Scott

Answer To 'should I Buy Now Or Rent' Questions

1,309 posts in this topic

I'm going to whack together a spread sheet at some point to put up, renting is and is not dead money. Its dead money if you only consider the rent but may not be if you consider what may happen to house prices in these uncertain times. With renting you also pay for the lack of hassle having to deal with repairs/maintainance and the conveinience of being able to up and move at a months notice. There is also the downside of having to deal with morons on a regular basis. For me at the moment I would be much better off buying, the cash sitting in the bank/metals/shares is at risk from the foolhardy moves of the government/BoE but on the otherhand those self same moves have created uncertainty in the jobs market so I cannot at this time buy cash, will be needing a mortgage but will not risk losing the savings through an inability to make the payments. Quite annoying that the same folly that is perpetuating the madness is holding house prices up and at the same time risking my savings whilst making the decision to buy difficult through uncertainty. Just let the fluckers crash, those who malinvested suffer and those who did not can splash the cash getting money velocity up and job creation going FFS!!!

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I know there is a lot of factor not taken into account but I am starting to be fed up of people manipulating figure to get them say what they want. I can do this to and just proved it.

Yes renting is better in some case, buying in some other. Yes house price are too high and so are rent but giving illustration as this one does not make any sense when it is just to illustrate your own point of view.

Anyway, I hope some people will find all these options illustration useful.

M

Not sure I'd go so far as to say it's manipulating the figures. It's more like saying "given this set of parameters, this is the result". Sure - it's certainly possible to overpay and it does save cash. My original illustration assumed a (hopefully more realistic) situation where people save like crazy for a few years for a deposit, then ease back afterwards because the cash is needed for other things such as insurance, repairs, holidays, kids, pension savings, replacing rust bucket cars and the like.

But yes, if you're hell-bent on paying off the mortgage as fast as possible then the calculations show it's cheaper to get a place now and overpay on it. Even then it might not be so clear-cut because of early repayment charges.

My main motivation for the post was to show those folks who continually trot out the "renting is dead money" mantra that it's not so clear-cut and will depend on the circumstances. So maybe the title should more accurately have been "Renting is sometimes dead money, sometimes not".

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The "just in case way"

You put down a deposit of £28k (10%), holding back £9k for fees, repairs, emergencies etc.

You get a 90% loan-to-value HSBC fee-free mortgage of £252k @ 3.84%

This gives a monthly mortgage payment of £1,308 over 25 years

However you decide to overpay monthly by £1500 (and save £500 /month just in case in your savings)

The total payment for the whole mortgage term is £297,531 Paid in 8.8 years

Added to your £28k deposit you've paid £325.531in total for your house

So house is paid in 8.8 years and you still have managed to save £52800 in your saving

Except that there are very few (if any) mortgages where you can overpay by anything like £1500 per month without penalty, so although you didnt take into account the AMAZING interest, you also didnt take into account the AMAZING charges for doing this

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Except that there are very few (if any) mortgages where you can overpay by anything like £1500 per month without penalty, so although you didnt take into account the AMAZING interest, you also didnt take into account the AMAZING charges for doing this

As I said it was just an illustration to counter-illustrate. Anyway regarding overpayment that is £18000/year. Plenty of mortgage product enable you to repay up to 10% of the remaining capital to repay without charge for the first 3 years when the charges apply

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We always hear people telling you that "renting is dead money". All that is, except people on this site. So for your edification (and a convenient page to point the doubters to), I present a fully worked example of when renting can save you money against a mortgage.

Enjoy!

The situation:

You want to buy a house costing £280k and prices aren't rising

You have a deposit saved up of £37k

You're currently renting a place for £900/month

You can save £2500/month while renting

Option 1: buy now

You put down a deposit of £28k (10%), holding back £9k for fees, repairs, emergencies etc.

You get a 90% loan-to-value HSBC fee-free mortgage of £252k @ 3.84%

This gives a monthly mortgage payment of £1,308 over 25 years

The total payment for the whole mortgage term is £392,396

Added to your £28k deposit you've paid £420,396 in total for your house

Option 2: rent one year then buy

After 1 year, your deposit fund is now 2500x12+37000=£67k

You put down a deposit of £56k (20%), holding back £11k for fees, repairs, emergencies etc.

You get a 80% loan-to-value HSBC fee-free morgage of £224k @ 3.29%

This gives a monthly mortgage payment of £1126 over 24 years

The total payment for the whole mortgage term is £324,246

Added to your £56k deposit and 1 year's rent at £900/month you've paid £391,046 in total for your house

Summary:

Option 1 total cost = £420,396

Option 2 total cost = £391,046

Meaning option 2 saves you £29,350 total and means your mortgage payments are £182/month cheaper.

For one year's "dead money" renting, that's quite a lot of cash you've saved!

Conclusion: Renting isn't always "dead money". And I've not even counted the extra interest you'd earn investing your deposit fund for one year (3% of £37k = £1,110) and the fact that in this case you'd have an extra £2k in your emergency fund.

