When Renting Really Pays Off

[Without_a_Paddle]

This is just an anecdotal story, but one of my friends bought the house he was already renting last year. Cost in rent £1200 pcm, which was comparable to other rents in the same area. Cost of repayment mortgage for the same place £2000 pcm. £800, or 66% more money to buy rather than rent!

On balance, he's happy he bought it, as he's the sort of person who hates upheaval - and you can't get any less upheaval than buying the place you're already living in! But I do detect a new worry in him now. If either he or his wife lost their jobs, they would be in a very bad situation, and realistically they won't be able to have children. Hearing him say he's not coming out because he's sorting through his finances is quite out of character! I can't say it's a bad thing he's actually thinking about money and budgeting now, but still, they are both feeling a bit less secure than they did before.

Yeah but, no but...

I assume he bought over 25yrs.

therefore house loan = £340k at 5% repayment loan.

If this is the case then he is 'really' only paying an extra £215pm for the house as he will be paying £571pm of capital off every month. (£1415pm interest)

In three years his rent could be £1300pm. At the same time his monthly interest payments fall to around £1325pm.

You do have to wonder why he didn't buy sooner if he can afford a £330k mortgage today.

[mercsl]

I think you will find that most people fall into the latter group. I already run one business, I don't want a BTL business too.

That's up to you of course , most people on here have regular jobs and unless you are on really serious money that's not enough in the long run these days , I think all on this forum will agree about that.

Even if you pay your home off eventually you need to keep hold of it during retirement as well as maintain a decent standard of living. Think most people's pension will do this ..LOL. In Nu Labors world you need to do something

on the side.

Edited June 3, 2006 by mercsl

[aussieboy]

Yes, your home is an asset - AN ASSET FOR YOUR BANK UNTIL YOU OWN AT LEAST 50%! WAKE UP! IT ISN'T YOURS! Sigh.

This fallacy gets an airing on every thread, it seems.

When you buy the house with a mortgage, you do own the property. The mortgage provider has a charge over the property and keeps the deeds accordingly as security.

But you do own the house. You just have a loan secured on the asset. And debt is not always a bad thing.

It's like saying that if you own any share in a company with >50% leverage you don't actually own a share in that company.

WAKE UP yourself.

[mercsl]

This fallacy gets an airing on every thread, it seems.

When you buy the house with a mortgage, you do own the property. The mortgage provider has a charge over the property and keeps the deeds accordingly as security.

But you do own the house. You just have a loan secured on the asset. And debt is not always a bad thing.

It's like saying that if you own any share in a company with >50% leverage you don't actually own a share in that company.

WAKE UP yourself.

Well put !

[Jason]

Why do these renting v buying threads get so many responses? I'm amazed - looking purely at financials it's painfully simple to work out what is best for the individual person.

Personally I look at the figures today, as I have never owned and live with my parents. It's great to say you should have bought 5 or so years ago, and I would of, if I wasn't in college!

Oh, and the house I live in could be rented for around 3% gross- I could try and convince my parents to STR, but they don't care! If prices fall their next house will be cheaper..

Edited June 3, 2006 by Jason

[keepwatching]

I sense a lot of aggression here (and maybe a little denial)

The 'problem' with doing your rental comparisons is you are always stuck at day 1 with your comparisons.

I'm looking many years down the line. You WILL be paying out >5% of the purchase price in rent each year.

HOW LONG HAVE YOU BEEN PAYING RENT? (be honest)

Compare your annual rent today with the cost of buying that house 5 years ago?

Convince me it is less than 5%. We'll have this conversation again in 10 years if you like. Long term renting doesn't make sense which is why I argued against the OP.

This is a thread about STR and 'why it makes sense' . I've put forward some counter points against someone who seems to imply that selling (in his case maybe 50% equity?) to rent for 'many' years is a good plan.

At the end of the day it's his/your choice.

(and I'm not a BTL Landlord BTW)

Been paying rent now for 10 months (Previously paying mortgage for 11 years)....

