But Renting Is Dead Money....

[=-FTB-=]

Whats the best way to answer that good ol phrase? How do you explain it to people?

(excellent forum btw)

[DonnieDarker]

Whats the best way to answer that good ol phrase?  How do you explain it to people?

(excellent forum btw)

<{POST_SNAPBACK}>

Often the most appropriate way to counter a statement is with a question.

How is renting a place to live with no responsibility greater than paying your rent each month any worse than RENTING a loan of several hundred thousand pounds in a depreciating market?

[Gentle Ben]

I always counter that interest paid to the bank is dead money. And that it would be an awful lot more than the rent I pay if I were to buy the place I live in.

[=-FTB-=]

ok, then they reply; But my money is actually going towards something. I'll have something to show at the end of it.

[DonnieDarker]

ok, then they reply; But my money is actually going towards something.  I'll have something to show at the end of it.

<{POST_SNAPBACK}>

That line is synominous with the "house-prices always rise" maxim

Please refer to them to a period of modern history: 1988-1995.

[beerhunter]

Whats the best way to answer that good ol phrase?  How do you explain it to people?

I assume the person asking the question has a mortgage?

The trouble (IMHO) is people don't realise the total cost of a mortgage. Forget interest only, it has had the bad press.. but even a repayment mortgage averaging ~6% over 25 years.. you borrow £1.. you pay £2 back.. isn't that £1 dead money too?

Back to renting.. say 5 years ago you could of bought a house for £100k.. it's commonly said that prices have doubled, so today you could buy it for £200k.

So what are today’s choices?

1) Buy the 200k property and pay interest on £200k

2) Rent and pay the landlords mortgage, which is only the interest on £100k + a bit more profit / costs.

Which is the better deal? In neither case you own the house... with 1) you have the option to buy in the future.

But with 2 you have the currently lower costs.. and not tied in to buying an over priced asset

This is the key.. paying rent is less than paying an interest only mortgage now

Personally, I would not buy interest only ever. With the current inflation limit of 2%.. I would not rely on inflation like our parents did... and difference between an average of 2% and 5% inflation over 25 years is HUGE!

BTW I assume a 100% mortgage.. I think its fair a comparison because if you renting your money is earning interest, if you bought your money reduces the interest on the mortgage... more or less cancelling out (it depends on actual circumstances)

[Dunks]

In the case of an IO motgage, with no saving/investment plan to pay the actual loan, then you are only renting from the bank. And you have just as much to show for it at the end (i.e. nothing). In fact, if the house price has decreased over that time (which it may have), you may end up owing more than you would make by selling it at that point.

[zzg113]

In the case of an IO motgage, with no saving/investment plan to pay the actual loan, then you are only renting from the bank. And you have just as much to show for it at the end (i.e. nothing). In fact, if the house price has decreased over that time (which it may have), you may end up owing more than you would make by selling it at that point.

<{POST_SNAPBACK}>

Good point.

[beerhunter]

ONLY THE BRAIN-DEAD think renting is Dead Money in this market

...

Rent paid is no more "dead" than interest paid (which is the cost of "renting money")

Dr Bubb.. brilliant phrase!

Interest is so blasé.. the cost of renting money.. I like it and hope it appears in the next hpc release!

[Bubble Pricker]

ok, then they reply; But my money is actually going towards something.  I'll have something to show at the end of it.

<{POST_SNAPBACK}>

When comparing renting with buying, one has to compare like with like. You need to compare

rent

versus

mortgage interest + lost interest on deposit + additional costs of owning

With a repayment mortgage, the payment is split into interest and a capital payment. Only the capital payment "actually goes towards something". The interest is totally equivalent to the rent. There is no difference. Instead of renting the property, one rents the money from the bank, same thing.

Most people also make the mistake of failing to take into account the opportunity cost of the interest they would be earning on their deposit if they did not buy. For example, a £20k deposit on a £200k purchase: Mortgage Interest at, say 5%, is 5%x£180k=£9k, but they would also have earned interest of, say again 5%, on the £20k, so this is 5%x£20k=£1k, so the total cost of financing the purchase is £10k per annum, plus any costs associated with owning (repairs, service charges).

Again, people tend to forget to take these into account. On a £200k flat, annual service charges are typically at least £1k, so the total cost of buying is £11k per annum.

