Bubble Pricker Posted August 16, 2004 Share Posted August 16, 2004 Many first time buyers (FTB) argue that they want to step onto the property ladder because they feel that renting is "money down the drain". This is a common misconception. There is no difference between paying rent and paying interest on your mortgage. Mortgage interest is paying rent to the bank by a different name. Only the payments towards the purchase price and the captial repayments on the loan "really" go towards ownership of the house. On a repayment mortgage, the interest makes up the vast proportion of the payments. In fact Sharia compliant (Sharia law forbids interest payments) mortgages work by the "mortgagee" paying "rent" to the bank who owns the legal title to the property. The fact fact that interest and rent are interchangable in that way depending on the legal construct chosen just goes to show that they are economically the same. If you are paying more in interest than you would pay in rent on the same property, then it does not make sense to buy. Quote Link to comment Share on other sites More sharing options...
George Mainwaring Posted August 16, 2004 Share Posted August 16, 2004 Absolutely. There is a lot of fokelore about buying houses. It mostly falls into two categories. 1) Stuff that was never true (money illusion mostly) 2) Stuff that was only true in the 1970's Having a mortgage when interest rates were 12% and inflation was 20% is a very different proposition to having one when interest rates are 5% and inflation is 2% Quote Link to comment Share on other sites More sharing options...
Yogi Posted August 16, 2004 Share Posted August 16, 2004 Correct me if I'm wrong, but if I rent for 25 years, I will then have to continue to pay rent for as long as I'm in the house. If I buy the house and pay the mortgage, after 25 years I have the house and no more repayments to make. Surely I'd be better of buying? Have I missed something? (not that buying is an option at the moment for me anyway!) Quote Link to comment Share on other sites More sharing options...
George Mainwaring Posted August 16, 2004 Share Posted August 16, 2004 For as long as mortgage interest is more than the rent you can save the difference and use it to buy a house. If you did that for 25 years you should have enough to buy somewhere outright. Mortgage interest is not paying off the capital on the house. Of course in reality you only need to do this until prices return to trend whereupon you can buy somewhere using the savings for much less than you can at the moment. Quote Link to comment Share on other sites More sharing options...
Yogi Posted August 16, 2004 Share Posted August 16, 2004 Thanks, I see where you are coming from. If I save the difference between the rent I pay, and what the mortgage repayments would be, I should have a nice deposit saved up before long. Then I pray that house prices are back to sensible levels! Quote Link to comment Share on other sites More sharing options...
Bubble Pricker Posted August 16, 2004 Author Share Posted August 16, 2004 Yogi, you are confusing capital spent on purchasing the property with making interest payments. Only money spent on the deposit (or outright purchase) and on repaying the principal of the loan is money spent on building an asset. If you do not have the money to buy a house outright now (and hardly anybody has) and you bring the purchase forward by borrowing, then whilst you do not fully own the asset you are paying interest which is no different economically from paying rent. It normally makes sense to buy with borrowed money because normally the interest you pay is lower than the market rent. We have now reached a point where the interest is higher than the market rent. You also need to consider that when you own the property, you are also responsible for upkeep and maintenance and insurance, so even if the interest payments and rent are the same, it is still cheaper to rent. Therefore, as long as rents are lower than interest payments on the same property, it makes no sense at all to buy. As George says, you could save the difference towards a purchase later, when interest payments have fallen below rents again. Quote Link to comment Share on other sites More sharing options...
Yogi Posted August 16, 2004 Share Posted August 16, 2004 Thanks guys. Just wish I didn't have to line my landlord's pocket in the meantime, but hey thats life I suppose! Plus I can save money at the same time and get all the repairs done for free. As I have mentioned before on this site, my only worry is the landlord selling up, and then having to find a new home. Every time I get home I panic if there is a letter from the letting agency giving me my notice, which isn't a nice cloud to have over your head. Other than that, I dont think renting is so bad. Quote Link to comment Share on other sites More sharing options...
Van Posted August 16, 2004 Share Posted August 16, 2004 The only way that it makes sense to own when renting is less than interest rates is if there are capital gains to be made while prices are still rising. These paper profits then still have to be realised through selling. The selling will precipitate the price falls... like a chicken and egg scenario. Quote Link to comment Share on other sites More sharing options...
Bluelady Posted August 16, 2004 Share Posted August 16, 2004 As has already been pointed out, you're not lining the landlord's pocket, in fact he's probably subsidising you so you should feel sorry for him. Quote Link to comment Share on other sites More sharing options...
Bubble Pricker Posted August 16, 2004 Author Share Posted August 16, 2004 Whether you are lining the landlord's pockets or the bank's pocket should not really make that much of a difference. Quote Link to comment Share on other sites More sharing options...
bottletop Posted August 16, 2004 Share Posted August 16, 2004 Looked at my mortgage interest rate yesterday (A&L, 5.45% SVR) and my ISA rate (4.65%) and decided to withdraw nearly all my savings to pay off some of my flexible mortgage. The way I see it I'm effectively getting a tax-free "return" of 5.45% by overpaying by 10K, and the £545 I save in interest payments yearly can be used to pay off £545 more of the mortgage itself. Unfortunately the missus likes our house so she didn't want to STR at the start of the year. Too late now of course. Quote Link to comment Share on other sites More sharing options...
Wiseman Posted August 16, 2004 Share Posted August 16, 2004 You are correct, except there is one other factor. Rent rises. So if the rent is about the same as interest payments + costs, it is better to buy because on average rent will rise whilst the interest payments will stay the same. (Yes I know interest rates are rising, but you get the idea) Quote Link to comment Share on other sites More sharing options...
chandellina Posted August 17, 2004 Share Posted August 17, 2004 I don't have the data in front of me but I believe rents are actually falling, not rising. Anecdotally I can confirm that rents appear to be trending down in London. I went from a 1-bed flat rented Feb 2002-2003 to a much nicer, larger and more centrally located 2-bed flat this year for the exact same price. Buy to let landlords are keen to get tenants in, even at a reduced rent... Quote Link to comment Share on other sites More sharing options...
George Mainwaring Posted August 17, 2004 Share Posted August 17, 2004 Quite right bottletop - reducing your debt is not taxable - it gives a tax free, risk free return from day one. Quote Link to comment Share on other sites More sharing options...
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