Buying vs Renting a House

First time buyers have seen Mortgage payments as a share of income rise significantly in the past 2 years, increasing the cost of buying a house. However, the private rented market has been even more problematic.  In the past four years, rents have risen 20%, pushing tenants to spend a higher share of income on renting. For those wondering whether to buy or rent, how does it compare financially?

The the cost of buying an average home is currently in the region of £265,000. If there is a deposit of £20,000, the mortgage would be £245,000. Assuming a fixed interest rate of 5%, the initial monthly payments would be £1,313, giving a total cost over 30 years of £473,377. Of which £245,000 is capital repayment and £228,477 is interest payments.

Why Buying a House Can Save You Over a Million Pounds

However, there are more upfront costs to include. This includes Solicitors, mortgage arrangement fees, survey and search costs. Buying white goods and furniture. Stamp duy is possible, though in this example, first time buyers wouldn’t pay. But, you’re still looking at possibly £6,000 upfront.

The other downside of owning a property is maintenance repairs, roof, guttering, boilers, decorating. It all adds up, this could be an average of £1-£2,000 a year forever. If we spend £1,500 a year for 30 years, that increases the cost by £45,000. Though don’t forget inflation will increase maintenance costs over time.

As a very rough rule of thumb, buying a £265,000 house is going to cost over half a million pounds over the next 30 years. But, the crucial thing is after 30 years, you are left only with insurance and maintenance costs.

By contrast, how does renting compare? The current average rent in England is £1,327 a month or £15,924 a year. It’s rather similar to the mortgage cost for an average home, except you don’t have the upfront costs of buying and ongoing maintenance costs. In the short-term at least, renting is marginally cheaper than buying. Though don’t forget Housing markets are highly regional. For example, currently buying is more expensive in London, but cheaper in the northeast and Scotland. This probably explains why house prices are rising more in these areas than the south-east

Of course, with renting you don’t have the uncertainty of interest rates changing. If interest rates fall to 4%, the monthly mortgage falls to £1,170 with a total 30 year cost of £421,080. On the other hand, if interest rates rose to 6%, the cost rises to £1,469 a month and the total mortgage cost rises to £528,804. However, this is definitely not the end of the story, there are two factors which tilt the balance heavily against renting in the long-term.

Rent Inflation

cost-renting-england

In the past 19 years, rents in England have risen by 65%, 3.4% a year. This is quite close to the average inflation rate. If we assume rents rise by 3.4% a year, it means in 10 years time, you will be paying £1,792 a month. In 20 years time, you will be paying £2,504 a month. The really scary thing is that in 50 years time, you would be paying £6,829 a month. Now, we hope earnings and pensions will also be rising by at least the rate of inflation. But, this is the difference after 30 years, mortgage payments end, but rent payments keep rising. After 50 years of paying monthly rent, which rises with inflation, you will have paid a total of £2,023,946.33, which is around £1.5 million more than the cost of buying. Of course, these figures rest on many assumptions which could change. Perhaps with a house you will end up spending £60,000 on an extension, £20,000 for solar panels. But, the longer you live, the bigger the total cost of renting.

How cost of renting depends on rate of rent inflation

This shows annual cost. For monthly rent/12.

Year number1%3.40%5%
1                   15,924                   15,924                   15,924
2                   16,083                   16,465                   16,720
3                   16,244                   17,025                   17,556
4                   16,407                   17,604                   18,434
5                   16,571                   18,203                   19,356
6                   16,736                   18,822                   20,324
7                   16,904                   19,461                   21,340
8                   17,073                   20,123                   22,407
9                   17,243                   20,807                   23,527
10                   17,416                   21,515                   24,703
11                   17,590                   22,246                   25,939
12                   17,766                   23,003                   27,235
13                   17,944                   23,785                   28,597
14                   18,123                   24,593                   30,027
15                   18,304                   25,430                   31,528
16                   18,487                   26,294                   33,105
17                   18,672                   27,188                   34,760
18                   18,859                   28,113                   36,498
19                   19,047                   29,068                   38,323
20                   19,238                   30,057                   40,239
21                   19,430                   31,079                   42,251
22                   19,625                   32,135                   44,364
23                   19,821                   33,228                   46,582
24                   20,019                   34,358                   48,911
25                   20,219                   35,526                   51,356
26                   20,421                   36,734                   53,924
27                   20,626                   37,983                   56,621
28                   20,832                   39,274                   59,452
29                   21,040                   40,609                   62,424
30                   21,251                   41,990                   65,545
31                   21,463                   43,418                   68,823
32                   21,678                   44,894                   72,264
33                   21,895                   46,420                   75,877
34                   22,114                   47,999                   79,671
35                   22,335                   49,631                   83,654
36                   22,558                   51,318                   87,837
37                   22,784                   53,063                   92,229
38                   23,011                   54,867                   96,840
39                   23,242                   56,733                101,682
40                   23,474                   58,662                106,766
41                   23,709                   60,656                112,105
42                   23,946                   62,718                117,710
43                   24,185                   64,851                123,596
44                   24,427                   67,056                129,775
45                   24,671                   69,336                136,264
46                   24,918                   71,693                143,077
47                   25,167                   74,131                150,231
48                   25,419                   76,651                157,743
49                   25,673                   79,257                165,630
50                   25,930                   81,952                173,911
Total cost over 50 years           £1,026,512           £2,023,946           £3,333,657

