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krosfyah

Can Someone Help Me Explain The Old "rent Is Not Dead Money" Adage Please?

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Hi - i remember reading the old "rent is not dead money" if you work out that it costs you less to rent than it does to repay the mortgage and associated costs of ownership, and that works out more expensive than renting and saving for a deposit.

Can someone help me understand (objectively) what my position would be now, compared to if i buy please?

Currently my wife and i pay £850/month for our 2 bed flat. If we were to buy the same property, or similar, it would be in the £220-230k price range or thereabouts (we can't afford this anyway).

We are also doing our darnedest to put aside £1000/month for our flat deposit. It's a struggle, but the way i see it, the higher our deposit, the less mortgage we will eventually need when we can afford to buy.

Now am i right in thinking i'm doing the right thing, because, even though we have outgoings of £850/month on rent, that would be less than what we would be paying in interest on a repayment mortgage on a mortgage of £220 or £230k (if we could even afford it) with a 10% deposit.

Essentially i'm a little confused and was hoping someone could take my cost of living figures and help me understand with more clarity how, even though we are renting, it's not dead money etc.

Many thanks if anyone can help.

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(850*12) / 220000 = 4.63% Gross yield.

Basically if you were to buy the property with no deposit you would be paying £916 per month interest only (@5% mortgage). That's before you repay any of the debt.

In my opinion renting as you are is the no brainer option!

Edit: If interest rates went up, as they are likely to do, you will be in a even better position!

Edited by Jason

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Edit: If interest rates went up, as they are likely to do, you will be in a even better position!

Why, because you'll have missed the chance of getting a cheap fixed rate :blink: ? What you really mean is that the notional comparison will look better. And if higher IRs trigger a price fall, then you'll really be in a better position, but only if.

Krosfyah,

Sounds like you may be best advised to wait a bit, especially since you are doing a good job of saving. That can make a big difference.

I do have a couple of niggles about this "rent if the rent is less than the mortgage interest theory" though.

One is that it depends what timescale you are looking at. Rents rise, and the interest part of a repayment mortgage falls over time. So if the gap starts out quite narrow it will be levelled within a few years. If it is likely to take more than those few years for prices to fall, the sums can work better if you buy now. Clearly renting is not the better option over 25 years so I'm assuming the plan is to pick the moment to buy rather than to rent indefinitely.

It's best to take this rule only as a very rough rule of thumb. But really what you should do is get a spreadsheet and look at what it will cost you over twenty-five years to buy now vs renting for, say, five years then buying on a twenty year mortgage (to compensate for the fact that you have rented for five years at the start). Try this for different lengths of wait, try it with different interest rates in the future, and try it with projected price rises, price stagnation, and price falls. Allow for the fact that you are saving a higher deposit by waiting. Look at the overall cost over 25 years and also at the mortgage payments you might expect to start on. It's the only way to really see which is the better option. Sometimes the results are surprising.

The rent vs mortgage interest comparison will look different to people in different situations so I think you need to analyse your situation more closely.

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Why, because you'll have missed the chance of getting a cheap fixed rate :blink: ? What you really mean is that the notional comparison will look better. And if higher IRs trigger a price fall, then you'll really be in a better position, but only if.

Krosfyah,

Sounds like you may be best advised to wait a bit, especially since you are doing a good job of saving. That can make a big difference.

I do have a couple of niggles about this "rent if the rent is less than the mortgage interest theory" though.

One is that it depends what timescale you are looking at. Rents rise, and the interest part of a repayment mortgage falls over time. So if the gap starts out quite narrow it will be levelled within a few years. If it is likely to take more than those few years for prices to fall, the sums can work better if you buy now. Clearly renting is not the better option over 25 years so I'm assuming the plan is to pick the moment to buy rather than to rent indefinitely.

It's best to take this rule only as a very rough rule of thumb. But really what you should do is get a spreadsheet and look at what it will cost you over twenty-five years to buy now vs renting for, say, five years then buying on a twenty year mortgage (to compensate for the fact that you have rented for five years at the start). Try this for different lengths of wait, try it with different interest rates in the future, and try it with projected price rises, price stagnation, and price falls. Allow for the fact that you are saving a higher deposit by waiting. Look at the overall cost over 25 years and also at the mortgage payments you might expect to start on. It's the only way to really see which is the better option. Sometimes the results are surprising.

The rent vs mortgage interest comparison will look different to people in different situations so I think you need to analyse your situation more closely.

Thanks both. Maggers, that's a very useful idea - you don't happen to have such a spreadsheet already to hand do you? It would be very interesting to try something like that out. And yes, you're right - the idea is to save now and pick the right time to buy (hopefully when prices have fallen, but if not, like you say, rent and then work out how to pay back the morgage in a shorter time scale if we get in after 5 years of stagnation to offset the extended renting period).

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Why, because you'll have missed the chance of getting a cheap fixed rate?

I'd rather be paying 10% interest on 100k than 5% interest on 200k.

Oh, but I forgot, suggesting that rates may go to historically normal levels for the last few decades, or house prices drop back to historically normal levels relative to incomes, is doom-mongering.

