We often hear that it’s cheaper and better to buy than rent, but is that always the case? The short answer to this is “no” as it really depends on your personal and financial circumstances.
How do you work out whether buying versus renting is better for you?
The best place to start is to assess your own personal and financial circumstances, then check what it costs to rent vs buy a similar property in the area you live in.
It may surprise you that it can end up being a lot cheaper to rent, in the short term, than it is to buy. However long term, it could be the other way around.
Are you ready to buy?
When you buy a home, you should be looking to stay in the property for a minimum of 5 years. This is due to the costs and the fact that property prices aren’t necessarily rising as rapidly as the media may report. 5 years gives you the best chance that your property will be worth more than you paid for it when you want to sell.
If you aren’t sure where you will be in 5 years, whether you will have the same job, be working from home or moving back to the office, living on your own or with someone else, it’s worth working through the costs first to find out what's viable for you. Decide if you're okay to buy or it’s better to rent during this time.
What financial calculations do you need to work out if buying versus renting is better?
There are five key steps to working out whether its better to buy or rent for you in the area you want to live in.
Step 1: What savings do you have?
Buying: If you are going to buy a property you will typically need at least a 5% deposit and a few thousand pounds for conveyancing fees and other costs. If the property you are looking to buy or rent is going to cost £200,000, it’s likely you will need up to £12,000 available.
If you use a government Lifetime ISA scheme, they will put up to 25% towards your deposit which can help save you several thousands of pounds, meaning you will not have to save as much.
If it is going to be tough to save this much, even with a LISA, we recommend talking to a mortgage broker. There are some mortgages which allow you to buy without a deposit of your own – but you will need support from a family member.
Renting: From a ‘cost to move in’ perspective, renting costs a lot less as there are no agent fees to pay and deposits are capped at 5 weeks of the annual rent. So if you are renting for £1,000 a month, the most you will need is a deposit of £1,153 along with any moving costs. Also if you're already in rented accommodation, your previous deposit should be released so you can use it on the next property
Bear in mind this is a deposit, if you hand back the property to the landlord in good condition when you move out, this money will be returned to you.
Step 2: Speak to a mortgage broker
Even if you are thinking of buying a few years into the future, talking to a mortgage broker can be really useful. They help you understand what you can afford now based on your savings and salary and they can work out what mortgage would suit your circumstances. They will also give you lots of help and guidance if you do decide to buy, so don't be afraid to ask them any questions you have.
You can also get free mortgage advice from MAB via reallymoving.
Step 3: Find some properties you can afford to buy and rent
Once you have understood what you can afford to buy, both now or in future, you can start looking at properties that fit and compare the costs for renting.
For example, you might find a great flat to buy, but you will also have to pay service charges on top of your mortgage. Some properties will also charge ground rent. On top of this, there maybe major works charges, such as your share of the cost of a new roof or boiler system, which you have to pay as and when the flats freeholder demands it.
In contrast, when renting, the costs of improvements or repairs, along with service charge increases are paid for by the landlord. You may pay for a service charge within your rent, but if your boiler breaks, it's not you who needs to pay out.
These costs could add several thousands of pounds to the buying and annual ownership costs. So when planning costs, it’s important to include the mortgage payment and make sure all of these extra costs are added in. This way you can do a proper like for like comparison against the monthly rental.
It is possible that you might be able to afford to buy a property, but not the type of property you want or the area you want to live – whereas you may be able to rent somewhere better and more suitable for you just now, which may suit your circumstances better.
Step 4: Compare the different costs to buy or rent
Once you have found some similar properties to buy and rent, it’s then just a process about checking the upfront costs you'll need to get the property, when buying or renting.
Typically when you buy and own a property you will need:-
- A deposit – up to 5% of the property’s value
- Fees to buy a property such as finance, legal and survey
Our Moving Cost Calculator can help you estimate how much you'll need to buy your desired property. Additionally, it is worth noting that it's possible to buy for less if you live in a cheaper area or if you consider schemes such as Shared Ownership.
When you rent it is much cheaper – you pay up to a 5 week deposit, often around £1,000 (this could be more or less depending on where you're renting) and you will get this back if the property is handed back in the same condition as you rented it.
You should compare your ongoing cost of the rent versus the mortgage costs and add in maintenance, building and content insurance and any service charges and ground rent that you'd pay after buying a flat.
If you are renting a room rather than a whole property, you may also save on council tax and utility bills as they tend to be included in the room rent.
Step 5: Compare the different costs to sell or move out of your rental
It’s also important to work out how much it will cost you if you have to sell the property versus moving out rental wise. Renting is easy, the only cost might be if you have to pay anything out of your deposit for damage to the property.
When selling though, you are likely to pay around 1 to 1.5% of the property’s value plus legal fees. If you bought with Help to Buy or through Shared Ownership, you will also need to have a property valuation. For a £200,000 property, this could cost you from £2,700 to over £3,500.
Buying vs Renting costs
|Deposit and buying fees
||Your deposit (Which should be returned)
|Buildings and contents insurance
|Costs when you sell/leave
|Agent fees Deposit (is returned minus any costs)
What if the property goes up or down in value?
Apart from the recent pandemic price rises, property values have been slowly growing in most areas. But for some, prices have struggled to recover to previous heights seen in 2007, especially in Northern Ireland and the North East.
Property prices going up isn’t a given while you own a property. To check what’s likely to happen in the future, you can look at previous increases on similar properties on the road you are looking to buy to estimate a property's value.
Bear in mind that if there is a crash, the last two recessions saw property prices fall by 20% on average and they took 5-10 years to recover – which is why buying when you plan to stay there for fewer than 5 years can be a risk, as you may be forced to sell at a loss.
If prices fall during your ownership, from a financial perspective, renting will be a much better option. However if prices rise, it’s likely buying versus renting over a 5 year period would work out best.
Flexibility should be considered
How to put a roof over your head isn’t just about the cost. The big benefit of renting is the flexibility. If you are renting you will typically be tied into a six month contract initially and then only have to give one or two months' notice if you want to move out. If you are buying, it may take months to sell, or if the market is poor, you might not be able to sell at all.
So remember, if the property market is on the up and is predicted to continue to do so, you are planning to stay where you are for 5 or more years and you have the necessary finances to run the property, it is likely that buying will be the better option for you.
But if the predictions on the market are uncertain, you haven’t yet saved enough to buy and your job or personal circumstances aren’t settled, then renting could well be the best option in the short term.
Remember, it's not just about investment and cost - it's about making sure you have a home that you feel safe and happy in, and that you can comfortably afford. There are multiple situations where renting is the better choice. Just make sure you're always on top of your finances, whichever option you choose.