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Rent Is Not Dead Money?

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I’m a touch confused. I’ll have to admit that I’m no economics expert, but I can’t really understand the mantra of “rent is not dead money”. Surely rent is always dead money? That is, you’re paying out a huge amount each month which amounts to nothing other than supplying a roof over your head for that month and that month alone.

If you can get a 15 year fixed rate mortgage and live in a place you will be happy in, what is the argument for renting? In my area, it would actually be cheaper to get a mortgage with the Nationwide and buy a one bedroom flat than to rent one! Let’s face it, maintenance costs in a flat are not going to be enormous are they?

The fact is, we just cannot be sure of a house price crash and renting whilst waiting for prices to fall is a huge, potentially life-destroying gamble for anyone but those who are already rather well endowed financially.

Maybe I’m thick and just need it spelt out to me in simple terms but I think that if we all rented, we’d be shooting ourselves in the foot as we’d be adding to the viability of BTL investments by increasing the demand for rented property!

If there really was a house price crash, is negative equity such a big deal, as long as you can keep up your repayments? If you want to then move up on the ladder, is it any harder than when you have positive equity? Do banks really not allow you to move unless you have positive equity? What happened in these instances in the crash of 1989?

I would love there to be a house price crash and to be able to buy a house for a reasonable sum, but I’m really not convinced that this will happen. Maybe these are stupid questions, but I just don’t get it. Sorry :unsure:

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I’m a touch confused. I’ll have to admit that I’m no economics expert, but I can’t really understand the mantra of “rent is not dead money”. Surely rent is always dead money? That is, you’re paying out a huge amount each month which amounts to nothing other than supplying a roof over your head for that month and that month alone.

If you can get a 15 year fixed rate mortgage and live in a place you will be happy in, what is the argument for renting? In my area, it would actually be cheaper to get a mortgage with the Nationwide and buy a one bedroom flat than to rent one! Let’s face it, maintenance costs in a flat are not going to be enormous are they?

The fact is, we just cannot be sure of a house price crash and renting whilst waiting for prices to fall is a huge, potentially life-destroying gamble for anyone but those who are already rather well endowed financially.

Maybe I’m thick and just need it spelt out to me in simple terms but I think that if we all rented, we’d be shooting ourselves in the foot as we’d be adding to the viability of BTL investments by increasing the demand for rented property!

If there really was a house price crash, is negative equity such a big deal, as long as you can keep up your repayments? If you want to then move up on the ladder, is it any harder than when you have positive equity? Do banks really not allow you to move unless you have positive equity? What happened in these instances in the crash of 1989?

I would love there to be a house price crash and to be able to buy a house for a reasonable sum, but I’m really not convinced that this will happen. Maybe these are stupid questions, but I just don’t get it. Sorry :unsure:

Rent is indeed "dead money" but so are mortgage interest payments. If your mortgage interest payments are more than your rent then it is cheaper to rent - even "in the long term". In many parts of the UK it is now cheaper to rent than to buy.

If you can get a 15 year fixed repayment mortgage for less than you can rent for then you are probaby in the minority. There is no way you could buy anything where I live for that kind of value.

Negative equity is not an issue if you can pay the mortgage and do not want to move. But what if you lose your job? or get offered a better job in a new area? or want to start a family? Negative equity is a nightmare if you need to be flexible.

These are all lifestyle choices of cause, there's no reason you should not buy if you can afford it and it's cheaper than renting in your area, but I'll leave you with this thought. There probably will be a recession in your working lifetime - how prepared for that are you?

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The point is that rent is no more dead money than mortgage interest in certain circumstances. Mortgage interest is the "rent" that you pay to the bank for the money you used to buy the house. So unless you buy a house outright, you are renting something either way.

Now, if house prices are increasing and likely to keep increasing steadily, and monthly mortgage interest payments are cheaper or not much more expensive than rent, then rent is dead money. You are paying for your landlord's right to enjoy capital appreciation.

If house prices are flat and likely to remain flat, and mortgage interest is less than rent, rent is dead money. You are paying off someone else's mortagage when you could be paying off your own for less.

