Renting certainly has its place in life and it also has its benefits, but from a financial perspective home-owning is by far the better choice.
Buying versus renting – the basics
When you are a home-owner, you pay interest on your mortgage, but, assuming you opt for a standard, repayment mortgage (as opposed to an interest-only mortgage), then the amount of interest you pay will decrease over time as you build up equity in your home (or, in other words, as you owe less to your lender).
If, however, you are a renter, you will not only be paying your landlord’s mortgage and other expenses (e.g. maintenance), you will also be paying them a profit on top and you will not be building up equity in your home (in fact, technically, it isn’t actually your home, it’s your landlord’s).
Buying versus renting – the sums
According to research undertaken by the Intermediary Mortgage Lenders Association (IMLA), mortgage interest rates would have to be 11.5% over the lifetime of a loan, before the cost of home-owning reached a point where it would be financially equivalent to renting.
This, however, assumes that rents continue to rise at an average of 2% per year, which is by no means guaranteed, especially not if interest rates reach those kind of levels.
Even if, however, this combination of circumstances does occur, the fact still remains that the home-owner will be building up equity in their home and, ultimately, will own it outright, whereas the renters never will.
Additionally, home-owners can benefit from their home increasing in value, plus they have the freedom to do what they like with it, which can open up opportunities for earning extra income.
For example, if a home-owner has a spare bedroom (perhaps they’ve bought a home with the intention of starting a family, but do not, yet, have children), they are perfectly within their rights to let it out, whereas renters would have to get their landlord to agree to any subletting arrangement.
Buying versus renting – the practicalities
For all its expense, renting is often the best choice for young adults, who generally place a high premium on mobility and flexibility, which is where renting excels. Once, however, people reach a stage in their lives when they are ready to settle down (and perhaps have children), then, in principle, the time is usually right for them to aim to invest in property and get on the housing ladder.
Unfortunately, in practice, this can be something of a challenge as these days buying a property typically requires a hefty deposit and this can be something of a challenge to build, especially if you’re also paying rent.
It may be that at some point in the future, governments will review the mortgage-lending rules to create something of a better balance between the need to ensure that lenders behave responsibly (which also protects customers) and the need to help people buy their first home.
Until then, however, first-time buyers may want to think about taking advantage of schemes such as the Lifetime ISA to help speed them along the path to home-ownership, and, ultimately, to being mortgage free.
