It's cheaper to buy property than rent!

by Robert Powell on 11 March 2011  |  10 comments
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It's now cheaper to buy a property than rent - or is it? Robert Powell assesses the options...

You’re throwing money away by renting.

This simple sentence is the mantra of the proud homeowner and scourge of the tenant. But if new research is to be believed then it may well be correct.

According to the property site Zoopla, renting a home now costs an average of 10.5% more than paying the interest on a mortgage for a comparable property. The research also shows that renting is now more expensive than owing in 80% of Britain’s towns and cities.

So as a renter myself, does this mean I should start looking around for my first property?

Let’s take a closer look at the figures...

Buy! Buy! Buy!

Zoopla has compiled a list of the top 50 locations where buying beats renting. Zoopla has based its figures on the average asking price for a two bedroom flat in the 50 largest cities and towns in the UK and compared it to an interest-only mortgage at 5% per annum on a similar property. Comparing these stats gives a rent vs. buy percentage and the higher the number, the worse off you are by renting.

Here are the top five locations where Zoopla claims it’s cheaper to buy than rent:

*Variance between average monthly rent and average monthly cost of 5% p.a. interest-only mortgage.

Source: Zoopla.co.uk

You can view the full list, with all 50 cities/towns, here.

The Zoopla stats show that renters in Milton Keynes are left £2,772 a year worse off than the owners of similar sized properties. The website’s research also shows that 12 of the 50 largest cities and towns have average rents that exceed interest-only mortgage payments by over 20%.

Even London has cheaper interest-only mortgage payments than rent. Zoopla puts the average rent for a two bedroom property in the capital at £2,252 per month – meaning buyers stand to save £4,656 annually compared to renters.

So as a London tenant myself, should I be heading down the estate agents in search of my dream home?

Is it really the time to buy?

For me – even with these Zoopla figures – definitely not! Here’s why...

Firstly, the buyer figures are based on an interest-only mortgage, meaning you won’t actually be paying off any of your debt when you shell out every month. So when you reach the end of your mortgage term, your lender will present you with a bill for the outstanding amount that you initially borrowed to buy your house. Fine if property prices increase; but you can never – especially in the current climate – guarantee that.

In fact, many people are predicting that property prices will fall or at least stagnate over the coming year. This makes interest-only mortgages a definite no-go area and ushers in the looming prospect of negative equity for first-time buyers looking to get onto the property ladder with a high LTV mortgage.

What the Zoopla stats also fail to take into account is the practicality of first time buyers actually managing to get a mortgage in the first place. Realistically, most first time buyers won’t have a large enough deposit to take anything less than a 90% LTV mortgage (and there are a few around now – read More mortgages for smaller deposits to find out more).

But to get hold of such a deal you’ll probably be looking at interest rates of around 6%. The Zoopla figures are based on a 5% deal; jack this up a percentage point and renting becomes cheaper in 78% of the 50 locations studied (not my words, the words of Zoopla’s Nicholas Leeming). And that’s before you even factor in the maintenance and insurance costs attached to owning your own home.

Even if you can get a 5% deal, you’ll still be hit by higher interest rates if the Bank of England base rate rises.

Suddenly I’m feeling fairly positive about renting!

Perfect storm

Renters looking at getting on the housing ladder are currently stuck in something of a perfect storm.

As I’ve outlined above, the current economic climate means it’s definitely not the greatest time to be thinking about buying your first home. The shadow of the recent property bubble is also still hanging heavy over many first-time buyers as they glance up a rung on the ladder and see home owners stuck in their first property, held back by price crashes and negative equity, blocking up properties that would usually be available to them.

So these first-time buyers are forced into the rental sector – which is by many accounts blossoming as buy-to-let mortgages boom and rents rise as a result of increasing demand, inflation and tax hikes. While these rent hikes are perfectly acceptable under the current market conditions, they’re still bad news for temporary-renters looking to save up for a deposit.

And it’s not just landlords expanding their portfolios who are contributing to the booming rental sector. Many people who are looking to move up the property ladder but are reluctant to drop their price to the current market level for fear of low or negative equity are also moving into the rental sector. This adds to the misery for first-time buyers as properties that would usually be available to them are taken out of the market.

The future

Last week, Barclays reported that mortgages are actually at their most affordable rate in ten years. This is all well and good but if affordable properties aren’t available, deposits continue to be sucked up in rising rents, interest rates are hiked and property prices fall – the future for first-time buyers will continue to look grim.

The recent introduction of a 120% mortgage from Lloyds and the return of a 90% mortgage from Northern Rock seems to – symbolically at least – point to a ‘hair of the dog’ solution for our current property mess. But even if you can find an appropriate property and stump up a deposit, these high LTV deals are really only practical for those who are determined to stay put for a long time in order to ride out any possibility of negative equity. And with the economy and jobs market still so fragile, can anyone really guarantee this?

What do you think?

Are renters like me just throwing money away? Is buying cheaper than renting? Or is owning your own property over-rated nowadays?

Let us know your thoughts in the comment box below.

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