Working out whether you are better off renting or buying can be a challenge. It is a complex question without a simple answer and there are many factors involved. Are you in the “rental trap” and feeling excluded from the benefits of owning your own home, or is renting in fact a cheaper, more flexible and sensible alternative given house price inflation, stagnation in earnings and the uncertainty about the housing market? This guide aims to help you sort out the issues and find a strategy that suits you.
While some aspects of the UK housing market seem clear, such as the boom in property prices in and around London, the issue of buying vs. renting is more complex across the UK. In terms of where renting is cheaper than buying, the infamous North-South divide does not play a clear role. Equally, while London prices seem to drive the housing market and have national impact, London is not a key issue for rental elsewhere, although the fact that many Londoners move out to find cheaper property may put pressure on the availability of rental properties and drive up prices in popular destinations. About 80% of householders wish to buy, according to recent data, and with historically low interest rates and the possibility that the fall in house prices has bottomed out, it can seem as though there has never been a better time to buy than now. Rental prices, on the other hand, are continuing to rise, and with more people needing to rent, a growing population, and less houses being built, demand for good quality rental homes is high.
As of June 2013, rental prices have continued to rise above inflation, rising in 6 out of 10 UK regions and gaining 7.2% in 12 months in London, for example. Average rental prices are predicted to keep rising and are set to reach £800 by mid-2015, according to LSL Property Services research. Experts point out that in 2012, monthly mortgage payments on a 3-bedroom home were up to £120 less than average rental for the same property type. However, buyers need to consider not only high property prices but other factors, such as the hefty deposits required to obtain reasonable mortgage deals, stamp duty, maintenance costs, and the potential impact of rising interest rates on mortgage repayments and other factors influencing their ability to pay. With wages stagnating, raising large deposits to buy property is becoming more challenging as house prices stay high, or continue to rise, as in London and the South East.
It is important to consider the pros and cons of each rent or buy scenario. Regarding the key issues for home buying, renting can sometimes seem a better option.
The size of deposits required to buy is the major barrier to home ownership. Given that the average deposit was more than £27,000 in 2012, the usual six week deposit required for a rental property suggests rental has the edge here.
Anyone who can raise a significant deposit stands to benefit from historically low interest rates. Those able to offer 40% of the property value can achieve 2-year fixed rate mortgage deals that fall below 2%, while even those who can offer only 10% of property value can find deals below 4%. In both cases, monthly repayments would be either similar or far lower than the monthly cost of renting the same property. The stability of owning, despite issues surrounding changes in interest rates, contrasts with the fact that rental rates may rise at any time apart from during a fixed-term tenancy, and that tenancies can generally be terminated at one or two months notice notice.
When it comes to household bills, renters have less chance to take advantage of energy saving deals, and have no opportunity to improve the energy rating of their home, which can mean that they are committed to paying over the odds for energy supply and other utilities. In comparison, homeowners have the freedom to switch to a better deal whenever they see fit. Financial experts suggest that householders can save over £200 per year by switching to the best energy tariffs.
Although renting means lacking control over home energy costs, it also means that maintenance costs are the landlord’s concern, not yours. Although taking out contents insurance is crucial, building insurance is the responsibility of the house owner. Homeowners, meanwhile, will have to pay for maintenance costs, which can be substantial and unforeseen, in the case of boiler breakdown, for example. Homeowners will also need to pay for both building and contents insurance.
Tenants have no option to make changes to their home without permission from their landlord – and even then, home improvements will be minimal; no substantial improvements can be made, that might improve the quality of living at home. Homeowners, on the other hand, can improve their property with planning permission to do so. Although initial costs may be high, changes should also add value to the home, so that the owners will benefit when they come to sell from additions such as loft conversions or conservatories or insulation and other energy-saving measures. Key advantages of buying include long-term stability and cost-effective living, both of which can be crucial, even non-negotiable factors for families with children, for example. Investing in a home rather than spending on rent is a major incentive for most people to buy. Key advantages of renting include freedom and flexibility that allow you to move around the country, and live somewhere temporarily without too great a commitment. Budgeting is easier because costs remain foreseeable overall. However, the relative instability and costs of repeated house moves must be considered too.
Although budgeting is simpler for renters, homeowners have opportunities to keep costs down not only by improving the energy use of their home and its desirability but also by renting living space to lodgers or guests, or outdoor space for storage. This can contribute substantially to the monthly costs of a home you own. Although the government’s new Rent a Room scheme may apply to tenants, in practice, this depends on the landlord giving permission for such an arrangement – unlikely in most cases.