What if that '50% equity' (In reality just a license to borrow more) equates to '£200000 mortgage' looking at it the correct way........ That is a lot of IR sensitive DEBT, is it not ?????

The problem with YOUR comparisons and you even responding on this site is you dont get it at all......... YOU DECIDED NOT TO STR and are IN DENIAL........

I will ask it again........ WHY BOTHER WITH US IF YOU ARE SO INTELLIGENT ???? WHY HAVENT YOU MADE MILLIONS FROM PROPERTY WHERE US, THE STR, PAY YOUR WAGES ???????

Whilst you are at it, give us some estimates on real wage inflation for the next five years, or explain how the current climate of job losses is to be reversed at a time when the cost of borrowing may well be going up in this country.....

10 years time i might well be in Australia or Canada mate..... My options are now open, HPI has worked for me..... I didnt MEW anything because i saw it for what it was, a big con.... Now i do not owe a penny to anybody, and take it from me (because YOU do not know)..... It is great to be free........

YOU ARE WOUND UP........ STRESSED........ ANNOYED........ LEFT OUT........ UNHAPPY......... TIED TO YOUR HOUSE........

[astos]

Been paying rent now for 10 months (Previously paying mortgage for 11 years)....

What if that '50% equity' (In reality just a license to borrow more) equates to '£200000 mortgage' looking at it the correct way........ That is a lot of IR sensitive DEBT, is it not ?????

The problem with YOUR comparisons and you even responding on this site is you dont get it at all......... YOU DECIDED NOT TO STR and are IN DENIAL........

I will ask it again........ WHY BOTHER WITH US IF YOU ARE SO INTELLIGENT ???? WHY HAVENT YOU MADE MILLIONS FROM PROPERTY WHERE US, THE STR, PAY YOUR WAGES ???????

Whilst you are at it, give us some estimates on real wage inflation for the next five years, or explain how the current climate of job losses is to be reversed at a time when the cost of borrowing may well be going up in this country.....

10 years time i might well be in Australia or Canada mate..... My options are now open, HPI has worked for me..... I didnt MEW anything because i saw it for what it was, a big con.... Now i do not owe a penny to anybody, and take it from me (because YOU do not know)..... It is great to be free........

YOU ARE WOUND UP........ STRESSED........ ANNOYED........ LEFT OUT........ UNHAPPY......... TIED TO YOUR HOUSE........

reminds me of

"The Lady, she protests too much!"

[keepwatching]

reminds me of

"The Lady, she protests too much!"

Really....... How interesting.

WAP doesnt have a clue what it is about though because he hasnt been there.......

[Without_a_Paddle]

Been paying rent now for 10 months (Previously paying mortgage for 11 years)....

What if that '50% equity' (In reality just a license to borrow more) equates to '£200000 mortgage' looking at it the correct way........ That is a lot of IR sensitive DEBT, is it not ?????

The problem with YOUR comparisons and you even responding on this site is you dont get it at all......... YOU DECIDED NOT TO STR and are IN DENIAL........

I will ask it again........ WHY BOTHER WITH US IF YOU ARE SO INTELLIGENT ???? WHY HAVENT YOU MADE MILLIONS FROM PROPERTY WHERE US, THE STR, PAY YOUR WAGES ???????

Whilst you are at it, give us some estimates on real wage inflation for the next five years, or explain how the current climate of job losses is to be reversed at a time when the cost of borrowing may well be going up in this country.....

10 years time i might well be in Australia or Canada mate..... My options are now open, HPI has worked for me..... I didnt MEW anything because i saw it for what it was, a big con.... Now i do not owe a penny to anybody, and take it from me (because YOU do not know)..... It is great to be free........

YOU ARE WOUND UP........ STRESSED........ ANNOYED........ LEFT OUT........ UNHAPPY......... TIED TO YOUR HOUSE........

That's interesting. (we FTBd at the same time)

BTW, I think you are the one who appears stressed.

