Renting vs Buying - Tell me my maths is wrong!?!?

Renting vs Buying - Tell me my maths is wrong!?!?

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Discussion

Sir_Dave

Original Poster:

1,494 posts

209 months

Tuesday 25th March 2014
quotequote all
Sarnie said:
It's bks, I've done one today. smile
Oh ffs lol.

Rough interest rates/fees/deposit required?





Sarnie

8,025 posts

208 months

Tuesday 25th March 2014
quotequote all
Sir_Dave said:
Oh ffs lol.

Rough interest rates/fees/deposit required?
25% Deposit
3.39% two year fixed with a £1995 fee added or 4.25% Two year fixed with zero arrangement fee

With a lower balance it usually works out to go on the product with the higher rate but zero arrangement fee.

Sir_Dave

Original Poster:

1,494 posts

209 months

Tuesday 25th March 2014
quotequote all
Thanks for that! Much appreciated smile


Alpinestars

13,954 posts

243 months

Tuesday 25th March 2014
quotequote all
Very broadly, I make it as follows;

Cost of renting is 63k, cost of buying using your numbers for a final valuation of 300 are 42k. I think your property value in 5 years is very very conservative and it should be nearer 350k??

The way I calculated the cost of buying is as follows;

Monthly costs
Mortgage 810 (243@4% estimated)
Service 150
Deposit (lost interest at say 3% on 27k)

One off costs/income
Stamp 10k, profit on sale 30k.

None of this takes account of the time value of money, but you will still be quids in unless your property does not appreciate very much. It also assumes no rent increases etc etc

Pit Pony

8,265 posts

120 months

Tuesday 25th March 2014
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One word : Inflation.

In 1998 my house was £57K. IIRC the fixed rate deal was a steal at just 8.5% and we were paying about £460 a month including house insurance.

Rent would have been £400.

Over 16 years we have spent £25 K on the house, although £15K added an extra bedroom in the loft.

Meanwhile the next fixed rate deal was 6.5% and then 4.6% but we kept paying the same monthly amount.

We overpaid a couple of big chucks when we inherited abit of money, so paid it off in 2012, instead of 2015.

Thing is rent would be £850 to £1000 now, on a house worth £195K (maybe less, maybe more, I don't care)

Thing is, for 2 year I have paid no rent and no interest and owe nobody, and nobody can ever ask me to leave, because it's all mine. (Well half is my wife's)

If you do the sums, think inflation, think LONG term.

What will the rent be in 25 years time? How much will the mortgage NOT be, (because you've paid it off)

Froomee

1,418 posts

168 months

Tuesday 25th March 2014
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First part of buying a property is the most expensive as you pay more interest and LTV is higher.

Also capital appreciation can be substantial even at 2/3/4% per year as it's leveraged. Obviously it can go the other way but you pay your money and take your choice smile

98elise

26,364 posts

160 months

Tuesday 25th March 2014
quotequote all
Pit Pony said:
One word : Inflation.

In 1998 my house was £57K. IIRC the fixed rate deal was a steal at just 8.5% and we were paying about £460 a month including house insurance.

Rent would have been £400.

Over 16 years we have spent £25 K on the house, although £15K added an extra bedroom in the loft.

Meanwhile the next fixed rate deal was 6.5% and then 4.6% but we kept paying the same monthly amount.

We overpaid a couple of big chucks when we inherited abit of money, so paid it off in 2012, instead of 2015.

Thing is rent would be £850 to £1000 now, on a house worth £195K (maybe less, maybe more, I don't care)

Thing is, for 2 year I have paid no rent and no interest and owe nobody, and nobody can ever ask me to leave, because it's all mine. (Well half is my wife's)

If you do the sums, think inflation, think LONG term.

What will the rent be in 25 years time? How much will the mortgage NOT be, (because you've paid it off)
This

If its your home then think of it as pretty much fixing your costs at a point in time, and at some stage they will become zero.

Or to put in another way, when you retire, do you rather be paying market rent, or nothing. along with that zero cost you also have a valuable asset.

I paid my house off a couple of years ago, and its a great feeling to know that whatever happens, my family have a place to live.

menousername

2,106 posts

141 months

Tuesday 25th March 2014
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Isn't this all assuming similar property price increases. And a stable employment environment.

Lack of which may prevent OP trading up in 5 years


1

2,727 posts

235 months

Tuesday 25th March 2014
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Shnozz said:
It's something I have stumbled across by accident. I bought in an area with reasonably high house prices but low rental yield. It's a place where people want to settle and buy a house, they aren't positioned there for a few years with a transient job or looking at moving further for a good while - hence 99% of people buy and rental demand is low. House prices high yet low yields. Not good for a BTL.

