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HPCheese

First Time Buyers - Is Your Rent 'dead Money'?

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Following on from Merryn's article in today's Sunday Times - "Buying - not renting - is the new 'dead money'", I wanted to put the theory to the test and answer the question -

"Is my rent less expensive than the repayments on an interest-only mortgage plus maintenance/ownership costs?"

First off, I live in a relatively small 2 bedroom flat 'worth' approximately £240K in today's market which I rent along with my partner for £900 pcm.

Buying the flat on a repayment mortgage isn't an option for us as the monthly repayments on a 90% mortgage would cost around £1245 pcm, which we simply can't afford. Additionally we have nothing like the £24,000 deposit required to take a 90% mortgage, and the repayments on a 95% mortgage are around £1360 pcm, so in a way this discussion is academic as we don't yet have a large enough deposit. But...

The best way for us to 'take ownership' of the flat (i.e. to pay a bank instead of a landlord each month) is with an interest-only mortgage. For this example I have used the Nationwide Quick Quote (https://olb2.nationet.com/applications/mpiui/start.aspx).

Based on a First Time Buyer purchasing a property for £240,000 requiring a fixed Interest Only mortgage of £215,000 (89.58 %) over a 25 year term.

Years 1-10

Interest Rate - 4.89 % (Fixed)

Basic Monthly Payment - £876.12

Years 11+

Interest Rate - 5.89 % (Variable)

Basic Monthly Payment - £1054.59

Total Amount Payable - £510594.00

APR - 5.5 %(Variable)

Taking the additional transaction fees and home ownership costs into account we are clearly better-off renting than buying on those terms.

Additional reasons for not buying today on an Interest Only mortgage.

1. Inflation is currently low. This means our debt will not be inflated away as quickly as it would have been in the past and we may be left with a very large repayment at the end of the mortgage term.

2. House prices are widely predicted to either flat-line, fall like a feather, or fall like a brick. There is no impetus for us to buy within the next few years as our £240K flat may be 'worth' substantially less in the future making a repayment mortgage affordable.

3. Interest rates are currently low, and are in no way guaranteed to be low indefinitely. If interest rates go up we could find our mortgage payments stifling when the fixed term expires.

I am convinced that it is better for us to rent at this point in time, and I think any sane first time buyer should seriously consider all these factors.

Our rent is not 'dead money' - it is a speculative investment in the short term which I think will save us thousands of pounds in the not-so-distant future.

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Following on from Merryn's article in today's Sunday Times - "Buying - not renting - is the new 'dead money'", I wanted to put the theory to the test and answer the question -

Renting IS dead money. Always has been, always will. (Unless you are collecting it of course)

Mervyn's actually wrong in describing buying as the new dead money.

In 2005 FTBing is WORSE than dead money. If prices fall over the next few years then you end up in negative equity should you have to sell.

Zombie money might be more appropriate :)

Better to wait a few years and then buy.

(Renting will still be dead money then too)

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Renting IS dead money. Always has been, always will. (Unless you are collecting it of course)

Mervyn's actually wrong in describing buying as the new dead money.

In 2005 FTBing is WORSE than dead money.  If prices fall over the next few years then you end up in negative equity should you have to sell.

Zombie money might be more appropriate :)

Better to wait a few years and then buy.

(Renting will still be dead money then too)

Actually I disagree with the idea of dead money.

You are simply paying for somewhere to live.

This belief that money is "dead" is just another example of how indoctrinated into the belief that having somewhere to live is synonymous with making a profit people in the world have become.

What exactly is so wrong with renting as a form of paying for somewhere to live?

As I have said before there is no "dead" money. All that matters is whether it suits you to rent and whether renting is cheaper than buying.

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Renting IS dead money. Always has been, always will.

How is it dead money when it may make it possible for you to save thousands of pounds in the future? House prices are coming down and renting now allows us to reduce our future mortgage - that makes it a speculative investment.

Of course if prices don't fall, or don't fall enough is will be seen as a bad investment in hindsight, but the same can be said for ALL speculation. Buying now would be a much bigger gamble.

Edited by HPCheese

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unless you are actually making a capital repayment that will contribute to you owning the property in the long run then both renting or an interest only mortgage are dead money (although i agree with the paying somewhere to live argument) - whilst there is a significant risk of capital depreciation isn't it better to pay out as little dead money as possible to live in the same place?

