Rent or mortgage?

The age old question of whether to rent a property or to take out a mortgage is even more relevant today than at any time in the past fifty years. The traditional view, that a mountain of debt could win a capital windfall over a twenty-five year term, has suffered during the last decade.

Property prices have broadly held steady, by and large, with both gains and losses in the medium term. In some parts of the country gains have been greater than losses, but these have been, mainly, in areas and sectors that are not representative of the rental property market as a whole. The examples below are based on simplified models and are intended to be illustrative rather than exact.

If you were to take out a mortgage of £130,000 for example, the repayments would be of the order of £620 per month at present typical rates, making total repayments over the term of approximately £180,000. We assume, by the way, that interest rates remain at the same level throughout the twenty-five years, otherwise the gains you need to make will have to be substantially higher.

To win the mortgage game you will have to achieve capital growth of roughly 40% over the mortgage term. That is what it will have cost in repayments simply to stay where you are. Anything less than this will mean that you will have paid more than your house is worth. All this is without the cost of maintaining the property for twenty-five years.

Remember, while you rent a property the landlord is responsible for maintaining the building you live in, the landlord is responsible for insuring the building, the landlord is responsible for the white goods and in a rental property is responsible for maintaining the cooking facilities, the boiler and the central heating system. While you are buying your house, you will have to pay for these yourself.

The real question, therefore, is “Can I invest enough to generate a return of £50,000 plus over a twenty-five year term while I rent?”. In simple compound interest terms, saving £113 per month over the same period will, at an interest rate of 3% fixed over the twenty five years will produce a capital value of £50,000. Of course, this is based on just paying into a bank's simple investment account. If that amount is invested into stocks, shares or bonds, they will pay dividends too, so the final amount realised could be considerably higher if those dividends are ploughed back into the investment 'pot'. Government bonds are relatively low risk and will offer a predictable yield, while stocks and share are more uncertain and can lose value as well as gain.

It is worth pointing out that if interest rates do rise, this works favour of those who are renting property while it works against those who are repaying mortgages.

As a home owner, you could easily spend that £113 (or so) on household insurance, on replacing washing machines, fridges, freezers and a three new boilers over the same period, without taking into account the inevitable costs of redecorating, keeping the roof, windows and doors in good repair.

So, is living in rental property such a bad idea after all?

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