Key Post Should I buy a property with a mortgage or rent?

Brendan Burgess

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This is a summary of this thread "Is it cheaper to rent or buy?"

Note - a person with the cash to buy a house outright who is facing the choice of buying a house or renting a house and investing in shares, has a very different decision to make and this will be discussed in a separate thread.

You may also find this Key Post of interest: Buy now, or rent now and buy later?

Example
These figures are provided only to show how to approach the topic. They will vary from location to location and according to the end of the market you are buying in. From discussions on askaboutmoney, it seems that it is cheaper to buy lower value apartments than to rent them, but for higher value houses, it’s cheaper to rent than to buy.


Cost of property| €200k| includes acquisition costs such as legal fees and stamp duty
Deposit in cash| €20k
Rent| €1,200 per month |7% of the cost of the property
Mortgage rate| 5%
Deposit rate| 2%
Annual cost of ownership
Annual interest on mortgage| € 9,000
Management charges| €1,000
Property taxes| €400
Maintenance and decoration| €1,000
Insurance| €500
Total| €12,000
Annual cost of renting
Annual rent| €14,400
Less interest on deposit| €400
Total cost| €14,000
Notes
When looking at the cost of the mortgage, use the interest cost and not the repayments. The repayments include a capital payment, which is a form of saving.

Assume water charges apply equally to renters and owners.

You will have to pay mortgage protection insurance if you buy, but your estate gets a benefit from this, so it should be left out of the comparison.

The figure for maintenance and decoration is low, but in reality, but you will get a higher standard of maintenance and decoration in a house you own than one you rent.

The most important factor is the future direction of house prices

At times of stable house prices, the above approach is valid. If house prices are rising rapidly or falling rapidly, the change in house prices is probably the most important factor.

If you did these calculations in December 2006, you would have rushed out to buy, especially if you had a cheap tracker mortgage. While your annual interest is a lot lower than the rent, you are still in big negative equity.

On the other hand, if you did these calculations in Dublin, in January 2013, you might have been happy to continue renting. But the 20% spike in house prices since then, will make you regret your decision not to buy.

The future direction of rents and interest rates are also key

At the time of writing, the ECB rate is 0.15% and this is likely to rise in the medium term. Unless new competitors enter the market, it's likely the Standard Variable Rates will increase accordingly.

Of course, rents are also expected to rise, so you are balancing one risk against another.


Non financial considerations favouring home ownership

  • Ireland is just not a good country to rent in - very few unfurnished apartments; very few professional and responsible landlords.
  • You can decorate and furnish the house to your taste and your requirements, not to the taste and requirements of the landlord.
  • Security of tenure – you are very unlikely to lose your home if you own it, but if you rent, you will have to leave if the landlord wants it back.
  • Security of tenure allows you to put down roots

Non financial considerations favouring renting
· Much more flexible, if you move job, it’s relatively easy to terminate the lease and take out a new lease elsewhere.
· Much more flexible, if you want to take time off work. You won’t have mortgage commitments to worry about.
· Much more flexible – if your financial circumstances change, you can “trade down” to a cheaper place much more easily
· Much more flexible – If your personal circumstances change, for example, if you and your partner split up, moving out of rented accommodation is much easier than trying to untangle joint ownership and a joint mortgage.
· You also have greater financial flexibility – for example, if you want to start a business, your savings won’t be tied up in your home.
 
[FONT=&quot]Factors which suggest that buying is better for you[/FONT]

  • [FONT=&quot]You have job security[/FONT]
  • [FONT=&quot]You are sure about where you want to live for the foreseeable future[/FONT]
  • [FONT=&quot]You don't have to borrow excessively to buy the house you want[/FONT]
  • [FONT=&quot]You have a family where "nesting" is more important[/FONT]
[FONT=&quot]
Factors which suggest that renting is better for you[/FONT]


  • [FONT=&quot]You are not sure where you will be working in the foreseeable future[/FONT]
  • [FONT=&quot]You are not sure where you want to live[/FONT]
  • [FONT=&quot]You may want to start a business. Having a mortgage is a big disincentive to risk taking[/FONT]
[FONT=&quot]If you already have high borrowings, you should not be buying until you have paid off your borrowings [/FONT]

  • [FONT=&quot]If you have an investment property financed by a mortgage, you probably should not buy a home as you are already exposed to the property market[/FONT]
  • [FONT=&quot]If you have borrowings for your business, you probably should rent instead of buying as you would be too exposed to interest rate rises[/FONT]
 
Which is riskier – home ownership or renting?
If you take out a large mortgage to buy a house, you become vulnerable to interest rate rises. Even if interest rates don’t rise, your personal circumstances may change which may make the repayments unaffordable. Many thousands of Irish mortgage holders are in deep distress at the moment.

If you rent, you are vulnerable to rent rises and house price rises. You may never be able to afford to buy a house. Your savings may also decline in value.

If you are renting short-term, you would probably be prepared to live in a much cheaper place than you would be prepared to buy in.
 
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