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

[Shaoxter]

oyster said:

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.

Well you bought at the peak of the bubble.

Also £1300pcm rent for a £465k flat is very cheap indeed. The £250k flats round my area (Finchley) yield that much.

[walm]

Sarnie said:

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.

Regarding interest only vs. interest+principal - I didn't realise the constraint on that - sorry.
However, in that case the fair comparison remains rent AND saving vs. interest+principal.

Once again, if rent is dead money - so is the interest part of your mortgage.

Your comment above truly highlights the unique situation we are in regarding interest rates.

THEY ARE LOW.

To assume they will remain so super low over the next 25 years is MADNESS.

Over the whole of history the period where interest rates are HIGHER than rental yield is FAR MORE PREVALENT.

[walm]

oyster said:

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.

Oyster - I am amazed by those numbers.
Most of my friends who bought even at the peak are laughing.
We bought in (very) West London in March 2007 (close to peak) and sold in Jan-12 and still did quite well! (Not megabucks but certainly above 0%!)

[Shnozz]

Shaoxter said:

oyster said:

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.

Well you bought at the peak of the bubble.

Also £1300pcm rent for a £465k flat is very cheap indeed. The £250k flats round my area (Finchley) yield that much.

That is the "lottery" of purchase price -v- yield though. It's benefiting from the anomalies that is key.

There is no point in a blanket renting -v- buying comparison because of the number of variables IMO. Mortgage term, interest rate variations, market fluctuations in house prices, market fluctuations in rental prices, natural disasters, remortgage fees etc etc.

That's before taking into account personal variables:- pay rises, job/career changes, having a family, moving to be close to an elderly relative, moves abroad, average period of ownership etc etc.

There are some flats where I live that are £140k to buy and yield £800 pcm.

There are houses not that far away that are £375k and yield £895 pcm. This, for example, is one of them:-

http://www.rightmove.co.uk/property-for-sale/prope...

I can "tie up" £140k and yield almost the same to allow me to live somewhere like that for almost nothing. And in doing so, I'm still on the property ladder but have the benefit of £235k in the bank (or, in my case, a loan that is £235k less!). I also benefit from 1% stamp duty on my purchase.

As I say, there are flaws, no doubt about that. But I am investigating the option more than ever having been caught with my pants down the other way around with a property that cost me a fair wedge to buy and yet yields peanuts in return and allows the tenants to live in a nice house paying little for the privilege. And of course they also call me whenever something breaks - and the bigger the house, the more things there are to go wrong.

[Pit Pony]

oyster said:

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.

One might suggest the exact time period was the unfortunate point in time, when you bought at a peak, and did well not to loose. What did the Value do in the previous 7 years, and what might it do in the next 7 ?

[Jobbo]

Shaoxter said:

Well you bought at the peak of the bubble.

Are we not still at that peak? Prices haven't crashed and inflation hasn't eroded our debt yet.

[DozyGit]

oyster said:

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.

Sorry but I never understand statements like this, you just rented and did not buy, you just bought a long rent.

[grantone]

Sarnie said:

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.

The functional equivalent of a repayment mortgage though is rent plus a bit extra into a savings/investments. That bit extra into savings/investments earns you interest which compounds up just like capital payments compound up to reduce the interest on the mortgage. You could even buy leveraged REITs to get a similar exposure to asset price movements as home ownership gives (this is probably not sensible!), or as other posters have noted, BTLs. I think a poster called groak did this, a bunch of high yield BTLs then rented his own home off someone else at a low yield.

The way the OP did his calculations took account of this anyway as it compared whole term costs and benefits.

For me the two biggest factors on rent vs buy after the simple things like monthly costs and where you think house prices are going are that buying has large fixed costs that make buying for the short term unattractive and renting in England & Wales via AST terms gives low security of tenure.

[walm]

grantone said:

The functional equivalent of a repayment mortgage though is rent plus a bit extra into a savings/investments.

That's what I have been trying to say.
You put it a lot more eloquently!

[MaxFromage]

walm said:

Oyster - I am amazed by those numbers.
Most of my friends who bought even at the peak are laughing.
We bought in (very) West London in March 2007 (close to peak) and sold in Jan-12 and still did quite well! (Not megabucks but certainly above 0%!)

Quite. A client of mine purchased a London property at the peak for £450K and has just sold for £650K. No refurb done whatsoever?

[Ozzie Osmond]

1. Inflation

2. Capital growth

Everything else is mainly psychology.