Conversely, living in a city centre I now see low flat purchase prices and high rents. £150k apartments for £800 pcm rental yield. Yes, service charge to take into account, but the maintenance on a 2 bed/2 bath electric heated flat is negligible, certainly in contrast to a 4/5 bed detached (my boiler in my let place went pop on Boxing day, my roof tiles went AWOL in the storms in Feb and my fence ended up in a neighbouring county - ££££s).

I'm looking at a house to rent at the minute that's both up for sale and for rent. £375k to buy, £895 pcm to rent.

I can spend £150k on the apartment and let it which almost covers my own cost on a house that would cost me another £225k to buy. As for maintenance costs, I'd wager that these will be less as a management annual charge than on the house. Mores to the point, it's a relatively fixed cost on the BTL flat so no massively unexpected surprises.

If I had £375k to spend, then 2.5 x apartments at that cost would yield circa £2000 pcm. So an £1100 additional income over and above the rent of a pad of the same outlay (I appreciate management fees/agent costs/etc need to come out of that).

Then there is stamp duty, another not inconsiderable saving at <£250k properties.

Small city centre flats are disproportionately high to rent -v- value. Large houses are the opposite. This is my findings anyway and no doubt geographically sensitive. For as long as that balance is the case, I'm happy "owning" things that return my enough income to live where I want to live. The only issue is I suffer the social stigma of being a renter on my primary residence. I couldn't give a toss how people judge me to be honest.

The added benefit of doing so is that if circumstances change rapidly I can alter my living costs rapidly also. If I have a great year and want 2 years in a mansion, I can. If I have a bad year and need to move to a studio, I can. If I hate my neighbours, I can move swiftly. If HS2 decides it's altering it's course to come through my bedroom, I can F off. If I want to move abroad for 2 years, I can. The flexibility is far greater all the while underpinned by property ownership and repayment, simply not in the format of a primary address.

Yes, there are of course downsides. Particularly if you have children and require a certainty of permanence, school places and the like. There's also the fact that Englishmen/castles and a passion for ownership and being able to "do stuff" to your own place. I accept all these negatives, but unless the figures start making more sense, it's a lot of money to spend to avoid those.
The problem is you need to pay income tax on the rental earnings and you can't offset your rent against you tax liability.

speedy_thrills

7,760 posts

242 months

Wednesday 26th March 2014
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marcosgt said:
And in 20 years time Rents will be 2 or 3 times what you're paying in Mortgage repayments.

At least, that was my experience...

M.
Whereas cost like rates etc. rise by some margin under inflation, interest rates remain low infinitely and house prices always rise quickly out in the real world? Well the latter two are working for home ownership at the moment anyway. In a way it depends on where you park your money in the meantime (and for many people how disciplined you are as a saver!), if you have good investment options then renting may actually work out as a prudent option.

Above all I suppose for most people it depends on lifestyle factors and age, if you where still young and looking to move up in a profession it may well pay to stay light on your feet so you can go where the better paid work is.

Shaoxter

4,048 posts

123 months

Wednesday 26th March 2014
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1 said:
The problem is you need to pay income tax on the rental earnings and you can't offset your rent against you tax liability.
Well you can offset the interest portion of a buy to let mortgage as well as letting fees, service charges, repairs, etc.

Shnozz

27,417 posts

270 months

Wednesday 26th March 2014
quotequote all
1 said:
The problem is you need to pay income tax on the rental earnings and you can't offset your rent against you tax liability.
Minimise the deposit and have an IO mortgage and offset the interest against tax. Offset agent fees, management charges, insurance costs of maintenance and a lick of paint every few years and any tax liability should be negligible. I don't see that as significant enough to cast any real shadow over the financials to be honest.

Pay the rental proceeds to an ISA and remain disciplined enough not to touch the pot. Can then use that to either pay unexpected bills on the property/provide security in bad times/redundancy etc, or invested in another deposit if you were minded to rinse and repeat. Yes, you could pay off the mortgage with the ISA pot over time but then you do expose yourself to the tax liability on the full yield.

oyster

12,577 posts

247 months

Wednesday 26th March 2014
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Sarnie said:
oyster said:
A sentence that summarises all that's wrong with the UK housing market.

If you break even then it doesn't matter whether you pay your money to a bank or to a landlord. All other factors being equal.
Not really. Even if the figures break even in the first five years, as time passes it works back in my favour. As I said in my other post, choosing to make this analysis over the first five years of a 35 year mortgage isn't comparing like-for-like.

Renting is continual dead money, that's undeniable. What if in five years time the OP's circumstances have changed and he's been priced out of the market he wanted to buy in, had a reduction in his income or has just changed his mind? At least if he'd bought at the out set he would be five years down the road to owning his own place....
I've placed in bold the point that you and other people replying to me seem to have missed.




oyster

12,577 posts

247 months

Wednesday 26th March 2014
quotequote all
Jockman said:
oyster said:
A sentence that summarises all that's wrong with the UK housing market.