This figure now needs to be compared to the rent on an equivalent property. If it is lower, there is no reason whatsoever to buy. It would be more expensive to do so.

[Japhy Rider]

When comparing renting with buying, one has to compare like with like.  You need to compare

      rent

   

versus

      mortgage interest + lost interest on deposit + additional costs of owning

With a repayment mortgage, the payment is split into interest and a capital payment.  Only the capital payment "actually goes towards something".  The interest is totally equivalent to the rent.  There is no difference.  Instead of renting the property, one rents the money from the bank, same thing.

Most people also make the mistake of failing to take into account the opportunity cost of the interest they would be earning on their deposit if they did not buy.  For example, a £20k deposit on a £200k purchase:  Mortgage Interest at, say 5%, is 5%x£180k=£9k, but they would also have earned interest of, say again 5%, on the £20k, so this is 5%x£20k=£1k, so the total cost of financing the purchase is £10k per annum, plus any costs associated with owning (repairs, service charges).

Again, people tend to forget to take these into account. On a £200k flat, annual service charges are typically at least £1k, so the total cost of buying is £11k per annum. 

This figure now needs to be compared to the rent on an equivalent property.  If it is lower, there is no reason whatsoever to buy.  It would be more expensive to do so.

<{POST_SNAPBACK}>

But if we're being honest about it then we should also consider the effect of inflation - or deflation for that matter. The problem of course is that there is no simple answer to the question, as there are too many variables.

We should concede that in an environment of even modest inflation then the balance does tip back towards buying rather than renting - all other things being equal (which they won't be, of course).

Japhy

[GCS15]

Spoke to someone just today. After 5 years she has repaid $10'000 off the mortgage. The rest has gone on interest. Hmm $40 a week

[right_freds_dead]

buying a house is THE DEAD MONEY.

you will be means tested at 60 and houses will be used to fund your private medical care / retirement shortfalls.

[laurejon]

In the case of an IO motgage, with no saving/investment plan to pay the actual loan, then you are only renting from the bank. And you have just as much to show for it at the end (i.e. nothing).

A vast history of house prices has shown the above to be incorrect.

At the end of a 25yr Interest Only Mortgage you will have far more than nothing.

In fact given that 25yrs ago a property was around 24K and that same property today is at least 300K then it is obvious that paying off the intial capital of 24K pales into insignivicance.

A tenant renting for 25yrs will at best get a bottle of sherry and postcard from the Landlord in Barbados.

[impatientFTB]

buying a house is THE DEAD MONEY.

you will be means tested at 60 and houses will be used to fund your private medical care / retirement shortfalls.

<{POST_SNAPBACK}>

And you can't take it with you when you pass on

[Killer Bunny]

A tenant renting for 25yrs will at best get a bottle of sherry and postcard from the Landlord in Barbados.

<{POST_SNAPBACK}>

A tenant renting for 25yrs will at best get a bottle of sherry and postcard from the Landlord in Barbados.

<{POST_SNAPBACK}>

This is where the bulk of people get it absolutely wrong.

Why is paying rent on its own always compared to a mortgage which can include capital repayments?

No!

Rent + savings = mortgage being either IO + savings or Cap rep.

After 25 years, in your example, of paying rent + saving = buy a house outright!

Example:

£300,000 house = £1,000 pm rent in East Herts. Add savings of £500/m to ISAs and after 25 years you have some £300-350k at about 6.5% pa.

Or you could borrow say £250,000 at 5.5% = £1,150 pm interest + cap repayment + insurance + maintenance + risk to £50k capital...

In theory rental costs rise but only when capital values rise. If there is a big fall rents will fall alongside because LLs will need to keep asking prices lower than the monthly cost of similar house mortgages. Thus, the £1000 rent will fall over the next few years and of course will take more years to get back to £1000.

So, Rent plus savings or a mortgage in March 2005?

Hmmm... difficult one.

[cock-eyed octopus]

This is where the bulk of people get it absolutely wrong.

Why is paying rent on its own always compared to a mortgage which can include capital repayments?

No!

Rent + savings = mortgage being either IO + savings or Cap rep.

After 25 years, in your example, of paying rent + saving = buy a house outright!