If house prices are flat and likely to remain flat, and mortgage payments are more expensive than rent, then mortgage interest is dead money. If you are renting, your landlord is subsidising you to live in a better house than you could buy.

If house prices are falling, then mortgage interest is dead money because you are paying the bank to own an asset that is falling in value. You say that negative equity might not be a huge problem, but why not just wait and buy the house when it is cheaper. The extra money you pay by buying it now rather than later could also be called dead money, and may outweigh the "dead money" of rent you pay in the mean time (which in itself may also be less than the mortgage interest you would pay, so you are throwing money away twice).

And don't forget that while your deposit is tied up in your house, you don't earn interest on it. That's the opportunity cost of money.

I am currently in the situation where 1) it would be more expensive for me to buy the place I am renting than to rent it and 2) the interest on my deposit is equivalent to half of my rent. So in this case, I am gaining a financial advantage by renting, therefore it is not dead money.

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Opportunity cost mate and flexibility.

Yes, a 15 year fixed loan may make buying that flat affordable, but:

- Do you see yourself in the same situation in 15 years time? In the same flat?

- If prices do go down, the flat has cost you more than renting would

- Transaction costs (economic jargon for "buying and selling property isn't cheap") With stamp duty, EA fees etc. the transaction cost is in the range 5-7% of value, making buying the flat less of a no-brainer. Plus the time spent trying to buy/ sell

E.g., my sister is looking to either move areas in London, or do a big renovation. The cost of moving is going to be about 50,000 quid on a 750k house. Ouch. So they will probably renovate instead.

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Rent may or may not be dead money. If house prices are static over a long period of time then rent MAY be dead money if it is more than the mortgage repayment.

You also have to consider the question of the deposit. Say you've got savings of £20,000, and if you buy a house this is your deposit. You're saving yourself rent, but you're losing the interest on this money. You're also losing the security this money provides if there's a crash/recession - particularly if the value of your house falls into negative equity. Finally, this £20,000 could be put to work in other ways. For example in the stock market. So your rent is allowing you to keep your savings - and if you're clever/lucky to manage your savings so they grow in value faster than the rate of inflation.

Overall, rent might only be dead money if property prices are rising, and even then not necessarily - money for a deposit might be better employed in another assert class.

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Currently rent is not dead money; it is mortgage payments which are dead money. To grasp this apparent contradiction you need to understand the concept of 'opportunity cost' which defines what one might be earning with one's money if it was invested elsewhere.

I rent a £400K property; if I tied up £400K of my equity by buying this place I would lose whatever I could earn by investing that money in, say, a high interest account yielding 5%. So the opportunity cost of ownership would be £20K per annum to which would be added maintenance, insurance, stamp duty, buying and selling costs and all the other invisible costs of ownership.

However I choose to rent this property and I only pay £12K per annum; furthermore the £400K that is not tied up by ownership is released to earn good returns elsewhere and I carry none of the risks of losing money in a sliding house market.

When it is cheaper to buy than to rent I will become a property owner once again. But for now a mortgage is dead money.

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I’m a touch confused. I’ll have to admit that I’m no economics expert, but I can’t really understand the mantra of “rent is not dead money”. Surely rent is always dead money? That is, you’re paying out a huge amount each month which amounts to nothing other than supplying a roof over your head for that month and that month alone.

To give you the context, "rent is dead money" is a quote that property bulls like to use. It needs to be challenged. It should probably be rephrased with "rent may be dead money", but whatever...

If you can get a 15 year fixed rate mortgage and live in a place you will be happy in, what is the argument for renting? In my area, it would actually be cheaper to get a mortgage with the Nationwide and buy a one bedroom flat than to rent one! Let’s face it, maintenance costs in a flat are not going to be enormous are they?

If you can find the deal described here, then you should probably take it. To be fair, the comparison should be between the rent, and the interest on 100% interest-only mortgage. These are the actual costs of housing. If you can pay a repayment mortgage for less than the rent, good for you.

The fact is, we just cannot be sure of a house price crash and renting whilst waiting for prices to fall is a huge, potentially life-destroying gamble for anyone but those who are already rather well endowed financially.

