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Is buying a home cheaper than renting?

Christina Jordan
by Lovemoney Staff Christina Jordan on 19 February 2013  |  Comments 9 comments

A new report says the average cost of paying off a mortgage is now £120 a month cheaper than paying rent. But is it that simple?

Is buying a home cheaper than renting?

A combination of plummeting mortgage costs and soaring monthly rents has meant that buying a home is now on average £120 cheaper than renting across the UK – and the gap has widened in the last year

According to Halifax, the monthly costs associated with buying a three-bedroom house are now 16% lower than renting one, and this has risen from 14% in 2011.

Average mortgage costs are £621 a month, compared to typical monthly rent of £741, says the bank. Over a year this amounts to a healthy saving of £1,140 for homeowners.

Of course, UK averages belie a wide disparity in both house prices and rents across the country. In Yorkshire and the Humber for example, average monthly buying costs are just £1 lower than average monthly rental costs (£482 against £483).

At the other end of the scale, in London, buying is far more affordable than renting, at £1,101 compared to £1,294, a monthly difference of £193.

On the face of it, buying looks like a smart option for the financially savvy, but is that really the case?

What about the deposit?

What the figures don’t include is the deposit needed to get onto the housing ladder in the first place. In fact, on checking the small print I discovered that the study works out the cost of paying a mortgage based on an average 73% loan-to-value (LTV) – in other words they assume that the borrower has a 27% deposit to put down.

If you are a first-time buyer in rented accommodation, that’s quite an assumption! Based on Halifax’s most recent house price index, the average UK property price is just shy of £163,000, and 27% of this is a whopping £44,000.

Those with less to put down will naturally have a larger mortgage, which will be more expensive to repay. And remember that lenders charge higher rates of interest to borrowers with small deposits, so you could find that buying doesn’t end up as cheap as you first thought compared to renting.

Of course, the Halifax figures are averages, and are designed to give a snapshot of the market, not to reflect the reality in every postcode of the UK.

What is clear from the report is that mortgage costs have been falling as a result of lower mortgage rates, which is good news for those who can get onto the ladder in the first place. But you need a deposit for that!

However, you also need to work out what’s best for you – taking the plunge into the property market or continuing to rent?

Reasons to rent     

Renting has a lot going for it. First and foremost, it gives you a level of freedom that is simply not possible when you are a homeowner. So if you are offered a job at the other end of the country, no problem. You can simply move, after giving notice, which is usually a month or two if you have been in the property a while.

Secondly, house prices aren’t exactly booming in many parts of the UK, so you aren’t missing out by not buying right now. The longer you can save, the more you will have to put down on a home and this will reduce your mortgage costs.

Thirdly, renting may be pricey but at least you don’t have to consider all the other costs of homebuying, like Stamp Duty, mortgage fees, legal fees and the survey on your new home, which can add up to thousands. In addition, when you own a home you are responsible for maintenance which can be extremely costly. Renters just pick up the phone and get their landlord to fix the problem.

Despite these obvious perks of renting we are still a nation of homeowners, and aspiring homeowners. And for good reason – there are plenty of benefits to owning your own property.

Better off buying?

Firstly, there is security of tenure with owning your own home. Nobody can give you notice to leave (providing you have met all your mortgage repayments).

Secondly, you can do what you want with your own property (within limits) – paint the walls, refit the kitchen, convert the loft. You own it and can adapt it to your own taste. Many tenants are afraid to even put up paintings for fear of their landlord deducting money from their deposit for pin holes in the walls.

Thirdly, you are slowly chipping away at your debt and buying an asset, probably the biggest one of your life. Many people believe that renting is throwing money down the drain, and buying represents a better use of your money because part of your monthly repayments is going towards paying off your debt. At the same time you could benefit from a rise in property prices over the long term, which would increase your equity stake (of course, prices may also fall!).

