In the face-off between renting and buying, buying is always the winner. In the short term it is often best to buy and in the long-term it is almost always best to buy.
Given a choice between renting and buying, choosing to rent is nine times out of ten seriously stupid.
First though, let me make a few things clear. I am not saying all renters are misguided and renting never is the right solution.
There will be times when renting is the sensible option and the right choice.
Renting may be the only option for some people of limited financial means and the provision of council or social housing is an essential part of our society.
However many people have the realistic capability to buy but opt to rent as the “easy”, “convenient” or “lifestyle” option. In the long term that is so not smart.
1. The cost of renting v. the cost of buying
The starting point in deciding which is right for you – renting or buying – is to work out the cost of renting as against the cost of buying.
A quick calculation almost always comes out on the side of renting.
Usually, renting needs a deposit of one month’s rent and the ability to pay the monthly rent.
Buying requires a 5-25% deposit, often running into many thousands of pounds – which for most people is an impossibility – at least in the short-term.
But a more detailed calculation is needed to accurately assess the position.
Taking the deposit out of the equation, buying is often significantly cheaper due to relatively low interest rates making the monthly cost of a mortgage cheaper than rent – which is high and rising in many parts of the country.
But for many people it is not possible to take the deposit out of the equation. The average deposit of first time buyers ranges from £13,710 (Barrow-in-Furness) to £174,974 (London Borough of Camden) according to analysis by Which in February 2018 – and such sums will be totally beyond many would-be homebuyers.
However – with patience, clear-thinking and application – it is by no means impossible to raise a deposit to purchase a property, even a very large deposit.
There are many ways to raise a deposit – with the relatively slow process of saving being just one of them.
Putting off buying in the hope that things will become easier with time – as your savings grow – is often a mistake since the long term trend with house prices is upwards.
The longer you delay in buying the more likely your targeted property will become unaffordable.
WAYS TO RAISE A HOUSE DEPOSIT
Quick house deposit (BOOK: 50 ways to raise a deposit in 6 months)
Buying a property fast (wacky and wicked ways to raise a deposit)
Raising a deposit (14 common ways to bag a deposit with ease)
Mum & dad to the rescue (ways parents/grandparents can help you to buy)
2. Rent is dead money
Perhaps the biggest drawback with renting is that rent is “dead money”. It is money you are paying out for little in return.
For your rent you get a roof over your head, but not the other ancillary benefits which homeowners enjoy.
When you pay a mortgage you are not simply paying for somewhere to live.
If you take out a repayment mortgage, you are also paying off each month a bit of the loan your took out to buy your home. By the end of the mortgage term you will have paid off the whole amount borrowed and will be left with a property free of mortgage.
If you take out an interest only mortgage, your monthly mortgage payments will be lower but you still have the principal amount borrowed to repay at the end of the mortgage term.
However, you will benefit from any increase in the value of the property during your period of ownership – and that could be tens if not hundreds of thousands of pounds.
Home ownership for a long period (20 to 30 years) pretty much guarantees substantial capital gain or equity.
Buying where you live is a form of investment; renting where you live is just another form of consumerism – with no long term monetary benefit.
3. Lifestyle advantages of ownership
It is not just in terms of capital gains or equity that home ownership outshines renting.
For tenants in the private rental sector (PRS), tenancies can be relatively short – typically 6 months or a year – and that results in a lack of continuity and certainty for renters, making it difficult for them to plan long term in terms of:
Homeowners can achieve a level of certainty as to housing costs by fixing their mortgage for a long time, such as by taking out a 5 year fixed interest mortgage.
In contrast, renters typically face annual rental increases and if they cannot afford the increase they will need to move.
Frequent moves are a cost of renting easily overlooked, not to mention the inconvenience and disruption.
The government has plans to bring in longer tenancies for PRS tenants, with a minimum term of 3 years being mooted. That would reduce but not eradicate the expense and disruption faced by renters.
Renting gives you less choice in terms of your home environment. For instance, you may not be able to decorate to your taste and you may be restricted in terms of not being able to keep pets.
4. Ownership wins hands down
It is when you look at the family, practical and financial benefits of home ownership that you see its impressive superiority to renting.
A home purchased is an asset. In time the difference between its value and the amount owed on it (the “equity”) will increase.
You can raise funds against the equity by means of a:
- Second mortgage
- Further advance
- Equity release.
You may be able to raise funds for any number of useful purposes, including: home improvement, starting or growing a business, medical/health expenses or helping a family member to raise a deposit to buy a home of their own.
If you take out a repayment mortgage and are mortgage-free at the end of your mortgage term, you are likely to have an asset worth several times what you bought it for.
You will be free to stay put or downsize to a smaller property and use any surplus as you wish – including to top up your pension or to assist family members.
Owning your home gives you a valuable asset you can gift to your children or other relatives in your will – gaining you the peace of mind of knowing that they will have some level of financial benefit or security.
For many people, renting is the only realistic option. However, if you are one of those people who at the end of the day really can afford to buy – but choose to rent – forgive me but “stupidity” is definitely one of the first words that springs to mind.
THE BASICS WHEN BUYING A PROPERTY
Buying a flat – what to consider (important things you must know)
Stress free property purchase (how to reduce the stress when buying)
New house no-no’s (things to avoid when buying a new property)
Are you a renter who wants to buy? What are the obstacles or challenges you face? Please leave your comments below. Others may have ideas or information which may help you.
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Rebel Property Coach
My website is: www.rebelpropertycoach.com