Is buying better than renting?
Buying versus renting – the facts
In the first of our series of advice blogs on buying a new home, we consider whether buying a property is better than renting for young and growing families. It’s one of the biggest decisions you have to make in your adult life – will you rent, or try to get onto the property ladder?
At first glance, when you take into account deposits, stamp duty and so on, you might think that renting has to be the cheaper option, but the latest figures from Lloyds Banking Group show that average mortgage payments are less than average rent payments. In December 2020 it was nine percent more expensive each month to rent, with an annual difference of £816.
And of course, the value of the home you have a mortgage on will (hopefully) increase, so that investment each month will be earning you money, while your rental payments are only going in one place – your landlord’s bank account.
Another thing to consider is that your rental payments are only likely to increase year on year, whereas as you pay off your mortgage, and your debt decreases, the interest payments should eventually drop.
Disadvantages of renting
If you have a young family, renting has some disadvantages:
- You may not be able to have a family pet, and you will have to ensure that you fix anything that your small children damage.
- You may also be unable to decorate or alter the home to make it work for your family.
- And you’re at the mercy of the landlord – if they decide they want to stop leasing the property, you will have to find a new home – and if your children are school age, this may be hard.
- You will have to look for a property nearby, endure a longer school run journey, or even move schools.
Disadvantages to buying
Of course, there are some disadvantages to owning your own home as well:
- There are a lot of upfront costs involved such as surveys, legal fees, deposit and so on.
- You will also have to maintain your own home and pay for any repairs.
- It is also possible that you could end up in negative equity (when the property is worth less than the amount you owe on it) if the housing market falls.
However, overall, owning a property does seem to be the more sensible option – in a few years’ time, you are likely to be paying out far less each month for your housing costs than you would be if you were renting – and with a growing family (and they only get more expensive as they get bigger!) this will be a great help with your family finances.
We explore further…
Getting the timing right
If you are just starting out as a couple, a short-term rental is the ideal way to test the water, to make sure your relationship is on the right footing, that you have the same values about raising a family, spending and saving money and so on. Yes, you have to put down a deposit (usually a month’s rent in advance) and your outgoings will be more, but should you decide to go your separate ways, it will be a simple process to extricate yourselves.
Something else to consider is what you can afford to rent or buy. If you can rent (but can’t afford to buy) a property that allows you plenty of space, in a nice area and with a spacious garden, this is worth a lot in terms of quality of lifestyle, especially when you have small children. So, while not a monetary consideration, it is certainly something you should discuss before making any decision.
Once you are ready to commit to buying a home, you will need to work out how you will raise your deposit. There are several options – aside from working longer and spending less! We cover this briefly below or look out for our December blog for more detail.
Raising a deposit
There are a number of schemes available to first-time buyers including the Help to Buy Equity Loan Scheme, the First Homes scheme, which offers a discount on new-build properties; and the Mortgage Guarantee Scheme.
It may also be possible to get help from family members. They could take advantage of an equity release scheme to release enough for a deposit from the equity in their own home or sign up for one of several mortgage products that allow their savings or home equity to be used as a kind of holding deposit, which you then pay off over a number of years. This is a good way to get on the property ladder before housing prices rise again.
When considering how much deposit you will need, bear in mind that most mortgages will require at least a 5% deposit – with more available to you, at a better rate if you can raise a 10% deposit. On a property worth £200,000, that means paying out £20,000, plus survey fees, legal fees, estate agent fees and so on.
Stamp duty is another consideration – although at present, first-time buyers buying a property under £300,000 are exempt.
Remember you will also need spare cash for furniture, white goods, a repair fund and so on. So it’s not a cheap option, but is probably worth it in the long run.
Finally, we should mention shared ownership properties, where you buy a share of the property and pay rent on the rest. Taking this option might allow you to buy a property that you would not otherwise be able to afford – as time goes on, and your financial circumstances improve (perhaps when the main child carer goes back to work), you can increase the amount of the property that you own.
There are downsides to this type of property – you will be responsible for all maintenance costs, even though you are part-renting, and you will probably not be able to make any major renovations as you still have a landlord. And as the property price increases, it will be more expensive to buy a remaining share. But it does give you the chance to buy a property with a smaller deposit, lower mortgage rates.
Established in Berkshire in 2004, J Finance Ltd is one of the leading financial planning companies in the area. We serve clients across the South of England including Oxfordshire, Buckinghamshire and Hampshire. If you would like to discuss this subject or any other financial matter, please contact us on 01635 521 300 or email [email protected], without obligation.
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J Finance Ltd was founded in 2001 by Jonathan Bright and is a financial services company located in Newbury, Berkshire – though we serve the whole of the UK. We are a team of financial advisers and mortgage consultants who are focused on giving you, our clients, professional advice along with outstanding customer service. We do this by developing long term relationships and offering an excellent, personal service. We’ll take the time to discuss your current situation and your plans for the future, and we’ll use this information to help identify the best financial products for you.