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Hmm. Personal circumstances have let me to this crossroads too recently.

In 7 weeks I and my GF will be moving into a 1 bed-flat in North London and the rent is a hike from what we were used to paying when we shared with one other.

The rent is now £1040 per month.

Now the property (if for sale) would probably cost £230K.

A repayment mortgage on that property would probably be about £1150 per month. (100% mortgage).

However we are in a position where (should be choose) we could put down 40K deposit which would mean repayments fo £950ish aper month.

So in some respects the argument for me buying is quite persuasive at the moment if I was looking at it purely from the pov of montly rent/repayment. HOWEVER...

1) We don't want to buy a 1 bed flat in the area for fear of getting trapped there for 10 years. We want a 2-bed (circa £250K) and ideally one at the top of the market in terms of location and features (outside space) - these go for £280kish at the moment.

2) Prices appear to be coming down at a speed of 2% a year (real terms 4%).

3) that £40K deposit is growing by £2k a year.

4) Interest rates are in the mid-to-long term likley to go up and so will the mortgage repayments.

I have a hunch that 2007 will be a good time to buy and hope that by waiting that long then we will have saved ourselves 10's of 000's - maybe as much as £50k.

However I can't deny that the fact I will be paying almost as much in rent as I would be in a repayment mortgage turns my eye.

Anyway, I'm locked into this rental contract for 14 months so we will have to sit and watch the market anyway!

;)

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I can't understand all this talk of 'dead money'. My definition of dead money is money which has no inherent value after it has been spent. I don't regard rent in our situation as dead money because it has the potential to save us even more money in the future. This is value above-and-beyond the service of putting a roof over our heads.

Every pound we spend on rent this year we are likely to regain in the future, because we have spent it on rent instead of mortgage repayments, and this is real value.

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In 7 weeks I and my GF will be moving into a 1 bed-flat in North London and the rent is a hike from what we were used to paying when we shared with one other.

The rent is now £1040 per month.

Crikey, where the hell are you living? I'm in a desirable area of SE1, in a 2 bed flat with balcony, market worth £450k and paying £1500pcm... methinks you have been shafted.

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Crikey, where the hell are you living? I'm in a desirable area of SE1, in a 2 bed flat with balcony, market worth £450k and paying £1500pcm...   methinks you have been shafted.

If only!

Am not prepared to reveal exactly where I live because....I'm paranoid.

We're paying the going rate for a very good flat in one of N London's better locations. I've looked at enough property and lived in the area long enough to know we aree not getting shafted.

You pay a premium for living in a 1 bed I discovered! I guess this is because landlords assume that a couple will live there and therefore they price 1 beds on the basis of two salaries.

I don't think there is a great deal in difference (rent wise) between a 1 bed and a 2 bed for this very reason.

I dont think what we are paying is that much worse than yourself.

You and your mate are paying £750 a month each.

We're paying £520 a month each.

As I say there is a premium for 1-bed flats. But at least we don't have to share anymore! :lol:

Edited by DonnieDarker

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Renting IS dead money. Always has been, always will. (Unless you are collecting it of course)

But under that basis:

Eating is dead money.

Going out is dead money

Holidays are dead money.

Cars are dead money......etc etc etc

The fact is that there is a cost associated with every aspect of life including putting a roof over yer head. The only dead part is the element which is in excess of what you would pay for a comparable service/comodity purchased by different means.

Renting money is equally dead money.

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Actually I disagree with the idea of dead money.

You are simply paying for somewhere to live.

This belief that money is "dead" is just another example of how indoctrinated into the belief that having somewhere to live is synonymous with making a profit people in the world have become.

What exactly is so wrong with renting as a form of paying for somewhere to live?

Rent is dead money. Rent until you retire and the penny will drop. You have nothing to show for the money and nowhere decent to live because your meagre pension will not stretch to renting privately any more.

Buy a property over 25years and you have something to show for the all mortgage money. Therefore the mortgage money spent is not dead.

Is it really that difficult to understand?

unless you are actually making a capital repayment that will contribute to you owning the property in the long run then both renting or an interest only mortgage are dead money (although i agree with the paying somewhere to live argument) - whilst there is a significant risk of capital depreciation isn't it better to pay out as little dead money as possible to live in the same place?

Well put. At least someone understood my first post.

