Renting vs buying: which is most rewarding?
It is undoubtedly ingrained in the British psyche that buying your own home is a life goal. Of all the property in the UK, 63% is owner-occupied. But just across the water there is a very different picture. In Germany, the strongest economy in the eurozone, the majority of people rent their home. Only 41% of Germans own property.
So, are we wrong to think buying is the be all and end all? Would we be better off financially if we stopped struggling for a deposit on a property and settled into life as a renter?
Here, we weigh up the costs of buying versus renting an average first-time buyer home. The average value of such a property is £203,000, according to data from the Office for National Statistics.
The upfront barrier to buying
Firstly, let’s look at the upfront costs. Signing up for a rental home isn’t cheap. Our research showed that you’ll need £1,080 on average to secure your rental property. That’s made up of a one-month deposit of £930, and letting fees of up to £150.
But to get on to the housing ladder and buy that £203,000 home you’ll need to find a whopping £23,925. That includes a £20,300 deposit, £500 Homebuyer’s report, £700 survey fee, £925 in legal fees and £1,500 in stamp duty.
Clearly, when it comes to upfront costs you are better off renting. “In many towns and cities, especially around London, property prices are extremely high – for most people too high to even consider anything but renting,” says Adam Male, founder of the online estate agent Urban.co.uk. “With more and more people choosing to rent, canny landlords are growing wise to the increasing demand, and rental prices are rising steadily.
“Rather than this driving people out of their rented accommodation and into a mortgage broker’s office, this phenomenon is likely to create further growth in people staying in rented accommodation, because higher rents mean they are unable to save the upfront costs needed to buy.”
“Mortgage regulation and rising house prices have combined to make home ownership more difficult to access,” adds Neal Hudson, associate director of Savills residential research. But money isn’t the only reason people choose to rent rather than buy: a Savills survey found that 24% of tenants rent “because it is less hassle and they like the flexibility”, says Hudson.
Another benefit of renting is you don’t have to cough up if things go wrong with the property. If the boiler breaks down, or if the roof needs repairing, all a tenant needs to do is to call their landlord who has the responsibility to arrange and pay for repairs
So, surely, in the longer term renting is cheaper too. After all, tenants only have to hand over rent, whereas home owners are faced with a whole host of monthly costs. Surprisingly, our research has found that annual costs are lower for home owners.
Cheaper to buy in the long term
Rent has soared in recent years, with the average tenant now paying £762 per calendar month – an increase of almost 5% in just a year, according to the HomeLet Rental Index. Let’s take our average first- time buyer home worth £203,000 and look at renting it.
Average yields for landlords are around 5.5% – although they vary hugely around the country, from 3% in London to 8% in some other areas. That means that the average rent for our house would be £930 a month. Once you have factored in council tax and contents insurance, a tenant in that house would have annual costs of £12,334.
By contrast, mortgage rates are at a record low, with most first-time buyers paying 3.27% interest on their mortgage, according to Moneyfacts.co.uk. This means our example of someone in a £203,000 home with a 90% mortgage is paying £892 a month (assuming they have a £500 mortgage fee).
However, as a home owner you also have additional costs in the form of maintenance and buildings insurance. This means that, over a year, owning that average home would cost £12,639 – just over £300 more than if you rented it.
That, however, is including capital repayments in the calculations. Given those repayments mean after 25 years you will own a significant financial asset, whereas renters won’t, we’re going to strip them out.
Instead, we’re going to compare rent versus the cost of the loan for the house. By doing so, it shows that without capital repayments the home owner is paying out £7,910 a year to live in and maintain their home – that is £4,423 less than the person who is renting the same property.
“With rental demand – and therefore rents – very high in many places, and mortgages at record lows, it’s little surprise that many people find buying actually cheaper month to month,” says Peter Gettins, product manager at mortgage broker London & Country Mortgages.
Admittedly, at the moment home owners are enjoying astonishingly low interest rates on their mortgages. Rates would only have to rise to 5.7% before renting would be cheaper than home ownership. But that assumes that rents wouldn’t rise too, and as landlords would need to cover higher buy-to-let mortgage rates, that is unlikely.
Big financial benefits of owning your home
In the long term, home ownership has numerous benefits. Homeowners get “the longer-term financial benefit of gradually building a significant asset that should over time allow them to trade up and ultimately leave a benefit to children”, says Gettins.
“Aside from the financial questions, the personal and emotional aspect is just as important,” he adds. “Renting carries no long-term security for the tenant, with most agreements only lasting six to 12 months, and with no guarantees after that.
“And many tenants may be constrained in the character of their home – in terms of décor, pets, perhaps even furnishings. As a home owner all these things are under your control. Your home is yours, barring disaster, for as long as you want to be there, and can be shaped to your own desires. It brings stability and the ability to plan with confidence that tenants rarely enjoy.”
Home ownership can also make a huge difference to your finances in later life. The problem with renting is you will always have to pay rent. Whereas with a mortgage you should eventually pay it off, freeing yourself from monthly housing costs – hopefully before you face a drop in income when you retire.
In retirement this can make a huge difference as your pension will not have to cover housing. That could leave you £800 a month better off, based on current rental rates. You also give yourself the option of releasing equity from your home to help fund your retirement.
“Owning your home when you’re in retirement gives you far greater security than renting, in terms of where you live and controlling your ongoing monthly costs,” says Patrick Connolly, a certified financial planner for independent financial adviser Chase de Vere.
“These factors are both incredibly important for most people when they’ve stopped working.” Over the long term, owning your own home makes a huge difference to your finances. You will have built up a large financial asset and will eventually have no outgoing housing costs – not to mention the fact that you’ve saved yourself thousands of pounds in rent.
A hugely unpopular tax paid on property and share purchases. Stamp duty on property is levied at 1% for purchases over £125,000 (£250,000 for first-time buyers) which then moves up at a tiered rate. For property between £125k and £250k you pay 1%, then 3% from £250k up to £500k and then 4% from £500k to £1m and then 5% for properties over £1m. But unlike income tax, which is “tiered” and different rates kick in at different levels, stamp duty is a “slab” tax where you pay the rate on the whole purchase price of the property. On shares, stamp duty is charged at a flat rate of 0.5% on all share purchases. Figures correct as of May 2011.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
The catch-all term applied to investors who buy properties with the sole intention of letting them to tenants rather than living in them themselves, with the proceeds from the let usually used for the repayment of the mortgage. Buy-to-let investors have to take out specialised mortgages that carry higher interest rates and require a much bigger deposit than a standard mortgage. Other expenditure can include legal fees, income tax (on the rental profits you make), capital gains tax (if you sell the property) and “void” periods when the property is unlet.
This type of insurance covers the structure and fabric of your property – the bricks and mortar, not the contents (for which you need contents or home insurance). If you have a mortgage, the lender will insist you have a suitable buildings insurance policy in place. Many lenders offer their own building insurance policies, but you don’t have to buy it from your own lender but you have the option of shopping around. The insurance covers you for the rebuilding costs, not the market value of the property.
Does exactly what it says on the tin: covers the contents of your home for theft and damage and also may insure certain possessions (jewellery, cycles) outside of the home. Things to watch for include the excess and also the maximum payout on individual items. Another grey area is kitchen fittings, as some contents policies say these are not contents but part of the fabric of the property and covered by buildings insurance and some buildings policies don’t cover them because they regard them as contents.