If you break even then it doesn't matter whether you pay your money to a bank or to a landlord. All other factors being equal.
You've lost me a wee bit there...

So they both cost the same but in one scenario you have a £300k asset gradually falling into your back pocket whilst on the other you have nothing confused

Apologies if I'm misreading you. smile
Re-read the OP - they have already accounted for receiving equity.

walm

10,609 posts

201 months

Wednesday 26th March 2014
quotequote all
Sarnie said:
Renting is continual dead money, that's undeniable. What if in five years time the OP's circumstances have changed and he's been priced out of the market he wanted to buy in, had a reduction in his income or has just changed his mind? At least if he'd bought at the out set he would be five years down the road to owning his own place....
I know you are a man who knows his mortgages so I will tread carefully but I should point out I have no axe to grind either way other than an enormous hatred of the astonishing lack of financial knowledge of the general public.

So "renting is dead money" or similar soundbites really drive me insane.
It sounds good and most people appear to believe it - because it is very easy to understand.
However the corollary which is "paying interest to a bank is dead money" never gets much press.
Yet this is absolutely key to understanding the economics of buying vs. renting.

The OP has painted a very good picture as to how and why buying often doesn't pay off.

There is huge disinformation in the thread (even ignoring the guy suggesting defrauding your mortgage company).

Mortgages aren't typically fixed for 25 years let alone 35 - so claiming "rent will go up" forgets that interest rates can also go up. I would suggest that with BOEBR at 50bps going up rather than down is somewhat more likely.

RISK!!!
Of course, the other natural issue is to ignore the fact that house prices can in fact go down.
If you bought in 87 you wouldn't have broken even until 2001.
Negative equity is not nice. Who on earth doesn't want to move in a 14 year period?

Lastly - there is nothing magic about principal repayments.
It is merely a saving choice.
You could just go interest only and pay into ISA/pensions/whatever.

The purest way to run a like for like comparison on rent vs buy is to compare rent vs. interest only and don't forget the opportunity cost of your deposit.
Then be realistic about the frequency of house moves.

Sarnie

8,025 posts

208 months

Wednesday 26th March 2014
quotequote all
walm said:
Sarnie said:
Renting is continual dead money, that's undeniable. What if in five years time the OP's circumstances have changed and he's been priced out of the market he wanted to buy in, had a reduction in his income or has just changed his mind? At least if he'd bought at the out set he would be five years down the road to owning his own place....
So "renting is dead money" or similar soundbites really drive me insane.
It sounds good and most people appear to believe it - because it is very easy to understand.
However the corollary which is "paying interest to a bank is dead money" never gets much press.
Yet this is absolutely key to understanding the economics of buying vs. renting.
Given that most folks can't buy properties for cash, then paying a bank interest is a necessary evil for most. However, interest decreases over the term and will eventually cease when the balance is paid. Rent is constant and is never likely to decrease and at the end of 25 or 35 years what would you have to show? Nothing, hence it being dead money, in my opinion of course.

The biggest ambiguity of this thread has been the time frame stated. When comparing rent vs a mortgage over a short period of time, based on a mortgage over the longest term possible, yes it's going to be difficult to split the two. But once you expand that comparison over 10, 20 or 35 years then the argument for renting wanes...


walm

10,609 posts

201 months

Wednesday 26th March 2014
quotequote all
Sarnie said:
Given that most folks can't buy properties for cash, then paying a bank interest is a necessary evil for most. However, interest decreases over the term and will eventually cease when the balance is paid. Rent is constant and is never likely to decrease and at the end of 25 or 35 years what would you have to show? Nothing, hence it being dead money, in my opinion of course.
Again with all due respect I fundamentally disagree.
This is just a poor way of describing what is happening with a principal and repayment mortgage.
If more people understood it as an interest only product with a fixed saving alongside - a lot of the confusion would be alleviated.

Today is a bad period of time to use given interest rates are so low.

IMHO a far more realistic comparison is to suggest that rental yields are EXACTLY THE SAME as the INTEREST ONLY cost of a mortgage.
As far as I know this has been true for most of history (just not today) and it will be again in the future.

So - your choice is say 4% rental yield payment to a landlord or 4% interest payment to a bank.

It is incredibly rare to find a interest+principal repayment monthly cost which is the same as rent (even with a decent deposit).

So it is fundamentally MISLEADING to say "interest decreases and rent never decreases".

The true like-for-like is the following:
- Rent and some additional saving, building up over 25 years with some tasty compound interest.
- Interest and principal repayments.