I'm just offering my opinions on an open forum and you seem to have (again) spat your dummy out.

The IR sensitive debt is not a problem if you go fixed rate BTW.

My decision not to STR was made before I came on this site. I pay 40% tax so banking the dosh and renting off the interest would lose me money each month.

Also, I don't really plan to sell this place. I'm looking into the tax advantages of renting it out and buying the next place as a 'FTB' (probably not for a while yet though). If I arrange the mortgage right (I'll have to get a mortgage again on this place probably) I can effectively get a reduced IR on the next house. If I sell house 1 within 3 yrs of buying house 2 then I dodge any CGT I incur on house 1. If prices don't pick up I'll keep on taking rent from the house 1 tenant to pay the mortgage.

With this plan any HPC will be a bonus for me. Hopefully you can see this, but I HONESTLY don't see one appearing this side of the next election. It may well be masked by inflation.

If there is a huge HPC then I will be pleased (but very surprised, and not ashamed to admit I was wrong).

YOU DECIDED NOT TO STR and are IN DENIAL........

OK, so why don't I simply STR today?

Prices have gone UP since you STRd. (now where's that dummy...?)

Edited June 3, 2006 by Without_a_Paddle

[AFineMess]

Yeah but, no but...

I assume he bought over 25yrs.

therefore house loan = £340k at 5% repayment loan.

If this is the case then he is 'really' only paying an extra £215pm for the house as he will be paying £571pm of capital off every month. (£1415pm interest)

In three years his rent could be £1300pm. At the same time his monthly interest payments fall to around £1325pm.

You do have to wonder why he didn't buy sooner if he can afford a £330k mortgage today.

He did not buy sooner because he blew his existing deposit on getting married, his partner has only relatively recently started earning a reasonable amount of money, and they could only afford to buy this place with both their incomes.

As to the rest of your calculations, I am afraid that this is where my financial knowledge fails me, being a bear of small brain. I understand that rent will keep rising, and that he is paying off an increasing amount of capital over time, so that long term he will probably be better off, assuming no drastic negative change to their income or spiralling interest rates making repayments unaffordable.

My limited understanding of mortgages is that the repayments will be the same each month (subject to interest rates), but that the proportion of capital to interest repaid increases over time. I did not think that the actual repayments went down. How do you calculate the £215 figure? What am I missing here?

[thefruits]

blimmin el... go out for a round of golf and return to war and peace..

thx for all the responses.. a few responses to some of the points raised...

pensions are crap... apparently. I beg to differ... my point would be that at the moment there are so many people who have no pensions at all, they have their house that they are hoping will be rented to pay for their retirement expenses. The sheer number of properties that will come on to the market will depress the rental yield significantly... perhaps even leading to a HPC itself

the level of equity that people have in their houses is declining rapidly. MEW etc are making people more highly leveraged as they borrow against their current value to raise funds to fund holidays, cars etc... whereas the equity that STR's have is more solid and more importantly.. more liquid

TTRTR - you called me a consumer... perhaps you're right.. but whats the point in being rich when you're old and your kids have left home and you've lost the opportunity to enjoy their youth with them. In this case, the kids get to live in a great house, with loads of room, in a catchment area of a brilliant school and enjoy a quality of life that if I was mortgaged to the hilt buying a £600k house I simply couldn't afford to maintain.

I haven't espoused renting for 20 years but frankly if it takes that long for a hpc then so be it. Just that I believe that there are times in individuals lifes and the economic cycles when its better to rent than own. I sincerely believe that now is a great time to rent. Perhaps in 5 years I may change my mind but I don't know at the moment.

One last thing about historic renting and now. In the past the quality of rented properties was not as good as now. I'm referring to what you can get for your money.. the TV shows that have shown what people need to do to their houses in order to rent them has increased the quality of the housing stock immeasurably. Hence the rental experience is far far better than it used to be. This will continue I believe as competition to get tennants to fill all the BTL's increases. Surely this makes renting even more enjoyable vs in the past.

