Should I rent or buy a house?
Your finances play a big part in whether you should rent or buy, but given the choice, what is best for you? Renting won’t tie you down, is quick to arrange and doesn’t require a big deposit, but buying means you’ll have a home to rightfully call your own that you can do with as you please.
Deciding whether you should rent or buy a house depends on many factors. Some of these may be dictated by your circumstances, others could be down to personal choice. But with the wrong decision not always easily undone, the mortgage vs rent dilemma isn’t one to be taken lightly.
How to decide whether to rent or buy a house
For some people, homeownership will always be the preferred option, but that doesn’t necessarily make it the right choice or even a viable one. Buying a home is probably the biggest financial commitment most of us will ever undertake, so if your finances aren’t quite where they need to be, getting to choose between whether you rent or buy could be taken out of your hands, in the short-term at least.
To try and work out if buying your own home is an option, or whether renting is more realistically where you must turn right now, think about the following:
Have you got a deposit?
Raising a deposit large enough to secure a mortgage is one of the biggest challenges most first-time buyers face. Yes, 100% mortgages are available, but only a handful of lenders offer them and you’ll need a guarantor to back you up (these are known as Guarantor Mortgages). Then there are low-deposit mortgages, which require a down payment of just 5%, but working this through on a property that costs £150,000, you’ll still need £7,500 to get started.
Some parents are able to help their children out with gifted deposits, but if this assistance isn’t forthcoming, and you’re struggling to save, deposit requirements can be a significant stumbling block to buying a home.
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Can you cover the additional costs of buying?
Besides a deposit, a number of other expenses associated with house purchase will usually need to be met. These can include mortgage fees, stamp duty, legal fees, surveys and costs associated with removals.
Will you be able to get a mortgage?
Mortgage lenders will only grant you a mortgage if you can satisfy their affordability tests. This means demonstrating that your income is sufficient to afford the repayments on a mortgage alongside your other living expenses and obligations such as loan repayments. If you intend to buy with someone else using a joint mortgage, their income can be taken into account too, and could allow you to borrow more than if you were buying alone.
Are you intending to stay put or relocate?
If you only plan to live in a certain area or property for a relatively short period, renting may be the better option, because of the flexibility that it can afford if you do want or need to move. It’s probably also not worth paying the various associated home-buying costs for what could turn out to be a brief stay.
Is it better to rent or buy?
Even if you’ve established that buying a property is feasible, there are many other things to consider ahead of deciding whether it is better to rent or buy.
The benefits of buying
- If you have a repayment mortgage, each time you make a mortgage payment, you’re another step closer to owning your own home. If you keep up repayments in full, your mortgage will be paid off completely.
- You benefit from any rise in the value of your home, with any equity that accumulates yours to help you climb the property ladder or to supplement your income.
- You’re free to redecorate, extend and renovate as you want, and have all the pets that you like.
- The uncertainty associated with being a tenant, and the risk of being told to move, is removed.
The downsides of buying
- The initial costs involved with buying can be significant and may take a while to save for.
- Paying a mortgage is a major financial commitment that requires careful thought. Falling into debt and even losing your home are both possibilities if you fail to keep up with your payments.
- Your mortgage costs may rise in line with interest rates, unless you fix your mortgage rate.
- Moving regularly or quickly is more difficult than if you rent due to the need to sell and the costs involved.
- If house prices fall, negative equity can make it difficult to move or remortgage.
- Covering the cost of putting things right with your home when they go wrong is your responsibility (although home insurance may help).
- If a relationship goes sour and you have a joint mortgage, selling a house and sorting the finances can be more problematic than if you’ve been renting.
The benefits of renting
- Finding somewhere to rent and moving in can usually be achieved far quicker than trying to get a mortgage as a first-time buyer.
- A slump in house prices won’t be to your detriment, as you don’t own the home.
- The cost of fixing problems with the house should fall on the landlord and not you.
- A larger house or better location may be more attainable than if you are trying to buy.
The downsides of renting
- There is a chance you could spend your entire lifetime paying rent if you decide not to, or are unable to, purchase a home in the future.
- Depending on the type of tenancy agreement you have, your rent could rise at your landlord’s discretion, or they could unexpectedly serve notice that you need to leave and find a new home.
- Renting a property involves its own upfront costs, including paying a deposit, rent in advance, and potentially agency fees.
- The final say over decorating and home improvements rests with the landlord, who may not take kindly to pets either.
Is it cheaper to rent or buy?
Regardless of the wider pros and cons, for many the decision between when to rent and when to buy will ultimately depend on their finances.
In the first instance, the upfront costs associated with renting tend to be lower than if you are buying.
With landlords not allowed to charge more than five weeks’ rent for a tenancy deposit (or six weeks’ if the rent is set above £50,000 a year), recent analysis showed that the average deposit paid by tenants amounted to around £1,000. While agency fees are banned in England and Scotland, they can still be charged if you’re renting in Wales or Northern Ireland, but will typically run into hundreds of pounds rather than much more.
Compare this with the typical mortgage deposit put down by first-time buyers of 20%, which could easily translate into a cash sum of at least £20,000, and it seems that becoming a tenant is initially more affordable than becoming a homeowner.
As to which is the cheaper of monthly rental costs or mortgage payments, there is no definitive answer, and will require you to do some homework yourself.
Working out how much you can borrow through a mortgage will give you an idea of the payments you’d need to make each month, which you can then compare with typical rental prices where you live. You may also find that for the same monthly outlay, you can get a considerably bigger rental home than you can afford to buy.
It is worth keeping in mind, however, that hopefully there’ll come a day when your mortgage is completely paid off, and the monthly payments end; if you rent, there is an open-endedness to the money you’ll need to find to keep a roof over your head.
What help is available if you really want to buy?
If the rent or buy question is null and void in your mind, and the property ladder is your only goal, there are various schemes to help you realise your home buying dreams.
A Lifetime ISA can fast track your progress towards a suitable deposit by adding a 25% bonus to your savings. You’ll need to open one of these tax-free accounts between the ages of 18 and 40, but can then contribute up to £4,000 each year until you’re aged 50.
Help to Buy Mortgages
A Help to Buy Mortgage allows aspiring homeowners with a deposit of just 5% to secure a loan for a further 20% (or 40% in London) of the price of a property without needing to pay interest for five years. Note that the scheme is for first-time buyers only and that there are regional price caps on the value of the home you can buy.
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Right to Buy Mortgages
Right to Buy Mortgages are designed to help council and housing association tenants buy the property where they currently live at a reduced price. To take advantage, you’ll need to have been a tenant for three years and use the home as your main residence going forward.
» COMPARE: Right to Buy Mortgages
Shared Ownership Mortgages
Shared Ownership Mortgages provide a way to buy a share in a property from a housing association or developer. As you’re only part-buying a home – and part-renting the rest – the deposit needed to get a foothold on the property ladder should be smaller than if you were getting a mortgage for the full value of the home.
» COMPARE: Shared Ownership Mortgages
First Homes Scheme
The First Homes scheme, which will be available from the end of June 2021, will help first-time buyers with a household income under £80,000 (£90,000 in Greater London) buy a new home at a minimum 30% discount.
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Tim draws on 20 years’ experience at Virgin Money, Moneyfacts and Future to pen articles that always put consumers’ interests first. He has particular expertise in mortgages, pensions and savings. Read more