These calc's are flawed!! Using your figures if you can save £2,500 whilst renting @ £900PCM, then surely you can 'save' £2,100PCM when paying mortgage of £1,304. Also from my experience of South West London properties worth £280k seem to go for around £1400PCM (6% gross). Finally if you can really save £2,100 on top of your £1,300a month mortgage, surely you'd be overpaying on your mortgage by a significant amount each month thus reducing the amount it costs you in interest!

Overall I don't disagree with you with renting not always being the wrong choice, but those calcs are all wrong!

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Except that there are very few (if any) mortgages where you can overpay by anything like £1500 per month without penalty, so although you didnt take into account the AMAZING interest, you also didnt take into account the AMAZING charges for doing this

Offset morgage.

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These calc's are flawed!! Using your figures if you can save £2,500 whilst renting @ £900PCM, then surely you can 'save' £2,100PCM when paying mortgage of £1,304. Also from my experience of South West London properties worth £280k seem to go for around £1400PCM (6% gross). Finally if you can really save £2,100 on top of your £1,300a month mortgage, surely you'd be overpaying on your mortgage by a significant amount each month thus reducing the amount it costs you in interest!

Overall I don't disagree with you with renting not always being the wrong choice, but those calcs are all wrong!

Indeed you could save or overpay while paying a mortgage, but that wasn't the point I was trying to make. It was simply to show the fallacy of the statement that "renting is always dead money", when clearly it isn't. However, in the illustration probably I should have put the following disclaimer:

"The following situation assumes that you're working your ar$e off giving up all sorts of things to get the deposit you need for the house. It further assumes that this is unsustainable in the long term and that once you get the mortgage, you'll not be overpaying on it."

However, for the doubters, allow me to present option 5: "the whole in the house way with 1 year renting"

You wait one year renting at £900 per month

After 1 year, you have a £56k deposit (as per option 2)

You get a 20% loan-to-value mortgage of £224k at 3.84%

This gives a monthly mortgage payment of £1191 over 24 years

But you overpay by 2500+900-1191=£2209 each month (again ignoring early repayment charges)

The total payment for the whole mortgage term is £251,965 paid in 6.18 years

Added to your £56k deposit and 1 year's rent of 900x12=£10,800 you've paid £318,765 for your house

Compared to the "whole in the house way" method that Mayalabeille described earlier which costs £316,110. So a difference of £2,655 in favour of Mayalabeille's option.

However, I've not counted the fact you get a lower mortgage interest rate on an 80% loan-to-value mortgage than on a 90% one, neither have I counted the 1 year's interest you'd earn on the deposit fund, nor the fact that house prices are slowly drifting lower at the moment. Even a 1% drop in prices over a year would be worth £2800 on it's own, which would still mean that waiting a year and renting actually saves you money.

All of which goes back to my (badly explained) main point that GIVEN THE RIGHT CIRCUMSTANCES, renting is not "dead money".

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Rent or buy? I tend to agree with those who conclude that, as things stand and in general, with all things considered, there probably isn't much in it. I do believe there will be a fall in values in the long term though. The monetary fiddling of the BoE scum has reached the end of the alley.

The economy continues to be screwed. It is increasingly apparent amongst policy makers and commentators that a massive house building exercise is needed. It will provide large numbers of jobs (helping the economy where money printing and artificial rates have failed) and address increasing stress and resentment amongst the hoards of under 35s who are taking the brunt of crap quality and high rent accommodation. Plus, it will make the economy more sustainable in the long run by reducing the need for high levels or personal debt, and will free up disposable incomes. Even if the current or the next government dont have the long term vision and sense to implement this, it will happen at some point in the next 20 years. Don't forget, the baby boomers won't be running this country forever. A big increase in supply, if it doesn't come soon, will come later as a massive backlash.

This must be factored into the calculations when considering the long term benefits of buying. Increased supply will place downward pressure on prices. It only takes a decision by policy makers to push the button. It will only take minor tweaks to planning regs and government funding to make this happen. Contrary to popular stupidity and lies, we are not an over developed island. Only around 4% of our landmass is built on. There is plenty of room for massive new urban extensions and even new settlements.

It's not if; it's when.

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Very interesting calculations, although I do think the choices should involve properties of similar value. A house worth £280k would cost much more than £900 per month to rent.

I am renting and have been considering getting on the property ladder of late. I have savings of about 35k and pay rent of about £10k/year, so I need to earn about 30% on my savings to reclaim this "dead money". I don't mind taking on heavy levels of risk so it isn't impossible to get a good return, although it is still very difficult of course.

The alternative is to buy something cheap for about £100k. I can see the costs around the transaction to be in the region of £3k, interest costs on top of that to be say £3k (depending on the specifics of mortgage of course), and also the many hours it would cost to re-organise my life. Since I might not stay in the UK for longer than another year or two, buying something seems like the wrong decision. It could take 6 months or longer to sell the property, costing me again a great number of hours and energy, and the outlook for house prices is not terrific over this timeframe.

Peter Schiff has said some excellent things about renting versus buying. There is nothing wrong with treating your rent payment like your grocery bill - just another cost of living. Buying a house is something you should probably do only when you know you would like to live in the property for many years.

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