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Gavin123

The True Cost Of Renting A House Vs Paying Off A Mortgage

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I'm wanting to move up the next rung of the prop ladder. I'm trying to sell my current home and if successful I've considered renting, as most of the houses the next rung up are still overpriced and the gap between my expected sale price and these houses is greater than it should be.

I started to do the sums to try and work out the true cost of renting and I think I must be making a mistake somewhere as with my novice calculations it would seem to cost £11k per year:

Here's the details I'm working off:

Current Mortgage is near £500 per month, interest element on this (currently 2.5%) is just under £100. So each month I'm reducing my debt (or effectively saving) £400. If I sell my house and move into rented property I'll be paying around £500 per month (excluding rates) to get a similar house to my own.

Am I right in thinking that I should be adding the amount I would be paying off my mortgage each month (£400) to the cost of the rent to work out the true cost of renting vs staying put? Therefore £500 rent + £400 being paid off mortgage = £900 or nearly £11k per year!

Happy to be corrected!

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I'm wanting to move up the next rung of the prop ladder. I'm trying to sell my current home and if successful I've considered renting, as most of the houses the next rung up are still overpriced and the gap between my expected sale price and these houses is greater than it should be.

I started to do the sums to try and work out the true cost of renting and I think I must be making a mistake somewhere as with my novice calculations it would seem to cost £11k per year:

Here's the details I'm working off:

Current Mortgage is near £500 per month, interest element on this (currently 2.5%) is just under £100. So each month I'm reducing my debt (or effectively saving) £400. If I sell my house and move into rented property I'll be paying around £500 per month (excluding rates) to get a similar house to my own.

Am I right in thinking that I should be adding the amount I would be paying off my mortgage each month (£400) to the cost of the rent to work out the true cost of renting vs staying put? Therefore £500 rent + £400 being paid off mortgage = £900 or nearly £11k per year!

Happy to be corrected!

You are correct but you need to minus from that 11k the interest you would receive from the money you bank which should be about 400mw quid a month?

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I'm wanting to move up the next rung of the prop ladder. I'm trying to sell my current home and if successful I've considered renting, as most of the houses the next rung up are still overpriced and the gap between my expected sale price and these houses is greater than it should be.

I started to do the sums to try and work out the true cost of renting and I think I must be making a mistake somewhere as with my novice calculations it would seem to cost £11k per year:

Here's the details I'm working off:

Current Mortgage is near £500 per month, interest element on this (currently 2.5%) is just under £100. So each month I'm reducing my debt (or effectively saving) £400. If I sell my house and move into rented property I'll be paying around £500 per month (excluding rates) to get a similar house to my own.

Am I right in thinking that I should be adding the amount I would be paying off my mortgage each month (£400) to the cost of the rent to work out the true cost of renting vs staying put? Therefore £500 rent + £400 being paid off mortgage = £900 or nearly £11k per year!

Happy to be corrected!

No.

Each month, you take £500 out your pocket to pay the mortgage.

£400* of this pays down your mortgage and can be considered as equity.

So you end up £100 out of pocket each month.

If you were renting, you might pay £500 to the LL.

All of this would be retained by the LL.

So you would be £500 out of pocket each month.

So renting is costing you £400 a month more than paying a motrtgage.

That's £4800 a year.

*The element of repayment to interest seems surprisingly high.

Are you sure you are paying off £400 a month??

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No.

Each month, you take £500 out your pocket to pay the mortgage.

£400* of this pays down your mortgage and can be considered as equity.

So you end up £100 out of pocket each month.

If you were renting, you might pay £500 to the LL.

All of this would be retained by the LL.

So you would be £500 out of pocket each month.

So renting is costing you £400 a month more than paying a motrtgage.

That's £4800 a year.

*The element of repayment to interest seems surprisingly high.

Are you sure you are paying off £400 a month??

One thing you have forgotten - will you have any equity in the house after you have sold it (subtract residual mortgage from sale price)? If so, then you could work out the interest you can earn on this sum of money also and subtract from your 'additional cost for renting' figure. The best interest rate on instant access at the moment is around 3%, if you can tie it up for a period then you might get 5-6% somewhere. Remember that you'd have to pay tax on this interest.

I too think that £100 interest on £500 total repayment sounds quite low. Use one of the mortgage repayment calculators (I think BBC has one) to check this out - some of these calculators will give you interest and repayment portions separately.