Maybe I’m thick and just need it spelt out to me in simple terms but I think that if we all rented, we’d be shooting ourselves in the foot as we’d be adding to the viability of BTL investments by increasing the demand for rented property!

In reverse order, having an open mind to ask suggests you aren't thick. In the current market, many people would significantly cut their housing costs by renting.

When that happens, the BTL investor is NOT paying his mortgage from the rental income. That isn't great, but it can make sense if the increase in the property value covers the difference. If the property market is flat, the value of the rental income becomes more important. If the BTL investors decide to stop subsidizing their tenants, they then risk depressing the market more.

But you seem to make a mistake suggesting that waiting for a crash is potentially catestrophic. That would only be the case if prices rose significantly further for the forseeable future.

I described my personal circumstances in this post.

I'm saving a huge amount against servicing a mortgage on the value of the property. I'm trying to save a considerable chunk of that in what I think of as a "synthetic mortgage".

If there really was a house price crash, is negative equity such a big deal, as long as you can keep up your repayments? If you want to then move up on the ladder, is it any harder than when you have positive equity? Do banks really not allow you to move unless you have positive equity? What happened in these instances in the crash of 1989?

I would love there to be a house price crash and to be able to buy a house for a reasonable sum, but I’m really not convinced that this will happen. Maybe these are stupid questions, but I just don’t get it. Sorry :unsure:

If you can buy cheaper than renting, then that would strongly indicate that you should consider buying. It would also indicate that it is unlikely that prices would drop from the current level.

The reason that you are unsure would appear to be that you have an un-typical situation. Where in the o****ry are you living?

Also, to clarify, the "dead money" is the difference between an interest payment and the rent.

Edited by slowjoe

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Lets take a practical example... imagining that prices won't rise or fall in the next 5 years (tough i know).

The sample FTB flat

Here's a flat in Finsbury Park (not the cheapest area of london... or the most expensive)

http://www.findaproperty.co.uk/agent.aspx?...prop&pid=221772

£170K one bed flat

And here's how much it would cost (per month) to buy on a 100% purchase 25 year 5% IR mortgage:

£1,005.15 (using http://www.bbc.co.uk/homes/property/mortga...lculator.shtml)

This pcm value doesn't include any additional cover or insurance i.e. death/illness/unemployment etc. which is probably an extra £30 or more per month.

So why might renting not be dead money?

Well, here's a similar rental property on the next road - let's imagine I live there for five years first (and if we assume there no HPI or HPC lets also assume rents stay the same).

http://www.findaproperty.co.uk/agent.aspx?...=prop&pid=15256

£150 per week = £650pcm

The difference between the two over five year is:

(£1,005 - £650 =) £355pcm = £4260pa = £21,300 but if your using ISA's etc. this should easily become about £24K.

So lets now imagine its five years later and i have my hard cash to put down as a deposit... and now take out a 20 year mortgage which is now (£170K - £24K =) 146K (so my 24K is aprox. a 15% deposit) at the same IR of 5% (although with a 10%+ deposit i might get a better rate).

Which becomes:

£976.28pcm

So what difference has that made...

1) Firstly I have reduced the size and length of mortgage which reduces risk and costs (ie. repair/upkeep)

2) I have saved by not paying insurance on my mortgage for 5 years (ie. £30x12x5 =) £1,800

3) I will save (£1,005-£976=) £29 pcm for the rest of the mortgage (ie. £29x12x20=) £6,960

4) Additionally because mortgages are front loaded with interest I start with more equity

This doesn't take into account the interest i could earn on these savings if invested elsewhere.

So bascially if things remain the same in a static market for five year I can save 10 grand and reduce my level of risk and increase my equity holding significantly!

So next time someone says 'renting is dead money' remind them that it's only true when HPI causes houses to outgrowing affordability and that in static or falling market conditions its better to rent and save!

Edited by pyewackitt

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Guest Bart of Darkness

The "rent is dead money" argument (for the man in the street) probably boils down to the idea that at the end of 25 years renting you will have zilch to show for it, at the end of a 25 year mortgage you will have a property worth more than you paid for it.