If you are thinking of taking that first step onto the property ladder below are some of the best mortgages around right now:

Mortgages for people with a small deposit

Lender

Type of mortgage

Rate

Fee

Max LTV

Chelsea BS

2-year fix

3.69%

£1,695

90%

Post Office

2-year fix

3.75%

£1,495

90%

Yorkshire BS

2-year fix

3.79%

£995

90%

The Co-op Bank

5-year fix

3.79%

£999

85%

Hanley Economic BS

3-year discount

4.19%

£550

90%        

Loughborough BS

5-year fix

4.24%

£599

90%

Norwich & Peterborough Building Society

5-year fix

4.79%

£295

90%

Loughborough BS

5-year fix

4.99%

£99

95%

Mortgages for those with a larger deposit

Lender

Type of mortgage

Rate

Fee

Max LTV

Chelsea BS

2-year fix

1.89%

£1,695

60%

HSBC

2-year fix

1.98%

£1,999

60%

Yorkshire BS

2-year fix

1.99%

£995

60%

Nationwide BS

2-year tracker

2.34%

£999

60%

Yorkshire BS

2-year tracker

2.44%

£995

75%

Yorkshire BS

2-year fix

2.49%

£995

75%

Nationwide BS

3-year fix

2.69%

£995 (£499 for FTBS)

70%

First Direct

5-year fix

2.69%

£1,999

65%

Loughborough BS

2-year fix

2.79%

£599

80%

Post Office

5-year fix

2.74%

£995

60%

Chelsea BS

5-year fix

2.89%

£1,695

75%

Use lovemoney.com's innovative mortgage tool now to find the best mortgage for you online

At lovemoney.com, you can research all the best deals yourself using our online mortgage service, or speak directly to a whole-of-market, fee-free lovemoney.com broker. Call 0800 804 8045 or email mortgages@lovemoney.com for more help.

This article aims to give information, not advice. Always do your own research and/or seek out advice from an FSA-regulated broker (such as one of our brokers here at lovemoney.com), before acting on anything contained in this article.

Finally, we tend to only give the initial rate of a deal in our articles, but any deal which lasts for a shorter period than your mortgage term may revert to the lender's standard variable rate or a tracker rate when the deal ends. Before you take out a deal, you should always try to find out from your lender what its standard variable rate is and how it will be determined in the future. Make sure you take all this information into account when comparing different deals.

Your home or property may be repossessed if you do not keep up repayments on your mortgage.

More on mortgages

The cheapest small deposit fixed rate mortgage in ten years!

Barclays Family Springboard: buy a house with 5% deposit

Five mistakes that mean you'll get the wrong mortgage

Seven reasons mortgage lenders turn you down

How to beat Stamp Duty

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Comments (9)

  • Iamcoldsteve
    Love rating 329
    Iamcoldsteve said

    The very basic and simple fact is that if you are renting, you are paying the landlord's mortgage (or a very large proportion at least). Is that not justification for saying that buying 'overall' must be cheaper?

    When you buy you will eventually own the property. With renting, that is just not the case.....

    Renting does offer some benefits - depending on lifestyle, ability to up sticks etc, BUT you are paying a premium for that freedom.

    Report on 19 February 2013  |  Love thisLove  0 loves
  • RichardSowler
    Love rating 18
    RichardSowler said

    A couple of additional points in favour of renting. Owners have the cost of buildings insurance as well as contents - not much but a consideraton. More important, the opportunity cost of having your money tied up in the property, when you could have it on the stock market where, so we are informed, the value of investments can go up as well as down.

    Report on 19 February 2013  |  Love thisLove  0 loves
  • athomik
    Love rating 16
    athomik said

    I bought my house in 1986, paid peanuts for the mortgage and rent at the time, waited 20 years and bought the house outright for less than 1/2 of it's value at the time (our contract dated from before there was a cap on discounts). Now I have a house which is worth 5 times it's original value and pay off a mortgage for less than 1/2 it's value. BTW the original mortgage was an endowment, which wouldn't have covered the original mortgage, but as I bought the house outright before it matured, I also got a nice cash bonus when I cashed that in.

    With regards to rent, my mortgage payments are about 2/3 of the rent charged for a similar property in this area.