[Without_a_Paddle]

He did not buy sooner because he blew his existing deposit on getting married, his partner has only relatively recently started earning a reasonable amount of money, and they could only afford to buy this place with both their incomes.

As to the rest of your calculations, I am afraid that this is where my financial knowledge fails me, being a bear of small brain. I understand that rent will keep rising, and that he is paying off an increasing amount of capital over time, so that long term he will probably be better off, assuming no drastic negative change to their income or spiralling interest rates making repayments unaffordable.

My limited understanding of mortgages is that the repayments will be the same each month (subject to interest rates), but that the proportion of capital to interest repaid increases over time. I did not think that the actual repayments went down. How do you calculate the £215 figure? What am I missing here?

Sorry, I didn't intend to mislead you with these figures.

With that £340k repayment mortgage (5% IR 25yrs) the monthly repayment will be around £1987pm

Of that £571 will be capital repayment and £1416 will be interest (on the first payment)

So the difference between the interest and the rent is 1416-1200 = £216pm.

As you only pay interest on the amount of debt you owe, the interest due each month will slowly FALL as you pay off tiny chunks of capital each month.

Therefore by 3 years the monthly repayment will still be the same at £1987pm but £663 will be going on capital repayments and £1325 will be in interest.

So yes, you do pay out more each month with the repayment loan, but a fair slice of this money is actively reducing your debt. So the 'extra' portion spent on capital repayments isn't 'dead' like the interest or the rent

(cue: Army of bears roaring about the implications of a HPC on these figures...)

Edited June 3, 2006 by Without_a_Paddle

[Guest muttley]

blimmin el... go out for a round of golf and return to war and peace..

thx for all the responses.. a few responses to some of the points raised...

pensions are crap... apparently. I beg to differ... my point would be that at the moment there are so many people who have no pensions at all, they have their house that they are hoping will be rented to pay for their retirement expenses. The sheer number of properties that will come on to the market will depress the rental yield significantly... perhaps even leading to a HPC itself

the level of equity that people have in their houses is declining rapidly. MEW etc are making people more highly leveraged as they borrow against their current value to raise funds to fund holidays, cars etc... whereas the equity that STR's have is more solid and more importantly.. more liquid

TTRTR - you called me a consumer... perhaps you're right.. but whats the point in being rich when you're old and your kids have left home and you've lost the opportunity to enjoy their youth with them. In this case, the kids get to live in a great house, with loads of room, in a catchment area of a brilliant school and enjoy a quality of life that if I was mortgaged to the hilt buying a £600k house I simply couldn't afford to maintain.

I haven't espoused renting for 20 years but frankly if it takes that long for a hpc then so be it. Just that I believe that there are times in individuals lifes and the economic cycles when its better to rent than own. I sincerely believe that now is a great time to rent. Perhaps in 5 years I may change my mind but I don't know at the moment.

One last thing about historic renting and now. In the past the quality of rented properties was not as good as now. I'm referring to what you can get for your money.. the TV shows that have shown what people need to do to their houses in order to rent them has increased the quality of the housing stock immeasurably. Hence the rental experience is far far better than it used to be. This will continue I believe as competition to get tennants to fill all the BTL's increases. Surely this makes renting even more enjoyable vs in the past.

Well put !

Edited June 3, 2006 by muttley

[North London Rent Girl]

This fallacy gets an airing on every thread, it seems.

When you buy the house with a mortgage, you do own the property. The mortgage provider has a charge over the property and keeps the deeds accordingly as security.

But you do own the house. You just have a loan secured on the asset. And debt is not always a bad thing.

It's like saying that if you own any share in a company with >50% leverage you don't actually own a share in that company.

WAKE UP yourself.