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Thanks both. Maggers, that's a very useful idea - you don't happen to have such a spreadsheet already to hand do you? It would be very interesting to try something like that out. And yes, you're right - the idea is to save now and pick the right time to buy (hopefully when prices have fallen, but if not, like you say, rent and then work out how to pay back the morgage in a shorter time scale if we get in after 5 years of stagnation to offset the extended renting period).

I don't have it all in one place anymore, but there's some interesting examples in this thread. WAP is giving his figures a bit of bull spin to start with, and DrB responds with some more bearish figures. I give a summary of my kind of calculations above in post 28 - my case is a bit different to you because I wouldn't really save much by renting.

http://www.housepricecrash.co.uk/forum/ind...opic=27198&st=0

I'd rather be paying 10% interest on 100k than 5% interest on 200k.

Oh, but I forgot, suggesting that rates may go to historically normal levels for the last few decades, or house prices drop back to historically normal levels relative to incomes, is doom-mongering.

No I was just making a cheap joke... I may have used the term "doomsday scenario" earlier, apologies if so, but I do at least try to avoid the term doom-mongering...

Edited by Magpie

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I'd rather be paying 10% interest on 100k than 5% interest on 200k.

And I agree completely with this. But what if for instance it's 10% on £150K? Or 15% on £100K? Then the choice might not be so clearcut.

I suppose it could even be 7.5% on £100K in which case someone who waits is quids in, but I don't think IRs doubling and prices halving is the only possible scenario you should consider.

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Don't forget that if there is house price inflation and/or rental inflation (and it doesn't take the astonomical figures we have been seeing in the past few years, just normal inflation in line with earnings) then, in 25 years time, you will nearly always be worse off renting than buying.

If there is a fall in house prices, you will be better off renting.

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Don't forget that if there is house price inflation and/or rental inflation (and it doesn't take the astonomical figures we have been seeing in the past few years, just normal inflation in line with earnings) then, in 25 years time, you will nearly always be worse off renting than buying.

If there is a fall in house prices, you will be better off renting.

rental inflation has been non existent for years. In real terms its negative.

HPI - when that turns after this mini suckers bounce it will resort to being negative again too.

In the longterm yes you would be worse of renting but in the short term in the current climate you are better off renting, paying less than interest and saving and gaining interest on your savings. You need to add on £100 per month for repair bills/future work for your own place too.

So this example of £800 renting v £900 IO mortgage is really more like £800 v £1000

and then there's life assurance, buidings insurance required for your own property too.

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It also depends on the size of your deposit.

We have a larger deposit and would look at anywhere from 20% to 50% LTV.

So for us, we fear the detriments of higher interest rate a lot less than we enjoy the thoughts of the golden delights of 30% cheaper property.

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It also depends on the size of your deposit.

We have a larger deposit and would look at anywhere from 20% to 50% LTV.

So for us, we fear the detriments of higher interest rate a lot less than we enjoy the thoughts of the golden delights of 30% cheaper property.

Yes, I think the sums are all skewed more towards waiting if you have a larger deposit - partly because a % fall in house prices has a proprtionately higher impact on the size of the mortgage.

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Renting at the moment is is best option. Build up a deposit ready for the repossessions of the muppets

who have been fooled to clamber onto the "ladder" and taken out massive IO's they can't afford.

Renting is risk free. For you the only other option is to service a massive DEBT (yes it's a debt) , you can't really afford and take on the very real risk of negative equitry. QED.

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Renting is risk free. For you the only other option is to service a massive DEBT (yes it's a debt) , you can't really afford and take on the very real risk of negative equitry. QED.

No - if you intend to end up as an owner, all options are gambles. Some are just better gambles than others.

The short term lower-risk strategy of renting turns into a bad gamble in a scenario where house prices don't fall, and for some it will even be a worse strategy in a scenario where they do fall slightly in nominal terms.

The best plan is not to be completely dogmatic about this but to look at all possibilities. If you are 100% certain that prices are going to fall a long way then of course that will bias you towards the renting gamble, but if you are rent you are still gambling, just in a different way.

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The short term lower-risk strategy of renting turns into a bad gamble in a scenario where house prices don't fall, and for some it will even be a worse strategy in a scenario where they do fall slightly in nominal terms.

Don't you mean increase slightly?

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..........and for some it will even be a worse strategy in a scenario where they do fall slightly in nominal terms.

................but if you are rent you are still gambling, just in a different way.

Maggers can you expand a little on these 2 points - i don't quite follow how this is the case and what you are referring to in the second point.

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None of you mention the fact that interest on money on deposit is taxed whereas the tax situation for owning is quite preferable, ie no CGT no income tax on the "opportunity cost" of having your money tied up in a house.

BTW I am a STR so would love it if this was not so!!

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Depends really. We are going from a 2 bedroom flat with rent for 390, to a 2 bedroom house on a repayment mortgage that is 460 odd a month.

For most people it would make more sense to rent because their repayment would be masses more than their rent.

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Depends really. We are going from a 2 bedroom flat with rent for 390, to a 2 bedroom house on a repayment mortgage that is 460 odd a month.

