Buying vs renting: as mortgage rates rise, which is cheaper?

In the UK, buying a home has traditionally been the preferred option over renting. But is that still true? Rebecca Goodman asks: which makes more sense financially - buying or renting?

Is it better to buy a home or rent? This is a question people have been asking for hundreds of years, and in the UK, buying property has always been the preferred option. But that doesn’t mean it’s the right course for everyone. So, which is the better choice financially - buying or renting? 

The pros and cons of renting  

There are lots of decisions to make when looking at where to live and whether to rent or buy. Some of the positive aspects of renting include the following:

  • Flexibility - you’re not tied into a long-term mortgage 
  • It is a good option if you don't need to stay in one location or you’re planning to move
  • You are not responsible for paying for the general upkeep of the property or fixing things when they go wrong
  • You have more money available for other things (if you’re not saving for a house deposit)

The major cons of renting include the following:

  • Lack of stability if your landlord decides they want you to move out
  • You won’t have the option of decorating (unless your landlord allows it) 
  • There might be restrictions on what you can do with the property 
  • There is little regulation in place to protect renters from rogue landlords or unsafe properties
  • You may not be allowed a pet

The pros and cons of owning your own home

The decision to rent or buy will usually come down to the costs involved. The positives of being a property owner include:

  • You will own the asset when the mortgage is paid off 
  • You have more stability than a renter as you won’t have to move out if a landlord decides they want to sell the property    
  • You can do what you want to the property, within planning regulations

Some of the downsides of owning a home include:

  • You’ll have to pay fees such as stamp duty, legal fees and moving costs
  • You’re tied into a long contract; if you’re unable to pay your mortgage your house could be repossessed
  • You may need to buy all your own furniture and white goods
  • Owning a house can mean a lot of money is tied up within the property and isn’t readily available for other things, such as supporting children through university or even meeting the rising costs of everyday living
  • There are even more costs associated with selling

Is it cheaper to buy or rent?  

It is often argued that it is cheaper to buy a home in the long run. Yet with recent rate changes, the decision may not be as clear-cut for many potential homeowners. 

Michael Webb, managing director at Mortgage Republic Limited, said: “Historical low interest rates, and government intervention in the form of help to buy and stamp duty exemptions had buying as the cheaper option to renting, on a monthly basis, for over a decade.

“Rapidly increased interest rates, without a correction of note in property values, has meant that typically it will now be cheaper to rent than buy.”

Yet buying a house isn’t generally seen as a short-term option and therefore you’ll need to weigh up the costs over a longer period.

Jonathan Burridge, a founding adviser at We Are Money, said: “There are two best times to buy a property: 20 years ago or today. 

“It's all well and good building spreadsheets and predicting the market but you buy a property for security of tenure or investment. In both scenarios, these tend to be a longer-term strategy and if you look over history, UK property values have always risen. 

“Renting may have lower costs on an annual basis at present but what is the longer-term reward? You are not investing in an asset or repaying a loan that was used to buy one.”

Still, it’s important to remember that mortgages are loans. It’s money you owe to the bank and have to pay back, with interest. 

Interest rates have been heading higher recently, pushing up the cost for borrowers. According to Moneyfacts, a first time buyer with a deposit of 10% could end up paying an interest rate of 5.5% today. 

The average home was £292,598 in October, an 8.3% annual rise. A first time buyer with a deposit of 10% would be paying £1,606 a month to buy a home at this price at today’s mortgage rates. 

Meanwhile, it costs an average of £1,162 per month to rent a UK property –  in London it is £2,343.

Is it worth buying a house?

On the surface, the costs associated with buying a house can seem daunting, but for some, they could be worth it, especially if you’re planning to stay in the property for many years. 

It also gives you a certain level of financial security. You know how much you have to pay on the mortgage and at the end of the loan term, the home is yours. 

In comparison, rents can always go up and if you can’t pay, you could be thrown out. 

Recent rises to mortgage rates have also increased the prices of buy-to-let mortgages and these costs are likely to be filtered down to tenants.

Imogen Sporle, head of regulated and term finance at Finanze, said: “Regarding the very common question I get at the moment of ‘As mortgage rates are going up is it cheaper to rent than get a mortgage?’, my answer to this is a hard ‘no’, and I think it always will be regardless of how high mortgage rates go up. 

“This is because the majority of landlords have mortgages on the properties they are letting out, and although their mortgage payments are slightly lower as they often pay them on an interest-only basis, due to the lender's debt service coverage (DSC) ratio they will still have to increase the rent they charge when the mortgage rates increase.”

Is renting a waste of money?

There is a prevailing view that renting is a waste of money and that it’s better to be paying your own mortgage rather than hand over your hard earned money to a landlord. 

But this ignores the realities of life. 

Some people may prefer the flexibility of renting and not having to deal with the challenges of home ownership. 

Indeed, many wealthy people rent for just that reason. They can walk into a full-furnished property and don’t have to worry about sorting out a plumber on the weekend if something goes wrong. Then, if they need to fly off, they can. 

Others also rent because they can’t afford to buy. There are four million households in the social rented sector in England. 

Some people rent because they don’t know if they want to take on the responsibilities of home ownership, after all it is a big commitment. 

In the short-term renting can also make more sense financially.

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