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I dont see Renting at dead money at all,

In this market it is "active money", since it keeps your options alive:

You are:

+ Free to move,

+ Free to buy,

+ Building savings faster than those pouring their money out paying interest on big mortgages.

Flexibility is great in a falling market. Don't feed The Morg !

Edited by HollandPark

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Is it really that difficult to understand?

No it really isn't that difficult to understand the point you are making.

But there are alternatives to the proposition you are making, and I am merely putting one forward: that some people choose to buy and some people are happy to rent - you can rent in both the private and public sector, and in fact it can be cheaper over the period of a lifetime to rent social housing. Subject to what house prices and interest do over the next few years, it could also be cheaper to rent in the private sector for the rest of your life.

The idea of buying a house over 25 years and then having nothing to pay for the rest of your life is great. But it may well be cheaper and better to rent perhaps for the whole of your life.

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Rent is dead money. Rent until you retire and the penny will drop. You have nothing to show for the money and nowhere decent to live because your meagre pension will not stretch to renting privately any more.

Buy a property over 25years and you have something to show for the all mortgage money. Therefore the mortgage money spent is not dead.

Is it really that difficult to understand?

Well put. At least someone understood my first post.

If I were to buy now it would cost me 3 times as much a month compared to renting. So I'm saving a lot of money as a result. Therefore I DO have something to show for renting - money in the bank. People I know who've bought in the last 4 years barely save a bean.

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in fact it can be cheaper over the period of a lifetime to rent social housing.

I'll take your word on that one TM2TC. I do know there are security advantages for those in social housing.

Back in the mid eighties when I was still at college a friend of the family gave me a long speech about the benefits of social housing. The main jist of which was that they can't throw you out once you are in (within reason). Also the welfare state looks upon you kinder if you fall ill or lose employment compared to a mortgage payer. His mind was made up to stay in that house for the rest of his life. (he was in his late 30s back then)

However, I looked at the house/area he was living in and decided I would rather take the risk of a mortgage when the time came and have somewhere better to live.

The majority of people today hold the same view as me (although a fair few will wish they had opted for social housing if they rented privately all their life and couldn't afford to continue once retired)

Interestingly, this friend of the family got a better job and decided to buy his council house for a knockdown fee some years later on.

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The 'rent is dead money' argument was especially interesting against renting in our case and in this area generally. We are paying 148K for a decent 3-bed semi, solidly constructed and very well maintained/updated by owner of 18 years. She is a very fussy lady!

Anyway, we will borrow 133K at 4.59%, fixed for 5 years on a 25 yr repayment mortgage with the Skipton BS.

Monthly Repayment is around 746pm

Interest Element is around 508pm

IF availabele to rent, similar properties rent for 650pm+, some 142pm more than the interest on our mortgage. Crash or no crash, I cannot see the rents of these properties coming down as there is in no way an oversupply of them locally.

As an aside, I've actually considered doing an interest-only mortgage on the above terms and stick the other 240pm or so into a cash-ISA, currently available giving up to 5.5%pa. I figured that at the end of 5 years the ISA savings would able to reduce the balance of the mortgage to around the same as if we had done a repayment from the start. Maybe this is a mad risk to take but with recent events and oil prices getting higher by the day, am I the only one who can see inflation taking off and interest rates chasing up after it to try to control it? Nice for cash -ISA rates if it happened, no?

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Guest muttley

Over a working lifetime it may very well be better to buy,but the "property ladder" is NOT a ladder,it is a market.To be more exact it is a cycle.

I choose to rent because I believe that the cycle has peaked and will now,inevitably,enter the downward phase. The question now is how far down and how soon?

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Rent is dead money. Rent until you retire and the penny will drop.

"Rent is dead money cause if you do it for 25 years....blah blah blah"

You don't leave much room for alternatives in your argument do you.

Renting can and invariably is "dead money" most of the time.....also over the long term it is also likely to mean a lot of dead money.

But we are not talking long term here are we....we are talking about a tactical move into rented accomodation until the direction/magnitude of the market is sorted.....to this end it is very much life money.

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Rent IS dead money.

I have a friend who...

The majority of people today hold the same view as me...

Er, no they don't. 99% of the people on this forum hold completely the opposite view to you - you're just too stupid to realise that, even after most of them post replies that shoot your theories down in flames.

