To ‘buy’ or not to ‘buy’

Dilemma of Renting vs. Buying — Solved!

Have you ever wondered what made more financial sense — buying a house or continue renting? Have you been encouraged by friends and family to choose one over the other? If yes, you are not the only one. In fact, a vast majority of people face this dilemma sometime in their life. 

In this article I’ve tried to weigh the pros and cons of renting and buying a house. At the end, there’s a handy calculator for you to use and customise based on your situation. You can use the calculator to know if you will be financially better off or worse off if you chose one over the other.

Before you read any further please be mindful that buying a house has a lot of intangible benefits such as sense of security and pride of owning a house. These benefits can not be measured in terms of money. Although the calculator offers an insight into financial gains, it can not measure these intangible benefits. Okay, now read on to find out more.

Benefits of Renting

1. 1. Lower initial costs: If you want to get started in a new city or country renting is a great way to do so as it involves lower initial costs. The initial costs involve majorly the security deposit and any furniture you might need.
   2. No maintenance costs: The landlords will be responsible for paying for the maintenance of the property and conducting any repairs. However, if the property is damaged by you, you will be asked to bear the repair costs.
   3. Flexibility and ease: If you are someone for whom the flexibility and ease of moving to another area or city is important then renting is a great option for you.
   4. Convenience: Usually a rented house will have better access to amenities such as retail, schools and train stations. If you have children who commute to school this is an important factor to consider.
   5. No market risk: You do not need to worry whether the house prices go up.

Benefits of Buying

1. 1. Equity Building: Over time houses usually grow in price. Also mortgage to buy a house is one of the cheapest debts you can set your hands on. Interest rates on other debts like personal loan, home rebuilding loan are much higher.
   2. Potential to earn rental income: When you own a house there’s a potential to earn rental income by letting out the entire house or a part of it.
   3. Stability and Security: This is, in my opinion the most important benefit owning a house can offer. You will never to asked to move out by a landlord.
   4. Creative autonomy: When you own a house you can decorate it to suit your lifestyle, needs and of course taste!

Criticism of Renting

Although renting and buying both have some unique benefits, I feel it’s important to address one of the most common judgement/criticism renters face which is,

Paying rent is nothing but pouring money down the drain.

Renters are sometimes made to believe that they could be better off paying mortgage than rent. Afterall, by paying rent you are paying someone else’s mortgae! But that’s not always as black and white as it may seem. Oftentimes rent is much lower than the mortgage payments when you compare apples to apples. In some cases, the difference in rent and mortgage payment can be as high as £650 if not more. So renters are actually saving more money month after month and year after year.

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The Calculator

Okay, let’s do some number crunching. As Unapologetically Money-Minded I always run my theories through real numbers and calculations. Here I have created a google sheet based calculator to determine if renting or buying is financially better for you. Now there are other such calculators available online. Then why did I create a new one?

This calculator offers you three important benefits — 

1. 1. UMoneyMinded’s calculator does not simply assume that you will sell the house after the end of the mortgage term but lets you extrapolate even after the mortgage term is over.
   2. This calculator lets you enter rates of return for your initial capital as well as savings. Some of the online calculators do not allow you that flexibility.
   3. This calculator shows you year by year breakup of the savings, expenses, capital growth, net asset value, etc.

Like with any statistical analysis, I’ve made some assumptions like –

1. 1. Inflation statys at around 3% so relatively, the salary grows by 3%, rent grows by 3% (Now though the mortgage rates revise every 2/3/5 depending on your contract, but the overall correlation between Inflation ← → Expenses ← → Mortgage rate ← → Rate of return usually stays the same).
   2. Salary is assumed to be £4500.
   3. House prices is assumed to be £500,000 and house price appreciation at 4%.

So go on, get your numbers in this spreadsheet and see it for yourself if buying makes more sense or renting for you!

Click here for the RentingVsBuying – Calculator

Summary

In summary, if you go by the numbers in the calculator as they are- 

1. After paying off the mortgage in 20 years, the net worth of the buyer will be £1.863217 million whereas the net worth of the renter will be  £1.849905 million.
2. Most of the buyer’s liquidity i.e. 58.8% will be locked in the house.
3. If the buyer at this point sells the house (assuming 1% is paid to the estate agent), the buyer will be only £2356 better off than the renter.
4. If the buyer continues to own the house and renter continues to rent, the renter will have £123,872 more than the buyer in net worth.

Conclusion

The dilemma of renting vs buying is faced by everyone at some point in their life. Both buying and renting have their own merits and demerits. The one big merit of buying a house to live in it is the sense of security and pride in owning the house. Even though we make this decision after much deliberation, there’s an emotional factor associated with buying a house.

Using this calculator you can see from a mathematical perspective if you would be better off buying a house or renting one.

Hope you find it useful.

So long till we see again!