So you technically have title to a house that you've got a 90% mortgage on - so what? It's only an asset in that it can act as security for more debt. Great. I don't happen to think that it makes you more secure financially. Strikes me as a bit of an illusory definition of the word 'own'. I do agree that debt is not always a bad thing - have never said it is - and when house prices stop being ridiculous I intend to go out and get me some debt of my own. Just not 200 grand of it right now, that's all.

Your share metaphor is a bit wonky. You would own the share and could sell or do with it as you liked, no question about it. We could argue about how much the share you own's actually worth and if the company went into liquidation you'd pretty quickly find out that the company's creditors might think that they had rights greater than yours to what was left of it.

[North London Rent Girl]

But compare this to the constant need to pay rent each year. Most renters today dish out 5% of the price of the house EVERY year. This goes up with inflation. After 5 years you have pissed a QUARTER of the purchase cost away in rent!

I pay 6 grand a year to live in a house that is 'worth' at least 800 grand. Is the figure you're using there based on that crazy old-fashioned reckoning of the purchase price of a house being approximately 12 times the annual rent? Hang on, I'm being stupid - according to your figure, then, a place rents for 20 times the annual rent - is that the new ratio? Doesn't apply to me or anyone else I know who's renting, I'm afraid.

[thefruits]

I pay 6 grand a year to live in a house that is 'worth' at least 800 grand. Is the figure you're using there based on that crazy old-fashioned reckoning of the purchase price of a house being approximately 12 times the annual rent? Hang on, I'm being stupid - according to your figure, then, a place rents for 20 times the annual rent - is that the new ratio? Doesn't apply to me or anyone else I know who's renting, I'm afraid.

Sounds like you've got one hell of a deal there. I pay 18 grand for a house valued at £600k.... think I need to ask for a rent reduction !

[North London Rent Girl]

Sounds like you've got one hell of a deal there. I pay 18 grand for a house valued at £600k.... think I need to ask for a rent reduction !

I share a house, though. Bloody hell 18 grand is a lot. Although in your case the house is still 'worth' 30x annual rent - 50% of the new 20x figure and 2.5x the probably more realistic 12x.

Edit: Go for the rent reduction next time your contract's up! We've permitted our landlady one rent increase in 4 years - last year, by a total of a 10/week on the total rent. Don't underestimate your worth as a good tenant!

Edited June 3, 2006 by North London Rent Girl

[tonification]

I pay 6 grand a year to live in a house that is 'worth' at least 800 grand. Is the figure you're using there based on that crazy old-fashioned reckoning of the purchase price of a house being approximately 12 times the annual rent? Hang on, I'm being stupid - according to your figure, then, a place rents for 20 times the annual rent - is that the new ratio? Doesn't apply to me or anyone else I know who's renting, I'm afraid.

Um, if its shared then you aren't paying £6k/yr for an £800k house.

[thefruits]

I share a house, though. Bloody hell 18 grand is a lot. Although in your case the house is still 'worth' 30x annual rent - 50% of the new 20x figure and 2.5x the probably more realistic 12x.

Edit: Go for the rent reduction next time your contract's up! We've permitted our landlady one rent increase in 4 years - last year, by a total of a 10/week on the total rent. Don't underestimate your worth as a good tenant!

you might think 18 grand is alot to pay for rent but an I/O mortgage for £500k at 5% over 25 years works out at about £25k per year ... thats a 25% saving thru renting ... and with buying the house at the moment.. I would take all the risk ... que all the bulls saying and all the reward ... but in most of Berkshire there hasn't been that much HPI for over a year now. Houses that were for sale and didn't sell a year ago are back on the market for the same price or less. Still not selling (price £450k - £500k).

I know it works both ways but a one-off 5% drop on a £600k house would be bearable. However, what (heavens forbid) would I do if we saw a 5% drop for 2 or 3 years running. I guess most bulls would say that this would never happen but it would leave me in negative equity (after the stamp duty £20k expenditure up front of course). Not somewhere I would like to be !