Example:

£300,000 house = £1,000 pm rent in East Herts.  Add savings of £500/m to ISAs and after 25 years you have some £300-350k at about 6.5% pa.

Or you could borrow say £250,000 at 5.5% = £1,150 pm interest + cap repayment + insurance + maintenance + risk to £50k capital...

In theory rental costs rise but only when capital values rise.  If there is a big fall rents will fall alongside because LLs will need to keep asking prices lower than the monthly cost of similar house mortgages.  Thus, the £1000 rent will fall over the next few years and of course will take more years to get back to £1000.

So, Rent plus savings or a mortgage in March 2005?

Hmmm... difficult one.

<{POST_SNAPBACK}>

And theprice of the £300k house after 25 yrs.?

I seem to remember an old joke about someone who invested 25p, got cryogenically frozen & woken up after 1000yrs.; he excitedly phoned the bank yo see what he was worth:

"your balance is now £100,000"

"Yipee!"

"That will be £250,000 for the phone call"

Actually, I could not agree more that, for most people, ftbing NOW would be an extremely bad choice. The problem is that, over a 25 yr. period, I can't think of anyone who hasn't been far, far better off buying than renting.

This may change. The past is not necessarily a guide to the future.

However, with the awful track record of economic "experts", past experience is what people rely on.

[crash_test_dummy]

I normally answer it with “the amount your house is depreciating is more than my rent.â€

[cock-eyed octopus]

I normally answer it with “the amount your house is depreciating is more than my rent.â€

<{POST_SNAPBACK}>

At the moment. And not necessarily.

[Killer Bunny]

And theprice of the £300k house after 25 yrs.?

Actually, I could not agree more that, for most people, ftbing NOW would be an extremely bad choice. The problem is that, over a 25 yr. period, I can't think of anyone who hasn't been far, far better off buying than renting.

This may change. The past is not necessarily a guide to the future.

<{POST_SNAPBACK}>

I'll be amazed if in 2014 prices are any higher than last summer.

This will change! Rent now, buy in a couple or a few years. Remember, as rents fall, one can save more so the 25 year pot of money will be even larger. Thus, your assertion that the renter/saver will lose out on capital growth is invalid.

[paranoidmick]

I'll be amazed if in 2014 prices are any higher than last summer.

This will change! Rent now, buy in a couple or a few years. Remember, as rents fall, one can save more so the 25 year pot of money will be even larger.  Thus, your assertion that the renter/saver will lose out on capital growth is invalid.

<{POST_SNAPBACK}>

Spot on!!!!!!!!!

Thats my philosophy and its a sound one in the current climate.

[MarkG]

In fact given that 25yrs ago a property was around 24K and that same property today is at least 300K then it is obvious that paying off the intial capital of 24K pales into insignivicance.

Why do you keep pretending that the last 25 years was 'normal' behaviour for the housing market? That period saw fairly high wage inflation, the boomers reaching their peak income, women going from partially employed to almost fully employed, and, in the last few years, interest rates at record lows. What possible changes are going to happen in the next 25 years that will even begin to come close to that?

[Guest prudence]

ok, then they reply; But my money is actually going towards something.  I'll have something to show at the end of it.

<{POST_SNAPBACK}>

The key is market timing. At times renting is dead money, at other times it is not. The people you are conversing with clearly to not understand that. Why concern yourself with the fact that some people are too stupid to understand a very basic concept

[Veritas]

A vast history of house prices has shown the above to be incorrect.

At the end of a 25yr Interest Only Mortgage you will have far more than nothing.

In fact given that 25yrs ago a property was around 24K and that same property today is at least 300K then it is obvious that paying off the intial capital of 24K pales into insignivicance.

A tenant renting for 25yrs will at best get a bottle of sherry and postcard from the Landlord in Barbados.

<{POST_SNAPBACK}>

Totally spurious comparison. We are now in a LOW INFLATION environment. IF inflation does start to rise interest rates will be increased to keep it in check. Result property prices will FALL - and badly.

There's every chance your current £300k house will be worth just that in 25 years time (which might equate to 3.5 x salary by then!).

[CrashIsUnderWay]

buying food is 'dead money'.

after all, u just have to eat again the next day, and all your hard earned cash comes out as poop.