Buying vs Renting a Home

Should you buy or rent a place to live? The answer is that it depends. I am not here to tell you what is the right thing to do, but I do want to make you aware of a number of things that you should be aware of when making your decision.

I feel that the majority of people view renting as throwing money down the drain. This is certainly not the case and it may be possible that renting actually saves you money when compared to buying a home.

Benefits of Renting

1. Mobility

I think this is by far the biggest benefit of renting that is overlooked. Having the ability to pack up and move to a new location as soon as your lease is up offers an incredible amount of flexibility. Trying to sell a home from the moment it is listed, to completion of the sale often takes 4-6 months. This is without any hiccups and on the assumption that you have found another place for you to purchase. You are incredibly immobile if you own a home and want to move somewhere else when compared to renters.

2. Buying a Home is a Huge Financial Commitment

If you do not keep up your mortgage repayments for reasons such as losing your job, your home could end up being repossessed. The buying costs associated with purchasing a home include things such as stamp duty land tax (SDLT), mortgage fees, mortgage broker fees, solicitor fees, survey and a land registry fee. You have maintenance and repair fees as the home owner as well as buildings insurance. Finally, when it comes to selling you will need to pay the estate agent usually a percentage on the sale of the house (which according to HOA is 1.42% on average).

If you rent, your landlord is usually responsible for the majority of repairs/maintenance for things such as structural issues, the electric and plumbing. If you own your home, you are responsible for everything.

If you are a renter, a dip in the housing market will not impact you. If you are a home owner, a dip in house prices could be significant and leave you in negative equity. Negative equity is a situation in which the value of your home is less than your outstanding mortgage. For example, if you purchase a home for £180k with a £30k deposit, then your mortgage is £150k. If the value of your house then falls to £100k, you would be in negative equity of £50k (£100k - £150k).

Source: Lloyds Bank

Your best bet if you ever find yourself in negative equity is to remain put and wait for house prices to rise again. Otherwise, if you were to sell your house in negative equity you would need to make up the shortfall. In the example above, if you were to sell the house for £100k, you would owe your lender £50k.

3. Opportunity Cost of Tying up your Deposit

If you buy a house/flat you will need to put a deposit down. This is often 10-20% of the value of the home. The average deposit for a home according to Statista in 2021 was £54k. If you tie this money up you will no longer have access to it, which means you would not be able to use the money to invest or for an emergency.

Upside of Buying a Home

1. Build Equity

House prices have historically always risen in the long run. Since 1968, house prices in the UK have risen by 8% a year. Although, in recent decades this growth appears to be slowing and in the last decade they only rose by 4% a year on average (source: Land Registry). In the short run, house prices can vary a lot and off the back of the financial crash in 2008, house prices fell by 15%. This is something to bear in mind if you don't plan to live in a property for a long period of time.

2. Leverage your Money

Buying a home using a mortgage (loan backed by the security of a home), means that you are leveraging your money. What I mean by this is that, if you put a 25% deposit down and obtain 75% of the rest of the funds through a mortgage, you have leveraged your money 3x. This is because for every £1 you have invested, you have borrowed £3.

Although the majority of the funds used to purchase most home's have been borrowed, any gains in the value of the property are 100% your own. For example, if you purchase a property for £100,000 using a 25% deposit, your mortgage is £75,000. If the property increased in value to £110,000, it has increased in value by £10,000 (+10%). This gain is wholly attributable to yourself. This is powerful because without being lent the money by your mortgage lender, you would never have been able to purchase the property in the first place and thus never been able to obtain that gain in value of the property appreciating.

3. Live by your Own Rules in your Home

You do not have to abide by your landlord's rules and can do as you please when you own your own home. This means you can decorate and furnish your property as you want, there will be no sudden rent rises and you cannot be made to move out at short notice.

Summary

I have only touched in this post what I believe to be the main benefits of both renting and buying. Ultimately, whether it is best to rent or buy very much depends on your own situation. It is something you will have to work out for yourself.

Generally, I would say that renting is best when you are planning on being in a particular location for a shorter period of time and buying a home is best when you know a particular area you would like to live in for a longer period of time.