Edited June 3, 2006 by thefruits

[Without_a_Paddle]

you might think 18 grand is alot to pay for rent but an I/O mortgage for £500k at 5% over 25 years works out at about £25k per year ... thats a 25% saving thru renting ... and with buying the house at the moment.. I would take all the risk ... que all the bulls saying and all the reward ... but in most of Berkshire there hasn't been that much HPI for over a year now. Houses that were for sale and didn't sell a year ago are back on the market for the same price or less. Still not selling (price £450k - £500k).

I know it works both ways but a one-off 5% drop on a £600k house would be bearable. However, what (heavens forbid) would I do if we saw a 5% drop for 2 or 3 years running. I guess most bulls would say that this would never happen but it would leave me in negative equity (after the stamp duty £20k expenditure up front of course). Not somewhere I would like to be !

I'm missing something here...

You have SOLD a house worth maybe £600k to rent. (mortgage was £500k)

This will have cost you £8k in various costs (incl moving and paying for your rental deposit)

You are now effectively PAYING YOURSELF £7k a year to live in that rented house because you say you are saving £7k over the cost of the old mortgage.

let's say you stick the £92k in the bank at 3% net interest yoy after tax. you also add £7k to the fund every year for 4 years.

After 4 years you will get around £132k.

You decide to buy your house back after 4 years. In 4 years from now let's say prices are static.

You buy your house back at £600k

This will cost £18k in stamp duty and maybe a few £k more in moving costs and legal fees etc.

So your £132k fund falls to just over £110k.

So your new mortgage in 4 years' time will be £600k minus £110k. = £490k.

BUT IRs will be higher (probably)

If you had fixed today on £500k you would be paying £25k pa in interest.

if you buy back in 4 years at £490k and 6% rates you will be paying £29.4k in interest.

If prices go UP 10% (nominally) in the next 4 years then you are shafted.

You would be paying £33k pa interest on that £660k house.

If prices fell 12% in the next 4 years you would be back to square 1. i.e. paying £25k pa interest on your house.

(528-110)*0.06 = £25k pa IO mortgage. (assumes IRs are 6% in 4 yrs)

Oh, and you will be paying that £25k for FOUR extra years.

Edited June 3, 2006 by Without_a_Paddle

[thefruits]

I'm missing something here...

Sorry but its probably my fault. I'll try and clarify a little.

You have SOLD a house worth maybe £600k to rent. (mortgage was £500k)

I sold a house for £350k.. giving £100k equity. Now rent a place worth £600k due mainly to attractions of not paying private school fees (£15k for 2 kids per year) - drove location.. but also renting a bigger house with far more space and far higher spec'd accomodation all round. Fortunately (not a brag) I could have afforded to buy the house but couldn't have afforded to enjoy the same quality of life afforded by renting the house.

This will have cost you £8k in various costs (incl moving and paying for your rental deposit)

You are now effectively PAYING YOURSELF £7k a year to live in that rented house because you say you are saving £7k over the cost of the old mortgage.

In effect yes on top of the £12k per year by not paying for private schooling (own choice of course)

let's say you stick the £92k in the bank at 3% net interest yoy after tax. you also add £7k to the fund every year for 4 years.

After 4 years you will get around £132k.

You decide to buy your house back after 4 years. In 4 years from now let's say prices are static.

You buy your house back at £600k

This will cost £18k in stamp duty and maybe a few £k more in moving costs and legal fees etc.

So your £132k fund falls to just over £110k.

So your new mortgage in 4 years' time will be £600k minus £110k. = £490k.

BUT IRs will be higher (probably)

If you had fixed today on £500k you would be paying £25k pa in interest.

if you buy back in 4 years at £490k and 6% rates you will be paying £29.4k in interest.

If prices go UP 10% (nominally) in the next 4 years then you are shafted.

You would be paying £33k pa interest on that £660k house.

If prices fell 12% in the next 4 years you would be back to square 1. i.e. paying £25k pa interest on your house.

