Is it cheaper to rent or buy a house?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The BIG question….

is it cheaper to rent or pay a mortgage?

Obviously, one would have to compare the cost on the same property to arrive at a fair comparison.

Here’s an example based on house prices and rental property values in Poole/Bournemouth in Dorset:

Example:

Dave owns a property worth £300,000 and he has £100,000 of equity, therefore, he has a £200,000 mortgage loan.

The mortgage loan is a capital repayment mortgage with monthly payments of £800.

So, Dave owns a £300,000 house and it costs him £800 per month to live in it.

Would it cost Dave less or more if he sold it to a landlord and rented it back?

Dave sells his house to a landlord for £300,000 and pays off the £200,000 mortgage loan. The market rent is £1000 per month (£200 more than the mortgage he used to pay). The rent is £200 MORE per month BUT Dave has £100,000 in the bank. He invests his £100,000 and earns 12% pa (£1000 per month). Dave can now pay the full rent of £1000 per month with the interest he’s earning from his £100,000.

So, Dave is now effectively living in his rented home for free. He still lives in a house worth £300,000 and isn’t having to find the £800 per month mortgage payments.

Roughly, £550 of his mortgage payments were paying off his £200,000 loan, therefore, this wasn’t actually a cost as such, however, he is still £250 per month better off.

Although Dave has £250 extra in his pocket every month, he is losing out on the capital growth (how much his own property may have increased by). If his property didn’t increase by more than 1% that year, then he would be in no worse position by renting. He also has the flexibility of living in different properties in various locations; perhaps worldwide, which might be attractive if his work can be done from a phone and a laptop.

There are always going to be pro’s and con’s but I think Dave’s example demonstrates that renting doesn’t look too bad at all!

Thoughts?

David Giles – Founder of EMBARQ

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