Or as I originally suggested and you ignored rent vs. interest only.
PRINCIPAL REPAYMENTS ARE A SAVING CHOICE.
(No one ever appears able to understand this.)

So unless housing inflation goes totally mental it would be perfectly possible to pay rent and save up a nice nest egg which you then use to buy the house AT THE END.
In the same way

Comparing rent vs. interest+principal IS A CON.

It's like saying: leasing a car is bad because you have to give the car back whereas if you do HP (for a significantly higher monthly amount) you get to keep the car so it is great.

Apples =/= oranges.

Wacky Racer

38,099 posts

246 months

Wednesday 26th March 2014
quotequote all
If you are in a job that requires you to move around a lot, say every two or three years, it does not really make sense to buy, with all the fixed moving costs, stamp duty, agents fees etc.

However, if you think you are going to stay in the same area ten/fifteen years or so, probably buying is the better historically long term option.

Eventually the mortgage will be paid off, hopefully a few years before your retirement, giving you the option to downsize when your kids move out, and free up some cash if you so wish.

Sarnie

8,025 posts

208 months

Wednesday 26th March 2014
quotequote all
walm said:
Sarnie said:
Given that most folks can't buy properties for cash, then paying a bank interest is a necessary evil for most. However, interest decreases over the term and will eventually cease when the balance is paid. Rent is constant and is never likely to decrease and at the end of 25 or 35 years what would you have to show? Nothing, hence it being dead money, in my opinion of course.
Again with all due respect I fundamentally disagree.
This is just a poor way of describing what is happening with a principal and repayment mortgage.
If more people understood it as an interest only product with a fixed saving alongside - a lot of the confusion would be alleviated.

Today is a bad period of time to use given interest rates are so low.

IMHO a far more realistic comparison is to suggest that rental yields are EXACTLY THE SAME as the INTEREST ONLY cost of a mortgage.
As far as I know this has been true for most of history (just not today) and it will be again in the future.

So - your choice is say 4% rental yield payment to a landlord or 4% interest payment to a bank.

It is incredibly rare to find a interest+principal repayment monthly cost which is the same as rent (even with a decent d.
eposit).

So it is fundamentally MISLEADING to say "interest decreases and rent never decreases"
The true like-for-like is the following:
- Rent and some additional saving, building up over 25 years with some tasty compound interest.
- Interest and principal repayments.

Or as I originally suggested and you ignored rent vs. interest only.
PRINCIPAL REPAYMENTS ARE A SAVING CHOICE.
(No one ever appears able to understand this.)

So unless housing inflation goes totally mental it would be perfectly possible to pay rent and save up a nice nest egg which you then use to buy the house AT THE END.
In the same way

Comparing rent vs. interest+principal IS A CON.

It's like saying: leasing a car is bad because you have to give the car back whereas if you do HP (for a significantly higher monthly amount) you get to keep the car so it is great.

Apples =/= oranges.
I ignored the Interest Only comparison as Interest Only mortgages are largely unavailable to most people currently. I am comparing to a repayment mortgage that most people have no choice in taking out when buying currently; why would I use Interest only as a basis for comparison when nearly all purchases are currently taken out on repayment? I take exception to you stating that comparing rent to a repayment mortgage is a con! It's actually the most relevant comparison given that the OP has stated that he'd be lending at 90% which is automatically going to mean he has no choice but to have a repayment mortgage.

On that basis, to say that my statement about interest reducing is misleading, isn't correct at all. Yes, if I was using an Interest Only mortgage for comparison you'd be correct but I wasn't and nor was anyone else within this thread, apart from you.

And from speaking to most of my clients, most of them have stated that the mortgage we have sourced them has usually been equal or less than the rent they were currently paying, especially in London.

oyster

12,577 posts

247 months

Wednesday 26th March 2014
quotequote all
Ok time to put some real numbers into the thread.

I bought a south London flat in Oct 2007 for £465k, using a £270k interest-only mortgage and £195k deposit.
I then sold it in Jan 2014 for £466k.

Over the 64 months of ownership I paid:
£30,066 in mortgage interest
£550 in house survey
£13,950 in stamp duty
£10,880 in service charges/ground rent
£8,011 in repair/renovation costs
£2,446 in conveyancing
£8,388 in estate agency fees
Total cost: £74,291

minus the small profit on sale = £73,291

So it cost me £1145 per month.
The rental cost in 2014 is approx £1400 a month, maybe it was averaging £1300 over the period I owned.

So on the face of it, renting was more expensive than buying.

BUT hang on. What about my deposit? £195k - in a savings account, paying 40% tax it would have generated approx £14,000. So that takes rent cost over the period to £69,200.

Cheaper than buying!


And that was with a bargain mortgage of bank base plus 0.62%. How many people got those? Had I fixed in 2007 at something like 6%, then buying would have cost even more.