(528-110)*0.06 = £25k pa IO mortgage. (assumes IRs are 6% in 4 yrs)

Oh, and you will be paying that £25k for FOUR extra years

I'm sorry I'm sure your figures are fine but just stay with me here. Effectively I would have around 17% equity if I were to buy the house.. sorry less because of the stamp duty. Each year vs. renting I would have £600 per month paying interest and assuming no house price increase or fall, I would not have 'saved' a penny through buying any equity. So I carry all the risk... without any reward. If interest rates increase by 1%, my rent will probably increase to (lets say something low in case my landlord is reading this ) £200 per month. On a £500k mortgage my interest payment will increase by £600 per month. Thats pretty scary stuff !

All in all, I'd recommend that anyone with less than 20% equity should look very carefully at their sums. If I had more than 50% equity then perhaps I'd feel differently. I doubt many people have more than 50% equity.. especially due to the incredible growth in MEW. You may be one of the lucky ones, its just if those in a similar position to me (income rich, asset poor) all decided that enough was enough and we simply weren't going to play the mortgage game any more then we might see those houses at the top start to come down in price... who knows.

Edited June 3, 2006 by thefruits

[North London Rent Girl]

you might think 18 grand is alot to pay for rent but an I/O mortgage for £500k at 5% over 25 years works out at about £25k per year ... thats a 25% saving thru renting ... and with buying the house at the moment.. I would take all the risk ... que all the bulls saying and all the reward ... but in most of Berkshire there hasn't been that much HPI for over a year now. Houses that were for sale and didn't sell a year ago are back on the market for the same price or less. Still not selling (price £450k - £500k).

I know it works both ways but a one-off 5% drop on a £600k house would be bearable. However, what (heavens forbid) would I do if we saw a 5% drop for 2 or 3 years running. I guess most bulls would say that this would never happen but it would leave me in negative equity (after the stamp duty £20k expenditure up front of course). Not somewhere I would like to be !

Well, blimey - that makes sense - I guess you are proof positive of the case for renting at the moment.

[BillyShears]

Unless you can tell me a way I can buy at 2003 prices.

Wait for a couple of years?

Billy Shears

[mikefluk]

I'm missing something here...

You have SOLD a house worth maybe £600k to rent. (mortgage was £500k)

This will have cost you £8k in various costs (incl moving and paying for your rental deposit)

You are now effectively PAYING YOURSELF £7k a year to live in that rented house because you say you are saving £7k over the cost of the old mortgage.

let's say you stick the £92k in the bank at 3% net interest yoy after tax. you also add £7k to the fund every year for 4 years.

After 4 years you will get around £132k.

You decide to buy your house back after 4 years. In 4 years from now let's say prices are static.

You buy your house back at £600k

This will cost £18k in stamp duty and maybe a few £k more in moving costs and legal fees etc.

So your £132k fund falls to just over £110k.

So your new mortgage in 4 years' time will be £600k minus £110k. = £490k.

BUT IRs will be higher (probably)

If you had fixed today on £500k you would be paying £25k pa in interest.

if you buy back in 4 years at £490k and 6% rates you will be paying £29.4k in interest.

If prices go UP 10% (nominally) in the next 4 years then you are shafted.

You would be paying £33k pa interest on that £660k house.

If prices fell 12% in the next 4 years you would be back to square 1. i.e. paying £25k pa interest on your house.

(528-110)*0.06 = £25k pa IO mortgage. (assumes IRs are 6% in 4 yrs)

Oh, and you will be paying that £25k for FOUR extra years.

Your fatal flaw here is in thinking that HPI will be + or - 10% over the next 4 years. What happens if property returns to its long term trend (as in deed it must otherwise it wouldn't be along term trend) and falls 30 or 35% or 40%. He could buy the £600k house for £360-£400k with more depost and a higher salary. I absoloutely agree he is doing the right thing. And I am doing something similar. Isn't it time you did the same too ?

[Guest muttley]

Wait for a couple of years?

Billy Shears

That's what I'm doing! (I was hoping WAP would suggest it though)