Still, yet another quality post from you, our resident pensions expert. And yet you don't understand either compound interest, falling house prices, stock-market investments or rents which are a fraction of both interest-only or repayment mortgages. And when people do the maths to demonstrate these things to you, they end up be called "bullshitters" by you. How mature and intelligent.

You really need to take some advice (which seems impossible for you, as you ignore all views contrary to your own) or just hope that you EA business survives the crash. :P

Nomadd (another one of those poor unfortunates doomed to a later life of poverty...)

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My view is that you probably want to end up with a house (of funds to buy one) by the time you retire, so there has to be some provision for accumulating this, either by renting *plus* saving or by paying off a mortgage. As other posters have said, the ladder wobbles about cyclically, so the ideal thing is get on/off at the right times, although (unfortunately) the timing is often dictated by other things. Another problem with long term renting is that the rent tracks inflation/earnings/hpi whereas the mortgage payments don’t – it’s partly this fact that allows moving *up* the ladder

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What seems strange to me is the fact that people are comparing where they are renting with what they would buy. When I was renting, I lived in a property which was "worth" about 3 times the one which I eventually bought. This was in the mid 90s, and everyone I know expected to buy somewhere which was less "nice" than what they could afford to rent.

Personally if I could afford £900 a month, I'd be buying a property rather than renting - it might not be as great as what I could afford to rent, but personally I'd find it worthwhile to avoid 6 month leases. Each to their own though.

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Rent is dead money. Rent until you retire and the penny will drop. You have nothing to show for the money and nowhere decent to live because your meagre pension will not stretch to renting privately any more.

Buy a property over 25years and you have something to show for the all mortgage money. Therefore the mortgage money spent is not dead.

Is it really that difficult to understand?

It depends. I did the maths and at current prices, if you have a fixed sum equivalent to a mortgage set aside, and either buy (spending all of the money) or rent (and invest the difference), you end up with the same amount of assets, either in the form of a property or shares after 25 years.

Shares then pay you through dividends, to cover your rental costs, or alternatively property leaves you without the need to pay housing costs. Then, when you go into care you either start selling your shares, or sell your house and use that money.

Long term, there's nothing in it at current prices. Post crash - assuming it comes - then the balance tips towards property purchase again.

The only 'dead money' is poorly invested money. At the moment, property is a poor investment in your own future.

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Here's another mortgage example, this time based on prices in our area falling by 20% over the next few years.

The difference this time is that it is a repayment mortgage - we can afford the repayments - and the total mortgage cost is £191,537 cheaper! That's right, a saving of nearly two hundred thousand pounds!

Yes we're paying rent at the moment, but the long-term gain will hopefully make-up for the short-term pain.

Based on a First Time Buyer purchasing a property for £192,000 requiring a fixed Repayment mortgage of £172,500 (89.84 %) over a 25 year term.

5 Yr Fixed Rate

Years 1-5

Interest Rate - 4.69 % (Fixed)

Basic Monthly Payment - £977.51

Years 6+

Interest Rate - 5.89 % (Variable)

Basic Monthly Payment - £1078.98

Total Amount Payable - £319057.00 - (The original total amount was £510594.00).

APR - 5.6 %(Variable)

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My view is that you probably want to end up with a house (of funds to buy one) by the time you retire, so there has to be some provision for accumulating this, either by renting *plus* saving or by paying off a mortgage. As other posters have said, the ladder wobbles about cyclically, so the ideal thing is get on/off at the right times, although (unfortunately) the timing is often dictated by other things. Another problem with long term renting is that the rent tracks inflation/earnings/hpi whereas the mortgage payments don’t – it’s partly this fact that allows moving *up* the ladder

Spline: Hope you don't mind, i'm not directly replying to your message just using it to put forward my views of "the ladder"

The whole concept of a ladder is flawed, up (i.e. more expensive house) means better than down....which in turn is infinately better than off (apparently).

Yet to move up this ladder can for many mean a lifetime of debt, a wage slave, woking just to live. What is so fantastic about being higher on the ladder than your peers if you are an office slave to get there...if you actually have no time/funds/energy left to enjoy living.

Some of the most interesting people I have met have been completely mortgageless and but for a small rickety boat - homeless.

I must confess STR'ing was originally undertaken by myself as a way of moving up this darn ladder thing.....but now I have stepped off it I do often think perhapes there's more to life than aspiring to get back on it again......

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  • 302 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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