Stop throwing money on rent and paying your landlord's mortgage. This is something that has been told to most of us for so long that we have started believing this. However, in 2023 with the interest rates peaking across the world, does buying a home necessarily mean that you have arrived in life?
Of course, there are some advantages to buying your own home. For example, when you buy your own home, you are building equity, which means that there's a part of money that no one can take away from you.
If house prices go up, your return on investment goes up. If house prices go down because you have equity in the home, your return on investment goes down, which is actually quite possible in the current climate.
So let's talk about some of the benefits of actually owning a home and renting a home. And then let's run the numbers.
1.The first advantage of buying a home is how much control you have over your living environment.
If you don't like the white walls, you can turn them into blue. If you want to put up some pictures and wall hangings, you can just put a nail in the wall and hang some pictures. You literally have so much control over how you design your living space that renting, frankly, won't give you
2. The second advantage of buying a house, especially when you are planning to live there for a number of years, is that you get to build a lot of memories in that house.
So, A lot of memories with your family, a lot of memories with your friends, and it becomes that anchor point, that emotional anchor that you go back home to. It feels like home, and that is something I don't think always happens with the rented house, especially because rental leases are much shorter.
3. Another advantage of buying your house is that if you are a constant fixer and a tinkerer, you can always find a project in your house.
You can redo the kitchen, you can redo the bathroom, you can do the windows, you can do some paint jobs, you can get new wallpapers. If you are creative in that way, you will literally always be entertained with the projects that you can run in your own home.
4. Another big advantage- I believe that society has somehow gotten us to believe that home ownership is the dream, and when you finally buy a home, you get to live that dream.
So, it's the emotional kick that you get out of it, which is again, not something you necessarily have when you rent a house.
5.Finally, in some countries actually, when you buy a house, you get some tax benefits.
I know this to be true for India, and I believe that this is also true for the US, in the UK not so much. You don't have too many tax benefits for buying a new home.
Now with all that said, let's look at the benefits of renting.
1. Renting offers an amazing amount of flexibility.
If you don't like the house, the location, you find the commute time to be longer than you had imagined, or you simply want to move abroad or to another city, you just pack your bags and move. You don't have to bother about renting it out. You don't have to bother about closing down a sale. You just get moving. The flexibility that renting offers is just unparalleled.
2.Another advantage of renting is that you can literally ring up your landlord and ask for repair and maintenance work to be done.
You don't have to lift a finger other than just ring your landlord because they are supposed to maintain the house for you. So, if there's a leaky pipe, if there's damp on the wall, It's your landlord's problem.
You literally don't have to do anything. Therefore, the amount of headache that you have is considerably lower than home ownership. Ask me. I've rented for years and now I own a home and the headache to home ownership is just another level.
3. The third big benefit of renting a home is of course, the fact that it doesn't require a huge amount of upfront investment.
Certain landlords do ask for half a years of advanced rent. However, this is considerably lower than the five or 10% deposit that you typically would have to put down for home ownership.
But speaking about upfront investments, it's worth noting about the a hundred percent mortgages. Over the last week, Skipton Building Society in the UK have reintroduced a hundred percent mortgage. In the US, a hundred percent mortgages already exist. So, technically in these cases, you don't need to have the upfront investment.
However, whether the a hundred percent mortgages are a good idea or not really depends on so many factors put together. Damien Talks Money has actually done a recent video on this.
Have you noticed something?
I talked mostly about emotional reasons of whether you should buy your rent, but obviously buying a house is not just an emotional decision. It is much more than that. It's probably one of the biggest financial decisions of your life. It's probably the most expensive thing that you'll ever buy in your life.
So, it's worth running the numbers. It's worth looking at the opportunity costs of what else you can do with that money rather than buying a house. And how does buying a house versus renting and investing tally up?
It is not as simple as people make it out to be. There are a lot of factors that affect your buying versus renting decision over and above emotional ones.
While I want you to be, Happy in a home, I also want you to be financially savvy, especially with home ownership. It'll literally be the biggest purchase of your life. So don't just use emotions, use the math, use the analytics, and let's run some numbers.
How do we run the numbers?
We use a buy versus rent calculator. I'll break this down for you. But before going there, let me tell you about a few important numbers that can tip the dial.
The first one is how much rent you are paying per month.
For example, if you are paying only 1500 and your mortgages 1800, are you going to compromise on your investment portfolio down the line? That's one thing you want to consider.
What are the opportunity costs of that money?
