Should You Buy or Rent Your Home?

When buying a property as an investment (e.g. a "Buy to Let") the profitability versus is risk is very important. When buying a home for yourself and family the profit or loss versus renting is not the most important consideration, but the potential risk may be. There is far more to consider that just is the rent more than the mortgage.

What are the other costs and risks?

Deposit: How much will this cost in lost interest?

Mortgage: What is the best rate you can get and how much deposit do you need to get a good deal. What is the arrangement fee?

Stamp Duty: 0% for properties under £175,000, then 1%, 3% at £250,000 and 4% at £500,000

Solicitors' fees: Extra costs incurred when purchasing the property

Service Charge: Serviced apartments may have an additional fee which will be included in the rent

Maintenance and repairs: What repairs or renovation needs to be done and what will the ongoing costs be?

Risks

Being forced to move home: Loss of job, illness, relationship breakup etc.

Forced selling of a property can result in having to sell at a low point in the market and therefore incurring a big unexpected loss. When renting this is unlikely to be such a big cost apart from possible loss of a few months rent.

See below for some examples for different scenarios

This example is for a half million pound apartment in London where prices are quite high, but rents surprisingly low. I have assumed a 6% house price growth (i.e. way above inflation) an average mortgage of 5% and a 7% return on the money not used for deposit (i.e. taking some risk, such as a stock market investment, to mirror the risk of home ownership)

House Price = £500,000
Deposit 25% = £ 125,000
Mortgage = £ 375,000
Mortgage Cost = 5% or £ 18,750 per year
Stamp Duty = 4% or £ 20,000
Service Charge= 1% or £ 5,000
Maintenance = 1% or £ 5,000

From the spreadsheet above you can see that despite healthy house-price growth of 6% per year, it actually takes 4 years to break-even versus renting and it has still cost £10K a year.

The same property, but with zero house-price growth.

The rental situation is the same, but the propery ownership scenario is very bad: a £192k loss.

Now the same scenario with a 6% fall in house-prices.

Obviously this is an extreme scenario, but a real one for the current state of the London, UK house market and does demonstrate that sometimes, when there is a possibility of house price falls, the potential risks of owning property can outweigh the joy of ownership.

I couldn't add an interactive excel spreadsheet here, but if you want to model your own situation it is very simple to do, using a spreadsheet similar to the above (calculate each of the extra costs of home-ownership and add them together and subtract the house-price gain then compare with the rent of a similar property minus the profit accumulated on the deposit cash), or checkout the microsoft excel books listed below or this Excel Article...