and wait.
— Will Rogers

NB: This post is written from the viewpoint of  MoneyNoters having the money to choose whether to rent or buy. We know this isn’t always the case and renting isn’t always a choice, and we will tackle this in future posts.

Ah, other than the weather there’s nothing that excites the great British public quite like a good old natter about property. However, just because we love to chat about it doesn’t mean we agree - the great divide between whether to buy or rent is all too real and not going anywhere anytime soon!

As I fumbled with my headphones on one of my recent commutes, I and the rest of the carriage couldn't help but overhear a good natured, though slightly heated debate between two travellers. 

“Interest rates are going up, and so will mortgages, property prices are going to come tumbling down.” Declared the first property aficionado.

”So what?, fired back her fellow natterer. I’m living in it and I’m not spending years wasting money paying some dodgy landlord stupid money for something that will never actually be yours! Oh and don’t forget they can kick you out whenever they want or decide to sell up.”

All fair enough points, but where was the resolution? Maybe, just maybe there was another way to pose the "to rent or buy" question that will help give a clear answer.

So never one to shy away from such a controversial topic, I am going to give it a go. Firstly in true MoneyNotes style let’s break it down into two questions:

Question 1 - If we accept house prices today for what they are, then over the long term (we assume 15 years) am I better off buying or renting?

Question 2 - If I chose to buy and then house prices come “tumbling” down immediately (we assume a 15% fall in house prices) then was I still better off buying over renting?

So here goes...

Location: London

  • The year is 2018
  • The price of a decent 1 bed flat is £350,000
  • The cost of renting equivalent 1 Bed flat is £1,300 a month
  • That "dodgy" landlord plans to increase rent by 2% a year

What does the above mean for Team Rent is best?

Team Rent is actually in a good position and can buy but thinks renting is best. 

  • Over a fifteen year period Team Rent pays £1,300 of rent a month which increases by 2% every year. So after fifteen years, a total of £291,000 has been paid in rent.
  • To build a nest egg, Team Rent can take house purchase savings (10% deposit, stamp duty plus other expenses) of £40,000 and put them in investments such as shares (also called equity or stocks) hoping that this will grow at 5% a year over the 15 year period to £84,000

Positive: Team Rent expects to have £84,000 in investments

Negative: Team Rent will have paid out £291,000 in rent

What about Team Buy?

Well, Team Buy can take savings of £40,000 (£35,000 deposit plus stamp duty and expenses) to purchase a one bed flat for £350,000. The remaining amount for the purchase is provided by a friendly bank as a mortgage.

  • The mortgage rate is 3%* every year for the fifteen year period. This all works out to a monthly mortgage cost of £1,320 (20 quid more than the rent but this amount is fixed for the fifteen year period).
  • Now comes the interesting bit. Imagine that after the purchase, house prices actually crash by 15% and the property is now valued at £297,500! We don’t have a crystal ball and cannot predict such a crash. However let’s indulge most first time buyers’ worst fears.
  • Finally, to make this all fair, remember that as a home owner you will need to have some funds aside for things like fixing the roof, servicing the boiler and other general maintenance. Let’s assume this is equivalent to 10% of mortgage repayment amount each year.

These all look scary right. After 15 years, Team Buy's report card reads as follows:

Negative: Property valued at £345,000, so not fully recovered to original purchase price of £350,000 even though we have assumed that after the initial crash, the property price has gone up by 1% each year for 15 years

Positive: Initial amount owed to the bank of £315,000 has now dropped to £186,000 as Team Buy was not only paying interest on the mortgage but also repaying what they borrowed (all included in the mortgage of £1,320 a month)

Negative: Expenses allowed for over fifteen year period for emergency and general maintenance was £30,000

Positive: Team Buy lived in their own flat for fifteen years and had all the flexibility that comes with that such as deciding deciding how mortgage repayment is made, what to do with internal structure of flat, sublet if extra income is required, release equity (as last resort) for other value adding ventures.

So where do Team Rent and Team Buy stand?

Expenses over Fifteen Years

Team Rent

Team Buy

Rent

£291,000

-

Interest on Mortgage

-

£125,000

Capital repayment on Mortgage

-

£129,000

Estimated Maintenance Expense

-

£30,000

Cost of purchase (Stamp duty and other expenses excluding deposit)

-

£5,000

Total Expenses

£291,000

£289,000

Assets after Fifteen Years

Team Rent

Team Buy

Investment

£84,000.00

-

Equity in Property

-

£159,000.00

Total Assets

£84,000.00

£159,000.00

In this case, Team Buy clearly comes out on top, but there is a lesson for us all out of this. Regardless of how the numbers are stacked up, there are still strong emotions as to which side of the camp is right. Ultimately,  as long as your financial affairs work for you and lead to better living, that's what's important. For those that are still renting and would love to own a home one day, we are with you all the way, and hope your plans come fruition soon. If there's anyway we can be of help either through our  Money Chat or the other financial education packages then let us know.

One final comment, please remember that this is not advice and whatever your decision is, MoneyNotes as always wishes you the best of luck. 

Let us know your thoughts on the buy vs rent debate, and please do feel free to share.  

 

* Mortgage rate is actually below 3% today but we have assumed this is the amount paid every year over the long term.

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