    Report on 19 February 2013  |  Love thisLove  0 loves
  • LastChip
    Love rating 92
    LastChip said

    A well balanced article, but......

    like many of it's ilk, it only looks at the short term - typical of this nation at present!

    Let's take an alternative look.

    Suppose you come out of education at (say) 20 and die when you're 80. We're looking at a 60 year period.

    The pro's of renting are well established in the article, but consider as time progresses, rents will increase, even if it's only at the rate of inflation. So what will be a £100 or so difference now, could be very different in 10, 20, 30 years time. Further, how much is renting going to cost you over a 60 year period? Will you still be able to afford that rent when you're retired?

    Buying is not all rosy, but you'll have a relatively fixed outgoing (subject to interest rates and mortgage terms), for a fixed period of time - 25, maybe 30 years. So how much is that going to cost you v renting? Potentially, you could be renting for over twice as long as a mortgage term.

    I wouldn't mind betting, buying comes out cheaper (even with the extra insurance and so on) over the long term.

    We've really got to get out of this very bad habit of looking at the short term and focus on a further distance to see the whole picture.

    One thing I can assure you of, when you're retired and your mortgage is paid and all you have is the statutory expenses and a bit of maintenance, you'll be grinning from ear to ear.

    Report on 19 February 2013  |  Love thisLove  0 loves
  • isobelsgrandma
    Love rating 41
    isobelsgrandma said

    Great to have the choice of course. For my daughter and her husband, renting a fairly grotty, one-bedroomed flat in Wandsworth for slightly less than £1000 per month not to mention student loan repayments, the possibility of saving enough for a deposit is a remote dream.

    Report on 19 February 2013  |  Love thisLove  0 loves
  • Arblaster
    Love rating 43
    Arblaster said

    Yes, everybody says that it is better to buy a house. But there are lots of disadvantages. For a start, if you own the house outright, then you have thousands that will not have access to until you can sell the place. If your house is worth £200,000, if you have to do a runner, you will be leaving 200 Gs behind.

    Also, interest rates are low at the moment, but they can rise several percentage points at a time, and probably will not long from now.

    You would be surprised at the number of multi-millionaires who live in rented property.

    Report on 20 February 2013  |  Love thisLove  1 love
  • Iamcoldsteve
    Love rating 329
    Iamcoldsteve said

    Arblaster, BUT if you rented you won't have access to that money EVER and will be continuing to pay long after the house would have been bought and you are living there 'free'.

    The words 'no' and 'brainer' spring to mind.

    The people who are Multi-Milliionaires probably rent off a company (maybe even owned by them!!) for tax reasons? More monthly outgoings and lower assets??????

    Report on 21 February 2013  |  Love thisLove  0 loves
  • cpwise2003
    Love rating 0
    cpwise2003 said

    Rather an all encompassing remark, that if anything needs fixing in your rented accommodation, its the landlord who should fix it. Whilst correct on some things, it is not on others and further, it may be according to contract on specific things.

    As a landlord and one who knows that if London is left out of the equation then renting is considerably cheaper everywhere else despite needing to include costs that are the tenants responsibility. The fact that too many tenants expect landlords to even change light bulbs as well as use a crystal ball to discover there is a problem to sort shows that a lot of people actually need to rent first, to understand just how much responsibility is involved in running a home, give them time to amass a sensible sized deposit for their first home and haven a government backed scheme which allows registered landlords to give character references for good tenants to the lenders to show their history for paying rent and keeping a proper home both if which makes them a better risk for lending.

    Report on 21 February 2013  |  Love thisLove  0 loves
  • edwardmk2879
    Love rating 65
    edwardmk2879 said

    As always, it depends on the circumstances.

    I'm renting a £600k house for £1k/month. No house expenses, although because it's so cheap, I do a lot of good DIY for the landlord and am trying to be an excellent tenant, treating the home as if I owned it.

    We're also saving like crazy and researching the market for a bargain.

    The most money you'll make on a house in this market is what you manage to reduce the purchase price by. Be patient.

    If interest rates tick up, there will be carnage.

    Be prepared.

    Report on 10 April 2013  |  Love thisLove  0 loves

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