Episode 12 Buy or rent?

I covered property last time and while I made the point that residential property is not an investment for most people, it is worth looking at the merits of renting or buying your own home before you start investing…it could make a big difference to you future wealth.

So should you buy or should you rent?

The Money Advice Service offers some help deciding and here is a selection of the main points

Benefits of owning

  • Once you’ve paid off your mortgage, your home will be yours and you won’t have to worry about paying for somewhere to live.
  • If your home increases in value, you could use the equity (its market value less the mortgage debt) to help buy a bigger home or fund a comfortable retirement.
  • You can spend money improving your home and increasing its value without having to ask a landlord.
  • Sometimes it can be cheaper to buy than rent.

Potential downsides of owning

  • It’s a big commitment – you need to be sure you can afford what you’re taking on. You will need to save for a deposit but there are other costs associated with buying such as solicitor’s fees and Stamp Duty.
  • When interest rates rise, your repayments will go up. It’s important you’re prepared for a rise.
  • It might not always be easy to sell your home, depending on what’s happening in the market.
  • You need to be sure you can afford maintenance costs like fixing a broken boiler or leaky roof. If you rent these are costs your landlord meets.
  • If you’re living with someone and split up, deciding what to do with the property can be complicated and expensive.
  • If the value of your home falls, you might be unable to sell if you owe more to your mortgage lender than your home is worth.
  • You have less flexibility than when renting. For example, selling up and moving is more expensive as you have estate agency and legal fees to pay.
  • If you’re buying a flat you might incur additional service charges which is not usually payable if you are renting.

It misses some important facts not least of which is that if you never buy your own home you will be paying rent for the rest of your life. Most mortgages are set up for 25 or 30 years, so your payments will end when the mortgage ends and you will not have to pay for housing from then on. If you get a mortgage at 35 and pay if off 25 years later you will be 60. Given that you will live probably for another 25 years that will be a massive saving v renting. Also as a homeowner your credit rating is higher, even if you have a mortgage, so it is easier to borrow money should you need to. (Check out the earlier episode for my views on debt though!!). When you rent it is almost certain that your rent will go up over time due to inflation. Since the credit crunch both general inflation and rent inflation have been subdued but nonetheless rent has risen between 3.5% and 20% depending on where you live.

Whilst the money advice service provides generic information, it omits the details that you need in making your decision.

How much will it cost to rent vs the cost of repaying a mortgage?

The average rent in the UK is now at an all-time high of £970. When London is excluded, the average rent in the UK is now £802 and average rents in London are now £1,689. (source: www.property118.com)

Going back to the point I made about mortgages coming to an end after 25 to 30 years, if you rent you will need to find £970 a month from your pension to meet housing costs. Over 25 years in retirement that comes to £291,000!

By contrast the average mortgage is currently £128,823. With an average interest rate of 2.48% that means that it would cost you about £577 p.m. in mortgage repayments. So average UK rent is £970 and average mortgage costs are £577 a difference of £393. Of course you will need to budget for maintenance and repairs.

The other fact missing from the Money Advice Service is the long term increase in property prices. According to the Halifax during the thirty years between 1985 and 2014 property prices rose by over 5% a year or over 400% in total! If you had bought a house for £100,000 in 1985 it would be valued at over half a million pounds in 2014. Little wonder that a lot of people want to get on the property ladder.

What if something goes wrong? Suppose you lose your job? If you rent you need to know that landlords will seek evictions and they hold your deposit. If you are broadly two months in arrears then notice can be served and the court will grant possession to the landlord. If you own your home with a mortgage things are a lot more complex. There are rules about what lenders must do before they take you to court and there are more options open to you. If they repossess your home, they then sell it and use the proceeds to take back what is owed. If there is a shortfall you still have to pay it, if there is a surplus you receive it.

It might help to consider the following two statistics from the Money Charity,

• 61 mortgage possession claims and 39 mortgage possession orders were made every day in October to December 2018.

• In the same period 313 landlord possession claims and 255 landlord possession orders were made every day. More renters are evicted day by day than owners and over 60% of households own their home.

On balance it is going to be far better for your long term wealth to buy than to rent. Even if there is a property crash just after you bought. Remember in Ep 1 I mentioned I was wiped out in the late 80’s by negative equity? That is where the house is worth less than your mortgage. I went through it twice. But long term the numbers stack up in favour or buying.

In today’s market if nothing changes you will save on average £393 a month which is £4,716 a year more than enough to cover the maintenance costs of the average property. Your mortgage will end after 25 years and you then save £577 a month for as long as you live – that is nearly £7,000 a year!

I would encourage you to seek professional advice before starting just in case anything changes between now and then.

What about the suggestion that you could take the deposit money and rather than putting it into a property you invested in the stock market? To answer that I am going to look at an example, let’s say you have £10,000 and could get a mortgage of £90,000 to buy a property at £100,000. If your property grows by 5% in year one you will have made £5,000 – 5% of £100,000. If you invested the £10,000 in the stock market and tried to match that return of £5,000 it would require a return of 50%. If you think that is achievable then go back to ep 1 on speculation.

Your first investment should be to look into property ownership and to educate yourself on what is involved so that you can make an informed decision for your circumstances. In my view the benefits almost always outweigh the detriments.

If you are struggling to get that deposit together – stick at it. Buying a house in your mid-30’s is still worthwhile. Especially as we are living longer and longer. Some estimates suggest that the chances of living to 100 years old for a child born today are about 1 in 3!!

In episode 2 I covered a few key ways to save and also mentioned Martin Lewis Money Saving Expert who has ideas on how to look at reducing your outgoings and increase your savings. Since then I came across Valuepenguin.com – check out their website for further help here

That is all for this episode. Next time I will start on how to being investing and what you need to do. Don’t forget that if you like what you hear – tell your family, friends and colleagues and if not tell me!!

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