Don't forget the "transactions costs" of (a) buying a house, and (b) selling a house are very high compared with moving into or out of rented accommodation. Biggest single items are Stamp Duty on Purchase and Estate Agent's fee on sale. On a £270k house that's £8,100 of stamp duty and about £5,000 of estate agent. In other words it will cost you well over a year's rent just to buy it and sell it.

[oyster]

walm said:

oyster said:

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.

Oyster - I am amazed by those numbers.
Most of my friends who bought even at the peak are laughing.
We bought in (very) West London in March 2007 (close to peak) and sold in Jan-12 and still did quite well! (Not megabucks but certainly above 0%!)

Slight typo, I meant sold in Jan 2013 not 2014.

March 2007 to Oct 2007 would account for possibly 10% difference. I remember looking during some of that time and it was crazy.

[oyster]

DozyGit said:

oyster said:

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.

Sorry but I never understand statements like this, you just rented and did not buy, you just bought a long rent.

Did you not read the rest of the thread?!

My whole reply was to show that there can sometimes be no difference between renting and buying in a REAL scenario (as all other posts on this thread refer to opinions and theoretical situations). My figures are not hypothetical - they are real.


Edited to add: I'll bet that a very large proportion of bought flats in London are only owned for periods of 4/5/6 years.

Edited by oyster on Thursday 27th March 15:05

[oyster]

MaxFromage said:

walm said:

Oyster - I am amazed by those numbers.
Most of my friends who bought even at the peak are laughing.
We bought in (very) West London in March 2007 (close to peak) and sold in Jan-12 and still did quite well! (Not megabucks but certainly above 0%!)

Quite. A client of mine purchased a London property at the peak for £450K and has just sold for £650K. No refurb done whatsoever?

Well done them.

That's 44%.

Since I think the London average to Feb 2014 is 22%.


Have a guess how averages are worked out.

[1]

Shaoxter said:

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.

I think most people are familiar with how it works but ultimately there has to be a profit at the end of it and that profit is significantly reduced by the tax you have to pay. Comparing it to other investments is fine but the OP is comparing it to paying down his own property.

[walm]

oyster said:

walm said:

oyster said:

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.

Oyster - I am amazed by those numbers.
Most of my friends who bought even at the peak are laughing.
We bought in (very) West London in March 2007 (close to peak) and sold in Jan-12 and still did quite well! (Not megabucks but certainly above 0%!)

Slight typo, I meant sold in Jan 2013 not 2014.

March 2007 to Oct 2007 would account for possibly 10% difference. I remember looking during some of that time and it was crazy.

That makes a lot more sense now you remind me.
It was going absolutely mental through 2007.

[oyster]

walm said:

oyster said:

walm said:

oyster said:

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.

Oyster - I am amazed by those numbers.
Most of my friends who bought even at the peak are laughing.
We bought in (very) West London in March 2007 (close to peak) and sold in Jan-12 and still did quite well! (Not megabucks but certainly above 0%!)

Slight typo, I meant sold in Jan 2013 not 2014.

March 2007 to Oct 2007 would account for possibly 10% difference. I remember looking during some of that time and it was crazy.

That makes a lot more sense now you remind me.
It was going absolutely mental through 2007.

I'm the first to admit I didn't deal all that well (rare for a PH'er to admit that I know). When I bought my seller was sticking to his guns and I was eager. When I sold my Mrs was 6 months pregnant, so was hardly going to play hardball and risk a sale for a few extra £k. Such is life.
I have a cracking mortgage deal though.

[jonny70]

OP its very simple . Over the long term buying makes most sense due to inflation and you actually end up owning it one day.(thats what alot of post have been drumming home)

However over the short term lets say 2/3 years renting can make more sense , the transaction costs to buy a house and then costs to sell after 3 years and then buying another (stamp duty) can for out cost renting over the same duration.As well as renting giving more flexibility.

So short term renting can make sense, long term its always buying

[Irrotational]

walm said:

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.

You're right of course - but I'd refer you to:-

http://www.bbc.co.uk/news/business-20858236

If you do interest only+saving then you need to be very very careful when/how you save.

[fido]

oyster said:

I'm the first to admit I didn't deal all that well (rare for a PH'er to admit that I know).

I'm still stunned that a property in London (albeit inside Zone 6) didn't go up between 2007 (peak) and 2013. As you say, if you HAD to sell then that could equally take 10% or so off the value. But as someone who tried to buy in 2013, it is still hard to fathom. Back on topic, it doesn't make sense to compare in the short term because Repair Costs can add a lot of volatility into the equation - with renting it's smoothed out. Stamp Duty is also going to be proportionally smaller over time (unless you hit one of the SDLT thresholds!)

Edited by fido on Sunday 30th March 00:11