You want to consider the expected property price growth over the next few years, year on year, against your other investment portfolios? Are the home prices in your area going up continuously? And, is there a reason for it to be going up other than mere speculation.
Just because they have gone up in the past does not imply that they'll continue to go upwards. In fact, we are currently living in a scenario where we are expecting house prices to slow down considerably in the next year or so.
You also want to consider how long you want to live in that house.
So, if you want to just live in the house for two years or three years and just get onto the property ladder, as opposed to you want to spend a considerable amount of time there because it's in a good school district and your children can go to a good school in that area and you are there for the next 10, 15 years.
It's a very different equation. So, If you are there for two years versus if you are there for 10, it really tips the dial.
You also, of course, want to consider what the current interest rates are.
I know in the US you can fix interest rates for the long haul for 30 years. But in the UK you can only fix interest rates for about five years.
So, if you are someone who has fixed their interest rates, when the interest rates were really low, great. But if you are getting into the market now and fixing it for 30 years, that's something that you need to think critically about. You want to consider how much down payment and deposit you have.
So, like I say, there are a hundred percent mortgages out there, but that doesn't necessarily mean you should go for them. You'll see that the more deposit you've put in, the lower the interest rate you are paying on your mortgage.
You also want to consider the length of the mortgage.
I know, now you can take mortgages for about 35 years. But if you actually squeeze it down to 20 years, you will much more aggressively pay off towards the principal of the loan rather than towards the interest, and you will pay a considerably lower amount of interest.
Additionally, you want to consider the maintenance costs and the cost of repair, and frankly, the cost of the headache that is required to maintain and repair your own house.
And also consider that when you invest for the long haul, for example, 40 years, whether that be in the stock market or in the housing market, you will very likely make some amount of money,
With all that said, let's look at the numbers. For simplicity's sake, I'm using a rent versus by calculator by smart Money tools. Also for simplicity's sake, I'm looking at a house which is worth around half a million pounds, and I looked up properties around the same area of the same size the rent for those sorts of properties are around 2,250pound per month.
I also made a series of assumptions. As you'll see, I assume that the rent increase annually will be at around 5%. I assumed that you'd live in this home for 10 years. I also assumed that the mortgage interest rate is 5%. That is basically the rock bottom interest rate that's available in the UK right now. I also assume that you are putting in 10% of the house price as a deposit, so that's 50,000. The mortgage length is 30 years. Obviously, you can stretch this out to 35 or bring this down significantly.
For simplicity's sake, I have considered the property price growth year on year to be the same as whatever else you invest in and the return that that gives 6% in both the cases. And I have also assumed that whether you are renting or you are buying, you are still investing the same amount of money per month in another asset.
I have also considered the stamp duty because when you are buying a house that is quite a significant amount of money. You also want to consider the buying and the selling costs. For example, you have to pay all the survey fees, the litigation fees, et cetera, while you are buying. And if you are planning to sell a house, there are significant selling costs, including the litigation, all of the other charges that you have to pay, and also the real estate agent's charges. So all of that put together conservatively is 5%, but in some cases this could go up to 10%.
This is a really important thing to keep in mind because many a times all your profits on a property will be shaved off by the time you want to sell it because you have to pay a lot of money to settle the costs of closing the house.
I've also considered that you are maintaining the house well, you can estimate to spend about 1.5% of the houses worth every year on maintenance and repairs. I'm not considering any service or annual charges, but if you are buying a flat or an apartment, very likely you'll incur a service charge.
I have also assumed that there are no additional rental deposits, but there's an agency fee of about a thousand pounds.
Now, see all the numbers. If they were to play out as I assumed, then you are much better off buying. However, there's a high likelihood that the numbers don't play out like that. For example, of living in the house for 10 years. You only live in the house of five years and your profit margin now goes down significantly.
Now, let's say the mortgage rate you are getting in the market is 6.5%, not 5%, now your gain decreases even further. If you have only a 5% deposit, your gain reduces even further.
I assumed that the property price is growing as much as the market. However, it's very likely over the next few years that property prices come down. So, if we consider that the property price basically remains the same, you are now better off renting. If the property price decreases by 1% every year, you are better off renting. Say if the property price is going up at 1%. Even then you are better off renting.
Only when your property price is growing 4% year on year is when, it actually makes more sense to buy.
Also consider that you will always need a place to live in. So, unless you sell that house and downsize into a smaller house, you will very likely not realize the profits on that house, which is why personally I don't consider my house to be a part of my net worth.
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