Are we living in the same century? I'm renting a one bed for almost 1K pcm. 2 bedroom house to buy... don't even want to think about it. My mate has just got a 2 bed house for about 2k pcm repayment.

Or did I miss something?

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Hi - i remember reading the old "rent is not dead money" if you work out that it costs you less to rent than it does to repay the mortgage and associated costs of ownership, and that works out more expensive than renting and saving for a deposit.

We are also doing our darnedest to put aside £1000/month for our flat deposit. It's a struggle, but the way i see it, the higher our deposit, the less mortgage we will eventually need when we can afford to buy.

well, you are probably better off renting especially as you are able to save £1k a month. The bigger your deposit, the less you will pay in interest on your mortgage in the end.

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Are we living in the same century? I'm renting a one bed for almost 1K pcm. 2 bedroom house to buy... don't even want to think about it. My mate has just got a 2 bed house for about 2k pcm repayment.

Or did I miss something?

No we are in the same century. I just live in Scarborough.

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Sorry for not reading all the posts. I'll get sacked if I spend that long. If you can buy and the mortgage is similar to what you are paying to rent, buying is best thing to do.

Unlike rent, which will increase with your salary rises, your mortgage will stay the same (unless IR's rise) or posibly drop if you get a better mortgage deal.

And after 25 years (maximum because if you had significant pay rises you could overpay) you will own a property and have no mortgage to pay.

I'm looking forward to having no mortgage. Might not be for a while yet but I sure won't be paying a majority of my earnings for the rest of my life like many that rent may do.

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Rent is not dead money. It's money paid today for consumption today & simply has no future investment element to it. There is nothing to be ashamed of and often it's the better choice for a person.

However buying is better as there is an element of investment for the future when paying down the loan taken.

But you can achieve the same investment by renting & saving. But of course the risk then as many complain of here, is that HP's will keep pacing ahead of your ability to save. You can't possibly save enough in an enviroment where people are willing to borrow now what you're trying to save slowly for.

So then the question begs, will you join them & borrow enough, or will take another approach & what is that approach?

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Sorry for not reading all the posts. I'll get sacked if I spend that long. If you can buy and the mortgage is similar to what you are paying to rent, buying is best thing to do.

Unlike rent, which will increase with your salary rises, your mortgage will stay the same (unless IR's rise) or posibly drop if you get a better mortgage deal.

And after 25 years (maximum because if you had significant pay rises you could overpay) you will own a property and have no mortgage to pay.

I'm looking forward to having no mortgage. Might not be for a while yet but I sure won't be paying a majority of my earnings for the rest of my life like many that rent may do.

I don't think anyone would say never buy property - many on here (myself included) feel that it's just not the right time to buy now. For example: If prices stay stationary (the properties I'm looking at were down 1.1% in the last ODPM figures, but that's so little it's probably noise), and you can rent 250 pcm cheaper than buying, then why not save the 250 pcm - after 2 years you'll have another 6 grand deposit, which equates to nearly 10 grand less to pay in mortgage terms.

Admittedly it's a gamble (what isn't in life?), but one that at the moment seems reasonable to take.

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I don't think house prices can go up much more in real terms in the next couple of years. This makes the case for renting and saving seem attractive in the short term.

However, I did some projections on this a few weeks back, and it was difficult to come up with a scenario that favoured the patient renter compared to someone who bought today with a repayment loan on long term fixed rate at 4.7%.

This assumes the renter DOES buy in the next 5 years. I think prices had to fall around 15% nominally for the renter to break even assuming (mortgage) rates went up to 6.5%.

EXAMPLE:

I think the figures were buy today at £160k, owe £117k in 10 years. (monthly repayment mortgage £907)

Or rent for 5 yrs and save (maybe) £10k (allowing for rent increases and the cost of 1 or two rental moves) and buy the same house for £136k after a 15% fall in prices (£126k loan)

At 6.5% mortgage rate this will be £850pm. Not much different to today's buyer.

After another 5 years you owe £114k. (the same date that today's buyers 10 yr fixed rate loan ends and he owes £117k)

A £3k difference. TODAY'S BUYER HAS BEEN IN THE HOUSE 5 YEARS LONGER.

Some may attack the 6.5% mortgage rate I have chosen, but remember, during the 1990s slump the mortgage rate was a good 2% ABOVE the base rate. I FTBd in the mid 1990s and this was the case.

You could be looking at mortgage rates >2% above the base rate if there is a recession.

If inflation rears it's head over the next 5 years then the figures look GRIM for the patient renter.

If prices only fall when adjusted for inflation then the patient renter gets SHAFTED.

i.e. the renter buys for £160k less £10k deposit saved (he may not get £10k if his rent goes up with inflation)

After 5 yrs paying (7% IR) £160k mortgage he still owes £136k (compared to £117k for today's buyer)

...and he's paying an EXTRA £150pm for his mortgage at £1060pm.

Better get the prayer mat out for those 30% falls in nominal prices... and keep an eye on inflation... ;)

Edited by Without_a_Paddle

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  • 332 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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