Rent inflation of 3.4% is a reasonable assumption. Though in the past four years, rent has risen by an average of 5% a year. If rents were to rise by 5% a year, the total cost over 50 years is £3.3 million. If rents rose 5% a year, and you live another 60 years, the total cost rises to £5.6 million. That sounds silly, but that is the effect of compounded rate rises.

I would like to think rent growth of 3% a year is a better guide than 5%. But, in the short-term at least, there are reasons to be worried about the private rented sector.. The UK population is rising rapidly, buy to let landlords are selling, and the number of social housing has been squeeezed. Even if more houses were to be built, it’s not clear how many would end in private rented sector to limit rent rises.

In the short-term, buying a house is expensive, you need a big deposit, you have large mortgage payments and then you have extra buying costs. But, the mortgage amount is then fixed. When I bought a house in 2005, my monthly mortgage payments were £950, it was close to 40% of my monthly income. It was more than the £700 a month I was paying rent. On the pre-crisis day, I got a self-certification mortgage with help of a parental deposit. I had a lodger who paid £300 a month (some of the time). But it was too much so I switched to an interest-only mortgage for 4 years. However, the monthly cost of that first mortgage is now £450 a month. Interest rates were lower, and I started paying extra back.

Now, I was lucky in that in 2007, interest rates fell to 0.5% and this made a mortgage much cheaper. If it had been the late 1980s and interest rates rose to around 10%, it would have been a very different situation. Later we’ll look at whether there is a chance of high interest rates returning. But first, there are other considerations. Renting has various advantages.

It gives flexibility and freedom to move around Repairing a house is not your responsibility or cost. Buying and selling a house can be a tortuous process.

However, renting has also has many disadvantages. Your landlord might want to sell, and you have to leave. Repairing a house is not your responsibility, but it means, things may not be repaired properly and you are at the mercy of your landlord.

There is less sense of ownership and you can’t always make changes to property or garden.

Renting itself can be a tortuous process with intense competition faced in recent years.

Buying a house also has other advantages. Since 1980 nominal house prices have risen 1,100%, that’s an extra £242,000. A lot of this is due to inflation, but in real terms house prices have still risen nearly 100% since 1980. This is capital gains, you don’t get when you rent. When you are 80, you could sell to fund a retirement home. Given house price to incomes are really stretched and many are on the edge of affordability, there may be a limit to how much real house prices increase in the future. But, if the past is any guide, there will be considerable increase in nominal prices in the coming decades. That’s another benefit of buying.

Interest Rates to Rise

The thing that can really hurt the decision to buy a house would be an unexpectedly large increase in interest rates. If we go back to our example, if interest rates were to increase to 8%, monthly repayments would rise to £1,798 and the total cost £647,180. But, at least for the foreseeable future, interest rates are likely to go down rather than up. A very rough consensus is for interest rates to settle around 4%. But don’t forget the long-run trend has been for falling interest rates. If you look at a country like Japan, with its advanced demographics, interest rates have been very low. Though Japan is one of the few countries, which has seen a sustained fall in house prices from the bubble years of the late 1980s.

Another thing about mortgage costs is that you aren’t necessarily tied to waiting 30 years to pay off the mortgage. When I got a mortgage in 2005, I took out the longest possible term 43 years, and for the first few years only paid interest only mortgage. But, in recent years, I have been trying to overpay the mortgage. Rather than invest in pension or savings, I use any savings to repay my mortgage. This significantly reduces the overall cost and I plan to pay it off several years early to save considerably on interest payments. This reflects the really important thing about buying a house. The first few years are really hard, you have all the expenses of setting up a home, and mortgage payments can be a big share of income. But, assuming constant interest rates, mortgage payments as a share of income should start to fall.

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1 thought on “Buying vs Renting a House”

  1. My thoughts are…
    The decision to buy a house would be an unexpectedly large increase in interest rates. If we go back to our example, if interest rates were to increase to 8%, monthly repayments would rise to £1,798 and the total cost £647,180. But, at least for the foreseeable future, interest rates are likely to go down rather than up.

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