Should You Buy or Rent Your Home

Much has been said and written of the arguments as to whether it is best to buy or rent a home, usually in a very subjective manner. Our research shows, that before we even consider the long-term cost comparison, there is no ‘generic’ right or wrong answer though there is very clearly a right answer for most individuals if they were to ask themselves a few key questions. An interesting survey was undertaken by the Communities and Local Government, which make interesting reading but only addresses attitudes and perceptions and not the practicalities and realities.

Practicalities and Emotions.

Are you building a career which would benefit from you being mobile and not geographically tied, or, is your work unstable, requiring you to be flexible as to where you will work?

As you can see here, recent research by Ocean Finance and the Independent demonstrated a very significant divide both geographically and by age group of the mobility of the workforce. A need or desire to be mobile, would suggest it prudent to not committing to buying a home unless you want to leave your family there whilst you remain mobile, for many people feel geographically tied when it comes to where they will work if they own their home. Ironically, when the economy is stagnant, is the time when people need to be the most flexible and mobile when looking for work, yet it is also a time when selling a property can be most difficult.

Are you willing/able to save for a deposit to buy a home and cover the legal and Stamp Duty costs, as well as take on the long term commitment of a mortgage?

Even with the assisted deposit packages available through the Governments Help to Buy scheme, the additional costs related to buying and furnishing a house can be prohibitive for many let alone the commitment of paying a mortgage for the next 25 years when you may not be sure if or where you may be working. If you lose your home because you are unable to meet the mortgage or rental payments, the financial risk to you of owning the home will be greater, due to the risk of loss of equity, legal fees and mortgage penalties.

Will a lender lend the amount of money you require for you to buy a home in the area(s) you want to live in?

Affordability, not just now but in the future, when interest rates are likely to be higher, is now an important consideration to lenders and we are already seeing signs of lenders restricting the amount of monies they will lend to would be borrowers. Factor in rising property prices and this dual affordability pinch will preclude many people from buying a home or force them to buy a smaller home and/or live in a less desire-able area, to keep it affordable. Worse still, will be people making rash moves to over extend themselves in a bid to get on the property ladder. This link to the property ladder map on the Guardian’s website, shows the increasing problem of affordability between 1997 and the end of 2013. With the ever increasing demands on land and increasing costs relating to materials and labour, it is likely many more of us will need to get used having to rent for all of our lives, as is the case in Germany and France.

How often are you likely to move house in your lifetime? Be it for a job move, a growing or shrinking family or health issues?

The cost of moving house should not be under estimated. Legal costs, Estate Agent fees, Stamp Duty, removals, etc, all add up. A typical cost of £20,000 or more is to be expected. See Rightmove’s useful cost estimator. Thus for many, a failure to look ahead and plan, results in significant replication of costs, which means there is less money left to meet your own future needs. If you rent, subject to giving the appropriate notice, you can move at will, incurring negligible cost.

How important is it to you to have control of the property you live in and the freedom, (within planning constraints), to modernise and decorate the property as you wish?

For many of us our house is also our home not just a place to live. It is a chance to build a nest, to relax, to take pride in, express our personalities and to provide some degree of security and certainty for the future and even a legacy for your family. You can also extend and modify pretty much at will. If that is important to you, then renting is likely to be unappealing, due to the many restrictions and obligations placed upon a tenant and the ever present risk that the Landlord may give you notice to quit at the end of any tenancy period. However, if you do not want the costs or risks associated with being responsible for the maintenance of your home, then renting is likely to appeal very much, for it is the Landlord’s responsibility to maintain the fabric of the building, repair and replace worn appliances, decorate periodically, insure the building, service the boiler, etc. Effectively as a tenant you are simply expected to pay your rent and utilities and keep the place reasonably clean.

What of the thorny subject of ongoing costs?

If we firstly consider the situation of buying a home. The maintenance of a property, both structurally and in terms of décor and repairing and replacing appliances, can conservatively be averaged at £2,000 per year, though for many it is considerably more than this. This cost will continue throughout your life, particularly if you want it to maintain its value in the event of wanting to sell and downsize, to release equity or to leave it as a legacy to your family upon your death.

For most of you who do buy a home with a mortgage, by the time you reach retirement you will have repaid any mortgage, thus during your retirement you will simply have to ongoing cost of maintenance to factor in as a deduction from your pension income to leave you with what you have to pay for your desired lifestyle. However, if you were to rent throughout retirement, you would not have to factor in the maintenance costs but you would have to factor in the cost of rent. The Homelet Rental Index shows that in the UK at present, the ‘average’ rent nationally is £848 p/month, which will only go up with time and can clearly vary significantly according to region and property type. Thus you would have to factor in a significant deduction from your net pension income to pay for this for the rest of your life.

Here is a useful, though simplified example;

A 30 year old man buys a home at £250,000 with a 20% deposit, thus borrowing £200,000 over 25 years at an average mortgage interest rate of 5%. Thus the monthly repayments would be circa £1,413 pm. This would be a total repayment of £423,900 over the full mortgage term. However, at age 55, he would be mortgage free.  Assuming average life expectancy of 85, that is then 30 years of no mortgage or rent.

By way of contrast, his twin brother decides to rent not buy. He happens to pay the market average rent of £848 pm (in 2014 terms), throughout his life. We assume he lives to age 85 also but he has to content with the rent increasing in line with compounding inflation at say 3% average and having to pay rent until he dies. Thus, the total rent payable would be £1,660,000 throughout his lifetime. So up front his rent is basically half of what his brother would be paying in mortgage and maintenance costs, yet over their lifetimes, he would be paying 4 times more than his brother who had bought the a house.

If he was smart, he could offset this problem by using the money he is saving each month over that which his brother is paying in mortgage payments and putting it into a pension. For example, if he simply paid the net saving from year one only, of £6,780, that would give him as a higher Rate Tax Payer a gross contribution of £8,475 plus a tax rebate of £1,695. Assuming a 6% per annum return, the £8,475 would be worth £65,140 by the time he was 65. At a net cost to him of £5,085. Thus, if each year he used the money he was saving in the earlier years, through not buying a house, to fund his retirement pot, he could counter the problem of how to pay rent in retirement whilst still living a decent lifestyle.

The above is not intended to be a definitive view, however it should serve to highlight that the right decision for each individual has many influencing factors and good objective advice can be invaluable in preventing costly mistakes. It also demonstrates how good planning and commitment to your future tends to lead to much better outcomes and options.