Which is better between buying a home and renting?. This is a no-brainer for some people because it is expected that at some point in life, they will go through the right of passage of buying a house. It is an easy process for them either because of help from family or a solid plan and income to start with. For others, the struggle is real when putting together a deposit. Also, varying circumstances will mean that renting might be suitable for some people and vice versa.
I grew up in Nigeria at a time when mortgages were almost non-existent. People bought land and built their houses slowly. Memories of my parent’s house, from when the foundation was laid to our Saturday visits are still fresh in my mind. We ate breakfast at the building site on those Saturday mornings and chipped in with some very hard labour. It was a dream come through and a huge relief when this project was finally completed and we moved in. This meant that rent was something my parents will never have to worry about. It was fulfilling to see the project from the ground up and gave us freedom from the worry of moving.
In the west, housing is more complicated by loans, mortgages, chains, and so on. It’s a huge task to take on from viewing to finally completing so something you need to give some hard consideration to. Given that housing costs is usually a high percentage of outgoings, it is a good idea to have this eliminated by the time you retire.
Buying a home, however, is becoming more challenging and the average age of first-time buyers has increased over the years. However, the chart below still shows that more people own their homes in the UK.
ONS Chart below showing more people own their homes in the UK
Pros and cons for renting
Even though most people want to own their homes and renting for life is not very common in the UK, there are reasons why renting might be more suitable depending on circumstances. Here are some of the pros and cons of buying and renting:
| Buy | Rent | ||
| Pros | Cons | Pros | Cons |
| Great if you need stability and plan to stay in the same location for a while | Much harder to up sticks and move if you need to as it takes a while to sell. | Great for people who want the flexibility to move | Not great if you have a family and need some security (you may have chosen a house based on schools or proximity to work), the landlord can give notice for any reason, decide to sell the house, or move back into it themselves as happened to my one-time neighbour. |
| It can prove to be a great investment. Your property can appreciate and you can cut down on interest by overpaying within limits (check the repayment clause in your mortgage) | Comes at a huge cost and requires a huge outlay. Deposits are usually from 10 % and there will be SDLT for properties over a certain amount and other fees to consider. Also, owners are solely responsible for maintenance costs. | The landlord is responsible for maintaining the property and paying for any repairs | It’s great that the landlord is responsible for repairs, but the quality of repairs and appliances can be lower than you will find reasonable in some cases. |
Let’s do the numbers: Which is financially better?
Mortgage interest versus Rental costs
For the purpose of comparing, I will be ignoring buying and renting administration fees and taking only the rent and mortage interest into account. The one-off costs of buying should not count towards the decision of which is better. The hope is that the capital gains from property appreciation will cover one-off costs like the stamp duty land tax, solicitor fees, valuation fees and other costs associated with buying. Also letting fees and deposits will not be taken into account.
The mortgage interest is the cost of hiring capital from the bank to buy your home. This is a sunk cost that will never be gotten back just like the rental cost. So to determine which is better financially between buying and renting, I will be comparing the mortgage interest to the rental cost.
Case Study
Say you want to buy a 2-bed house in North London for £500,000 with a 10% deposit and a loan-to-value of 90%. Your mortgage loan will be £450,000. Assuming a mortgage interest of 2.6%, the monthly mortgage payment will be £2041.51. This is broken down into £1066.51 principal which goes towards your equity and £975 interest payment to the bank.
In the above scenario, if you can rent for cheaper than the mortgage interest costs (£975) plus maintenance of a similar house, then renting wins. Although when I checked, the rental cost for a 2-bed house was significantly greater than £975 in North London. So buying a home in North London is financially the better decision in the long run.
Also, assuming interest remains the same throughout the life of the mortgage, you would have paid £162,453.83 interest to the bank compared to £420,00 to a landlord based on rental costs of £1,400 PCM.
What is the housing landscape where you live? which is better between buying a home and renting? If you are not on the housing ladder yet and want to get on, get your finances stable, make sure you do a budget and plan to save for that deposit!
Have a valuable week!