Anything more in-depth than that (whether it's right or wrong) is never considered.

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I’m a touch confused. I’ll have to admit that I’m no economics expert, but I can’t really understand the mantra of “rent is not dead money”. Surely rent is always dead money? That is, you’re paying out a huge amount each month which amounts to nothing other than supplying a roof over your head for that month and that month alone.

Obviously, neither rent or mortgage interest payments are "dead money", since you are getting one month's enjoyment of a dwelling in return for your hard earned cash. Otherwise, one might as well say "I am not going to buy a sandwich for lunch, the £1.49 I would have to pay to the newsagent proprietor is just dead money".

Typical mortgages are made up of two components: the interest portion and the capital repayment portion. The capital repayment portion is the only bit of the mortgage which goes to paying off your house. The capital repayment portion is in a sense equivalent to a savings vehicle, since you are putting aside a bit each month and at the end of 25 years you end up with a house.

The interest portion is what you pay the bank to rent the money you bought the house with until you pay it off. So the interest portion of a mortage is as "dead" as rent.

Many people do not seem realise this and seem to think that mortgage payments are 100% savings vehicle. Perhaps this is where the "rent is dead money" myth originates.

It is actually true that on certain classes of property rent today is less than mortgage interest payments. From what I gather, this seems to be mainly larger, more upmarket houses (probably because it is harder to find tenants). In some cases it may also be true for smaller properties. So, if you rent one of these places, and also put aside some savings every month, you are accumulating wealth more quickly for the same monthly outlay than if you had bought the place with a mortgage.

frugalista

If you can get a 15 year fixed rate mortgage and live in a place you will be happy in, what is the argument for renting? In my area, it would actually be cheaper to get a mortgage with the Nationwide and buy a one bedroom flat than to rent one! Let’s face it, maintenance costs in a flat are not going to be enormous are they?

In this case, the main argument for renting is that prices are falling and you will save yourself a lot of money by just delaying buying for 1-3 years.

Prices are so high that even tiny percentage drops equate to substantial savings. For example, suppose you are renting but looking to buy a place worth £200k. you delay buying for a year, and during that year the flat falls in price by 5%. This is hardly a crash scenario, many areas of the UK saw 5% falls or greater during 2005.

This equates to a £10,000 saving, just for doing nothing for a year. That's half of take home salary for a lot of people. It's a lot of money, in my book.

Personally I don't think there many good arguments for renting for life, unless you really value the flexibility of being able to move at short notice, for example if you had a job which moved around a lot. But the arguments for renting for the next couple of years are very strong indeed.

frugalista

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What we pay in rent now for a four bed property is £450pm. We are saving a lot of money, and it's never tight at the end of the month. When we do buy - we will have a large deposit therefore less of a mortgage.

The advantages of waiting are:

Cheap outgoings.

Saving substancially more each month.

If we'd have bought a while back when we sold we would have moved to the wrong area - therefore all the hassle of moving again.

Waiting has made us certain of where we want to go to.

We don't suffer negative equity.

Money's never tight at the end of the month.

We are completely debt free - hurray.

We will have a far bigger deposit - and would have paid far less of the mortgage off.

Quality of life = 100%

Btw - i don't think renting is dead money if you hadn't gathered!

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Rent is dead money when mortgage costs are lower and money can be made from selling the property at a later stage, e.g. when house prices have started rising.

When a peak in property prices is reached then the gap between mortgage payments and rent is met or as it is now renting is cheaper than buying.

Look back at renting in 1999 many properties rented out now do not cost anymore to rent then they did back then. This is especially true in London and the SE. Therefore renting has gone down in real terms given the annual rate of inflation.

Renting also becomes a more sensible option when job security is not good and mobility is required.

*** Also note that renting a property does not incur expensive property transaction costs, repairs, service charges, ground rent etc so while houses prices have peaked it is a no brainer for a renter to buy a property at this stage.

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  • 301 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% +
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      • Even
      • up 2.5%
      • up 5%



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