Renting versus owning - the pros and cons
From arranging mortgages to dealing with landlords; from determining what you can afford to searching for home insurance quotes - there are a host of differences between renting and owning a home. So which option is best for you?
Consider the market conditions
There are many that assume that buying a property is always preferable over renting believing that renting is effectively 'dead money' in that you continually pay out but ultimately have nothing to show for it.
However, this theory overlooks the market conditions, which should always be taken into account when determining the best financial option. Here is a quick guide to when it's best to buy and when it's best to rent based on market fluctuations:
When buying is best: If house prices are rising and it costs less to pay the interest on a mortgage and maintain a house than it does to rent a similar property, buying will usually be the best solution. This allows you to pay off your mortgage gradually while gaining ownership of an appreciating asset for less than it costs to rent.
When renting is best: If house prices are falling or flat then renting is often the preferable solution - especially if it costs less to rent than to pay mortgage interest and to maintain the home. Bear in mind that what you save by renting can be saved or invested putting you in a better position to buy in the future if you want to.
Consider all costs
When assessing the cost of buying a home and comparing it to the cost of renting a home, it's easy to simply compare mortgage costs to rent costs. However, there are often additional fees and other expenses that should be factored into the equation:
The costs of buying:
- Mortgage arrangement fees: Most lenders will ask you to pay a mortgage arrangement fee. These have risen sharply over the last few years and typically you should expect to pay from 500 - 1,500 pounds. Also bear in mind that this fee may be non-refundable.
- Valuation fees: Expect to pay a valuation fee for a survey to be carried out on the home to check that it offers the lender sufficient security. The cost depends on the property value but is typically in the region of 250 pounds.
- Legal fees: Though some mortgage lenders will contribute to legal fees, if you have to pay for your conveyance you can expect to pay from 500- 750 pounds.
- Surveys: It's best to budget for more than one survey as a survey may uncover issues you did not expect and you may decide to look at other properties as a result.
- Stamp duty: You will have to pay stamp duty land tax to the government. Stamp duty rates vary depending on the purchase price of the home - there is no stamp duty on homes with a value up to 125,000 pounds for example.
- Cost of moving: Factor in the cost of moving, such as hiring a removal van and paying for meals out until you get settled into your new home.
- Maintenance: Unfortunately the expense of buying a home doesn't end when you move in - make sure you put cash aside for unexpected property maintenance.
- Furniture and extras: If you're a first time buyer then you may need to pay out for everything from sofas and beds to lawnmowers and carpets.
The costs of renting...
- Agency fees: Unless you discover your rental property online or through a friend then you will normally find it through an estate or letting agency. Normally these fees are covered by the landlord who is advertising the property but if you ask an agent for advice check that you are not hit with any charges.
- Bond: Most rental agreements will require you to pay a bond – this is typically the equivalent of anything from one- to three months’ rent. You will normally get the bond back after you move out and after the place has been inspected.
- Furnishings: If a flat or home is advertised as furnished be sure to check what this includes. Some properties may also contain furnishings that are in a particularly poor state and it is the landlord’s responsibility to provide replacements.
Remember whether you buy or rent to look into additional costs such as for heating, water, telephone, cable and internet bills. Make sure you know a lot about the location – for example, if you have children, do the schools in the area have a good reputation; and what are the transport links in the area?
Consider your circumstances
After you have factored in all the costs of buying and renting it’s time to think about what you can comfortably afford. Unfortunately, it’s not just a case of assessing your monthly income against your potential outgoings – you should also consider the following:
- Job stability: How secure is your job? If you feel your job is insecure then it may be best to rent so you are not left with house payments you can’t afford and that ultimately force the property to be sold.
- Credit score: Late payments in the past could see you struggle to get a good interest rate on a loan. As such, renting may be a more affordable alternative.
- Relocation: Think about the future and whether you want to stay in a property long term or if another factor could mean that you relocate – such as finding a new job. Usually a property would need to appreciate in value by around 10 per cent to cover the cost of selling, otherwise you may lose money.
Don't forget home insurance
Finally, don't forget to factor in home insurance whether you are buying or renting a home. When buying it is often a condition of your mortgage to arrange buildings insurance and you will normally want to take out contents insurance to cover the property you keep within a home. When renting, a landlord should have buildings insurance in place and so you only need contents insurance to cover your belongings - there are specialist tenants'home insurance policies available that may offer a more affordable deal.