The rest is down to speculation. If prices fall by 5% and you are looking at buying a £200k house, say then you would save £10k (on average). If they start going up, you might be in a good position to move quickly on something as you have nothing to sell - it all depends on your personal circumstances and views on life as to how far you are prepared to play the risk / reward game and only you can decide that!

Edited by Analysis

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As Cells said, you need to factor in the amount of interest you are going to get on the equity you release. At 0.05% i na current account, it won't get you much. At CPI+0.5% or whatever it is in that new NS&I bond, it may be sizeable - I suspect several members here more than cover their rent and have some left over for beer and kebabs.

You also need to factor in house price movements. If you expect your target house to move up or down £20,000 in the next year, it dwarfs the gap between mortgage and rent...

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One further consideration, depending upon your mortgage term and repayment schedule:-

The interest on your repayment mortgage is unlikely to be charged pro-rata across the term of your mortgage. It's a while since I've had a mortgage (!) so I'd check your contract but the interest element is usually quite heavily front loaded such that in the early years you are not actually paying down much of the capital sum at all (i.e. accruing equity). With the low rate you appear to have this may not be a particular problem but I recall one of my previous repayment mortgages where after 5 years of repayments the capital owed had barely fallen at all.

Check your terms to confirm.

Edited by Red Karma

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No.

Each month, you take £500 out your pocket to pay the mortgage.

£400* of this pays down your mortgage and can be considered as equity.

So you end up £100 out of pocket each month.

If you were renting, you might pay £500 to the LL.

All of this would be retained by the LL.

So you would be £500 out of pocket each month.

So renting is costing you £400 a month more than paying a motrtgage.

That's £4800 a year.

*The element of repayment to interest seems surprisingly high.

Are you sure you are paying off £400 a month??

This also relies on the "equity" being sustained by flat house prices. Falling prices will screw this equation right up.

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Current Mortgage is near £500 per month, interest element on this (currently 2.5%) is just under £100.

Happy to be corrected!

What if your mortgage rate goes up to 5%? What if the house you bought temporarily loses 10% in a year? The place where I live, £250k houses have been losing £10K a year since 2007. A lot of them bought new for £250k and now are selling for less than £200k now.

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One thing you have forgotten - will you have any equity in the house after you have sold it (subtract residual mortgage from sale price)? If so, then you could work out the interest you can earn on this sum of money also and subtract from your 'additional cost for renting' figure. The best interest rate on instant access at the moment is around 3%, if you can tie it up for a period then you might get 5-6% somewhere. Remember that you'd have to pay tax on this interest.

I too think that £100 interest on £500 total repayment sounds quite low. Use one of the mortgage repayment calculators (I think BBC has one) to check this out - some of these calculators will give you interest and repayment portions separately.

The rest is down to speculation. If prices fall by 5% and you are looking at buying a £200k house, say then you would save £10k (on average). If they start going up, you might be in a good position to move quickly on something as you have nothing to sell - it all depends on your personal circumstances and views on life as to how far you are prepared to play the risk / reward game and only you can decide that!

Cheers for the replies, i suppose your right - it all depends on the personal circumstances. As I currently have a property to sell its not as clear cut as someone whos looking to buy there first home. In thieir situation the rent can be directly offset from falling house prices. In my situation I have a debt against my house that will remain regardless of how much i'm able to sell for. Thankfully Its quite modest at around 45kish over 8ish years. I take the point regarding the interest that could be gained from the equity i would release from the sale of my house which would bring the rental cost down a few hundred quid.

That said, I think in my situation selling to rent doesn't appear to be a wise move - unless someone makes an offer on my house i can't refuse!

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If house prices drop by £10/£20k in a year then any rent that has been paid will have been worth it.

A £10k drop in a house price could result in a lower LTV when you go to get a MTG therefore giving you a better interest rate and saving you prob 10 years on your MTG as well.

Renting is a far better option in the short term if you are wanting to;

1) Wait and see what happens with the market

2) Get your house sold quicker as you will not be part of a chain as such

3) Allows you more flexibility to buy your next house as you are no longer part of a chain. This gives you a strong hand to play when negotiating a purchase price of your next property

4) Means you are not rushing into anything ... at the end of the day it has to be the right house.

The hardest part will be getting your own house sold .. if it is priced correctly then it should sell.

Renting for me is a no brainer if you can get to this point. Then the cards are in your hand to play as you see fit.

Edited by tinbin

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  • 284 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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