To Rent or Buy - What should influence the decision

The housing market has been heating up since the mid-90’s and really picking up from the early 2000’s. Now, even though there was a blip in 2007 with the whole sub-prime debacle, it looks like the trend going forward is again for moderate price rises.

There has been a lot of press recently about election pledges to help those who are not yet on the housing ladder, with the Conservatives coming up with a brownfield plan where 100,000 homes will be built and offered to first time buyers at a 20 percent discount. But should you really be buying in this market? What about the interest rates – these seem to have been sitting at close to zero for what seems like forever (relatively speaking) and surely they would be going up soon.

In Pubs up and down the country the most talked about aspect of the property market is the base rate level – and most agree that the reason it is being held at an artificially low rate is because the incumbent Government doesn’t want to be the one responsible for raising the rates, especially so close to the Election next year. Who would vote for the political party that caused their mortgage payment to go up by even £100 per month? However, after the Election is done with, we can expect major upheaval.

So buying in the current market requires careful consideration, will the interest rate, unless fixed for a significant period, end up pushing the mortgage payment way beyond the original budget? Worse still, what if five years down the line, the housing market has a base rate of 4 or 5 percent with average mortgage rates of 6 percent plus (double today? The strong possibility of corrections to house prices would mean a chance of remortgaging goes out of the window.

For example:

1. A property is purchased in 2014 for £200,000
2. A deposit is provided of 10 percent (£20,000)
3. Mortgage amount is therefore £180,000 and a rate of 3.5 percent fixed (5 yrs) is offered.
4. Repayments are £901 per month and result in a balance 5 years later of £165,000.

Using the above example, if in five years the property value slumps by 20 percent due to the interest rates on average being 6 percent, the home would be worth £160,000 on the open market – that’s £5,000 less than the balance owed on the mortgage.

It would sting a little to say the least that after making mortgage repayments totaling £32,500 and a deposit of £20,000, so just over £50,000, the homeowner’s actually end up losing the entire £50,000 and still owe the bank the £5,000 shortfall on the mortgage.

What the above example doesn’t take account of is the fact that the homeowner would actually get somewhere to live for five years and depending upon the rental value for a similar property would be spending similar money. In addition, if the mortgage payments are paid continuously for the agreed period, it will end with the property being outright owned.

It seems the decision to rent or buy culminates with the need for flexibility. In our example the potential homebuyer needs to find £20,000 as a deposit (for the rate quoted the deposit requested may be higher).

If the renter wants to move, it is just one month’s notice and off they go – not the case with home ownership. If you own the home, you need to sell the property before you move (or try to rent it to someone else). The same applies if a relationship breaks down – the rental property wouldn’t be an asset requiring splitting up.

On the flip side, home ownership allows customization, the possibility of living ‘rent-free’ eventually, a future asset, mortgage payment should be cheaper than the equivalent rental.