To rent or to buy? That is the housing question

With the housing finance markets going through a dysfunctional period, many would-be home owners have turned to renting while they wait and see whether it is safe to take out a mortgage and dip their toe in the home ownership market. Even the government admits, "We can't know how bad it will get," according to briefing notes accidentally displayed by Housing Minister Caroline Flint. The same notes suggested that "at best" house prices could fall by 5-10% this year, further endorsing the argument for renting.

But while renting can be a good option in the short-term, is it really any cheaper than owning and does it have any real benefits over the longer-term?

Abbey said that this year 1.1 million first time buyers, representing 67% of new buyers, have decided to hold off buying for at least a year. It's a sensible move because with house prices unlikely to move upwards, this will give them more time to save up and grow their existing capital. It could be a good move as long as renters make sure their savings are in a top paying high-interest savings account.

Renting can offer short term gains

The only way to work out which is cheaper is to compare costs. The average mortgage taken out by first-time buyers across the country in March 2008, according to the Council of Mortgage Lenders, was almost £115,000. On an interest only basis, at a rate of 6.5% a year, such a mortgage would cost £623 a month and a repayment mortgage at the same rate of interest would cost £776.

Moneyextra's mortgage calculators can help you work out what you can afford.

You would also have household bills, household insurance and maintenance for repairs to pay. In comparison a two-bedroomed flat in East Dulwich, for example, could cost you around £1,400 a month in rent, substantially more and this still does not include utility bills and council tax.

Even sharing a flat could still cost you more than an interest only mortgage. To truly measure the costs you have to look over the long term. Abbey's renting versus buying survey for 2007 shows that the cost of ownership including home maintentance over 25 years was £437,925 while renting including inflation was £443,736.

Fewer moving costs with renting

The main advantages of renting is that it's cheap to move in and out; you don't pay for decorating and repairs; and rather than having all your savings invested in bricks and mortar you have a wider choice of savings options open to you.

You won't need to find the average 10% of the value of the property for a deposit that buyers now have to find nor will you have the added burden of stamp duty. However, renting doesn't always give you security of tenure and your landlord can ask you to leave whereas it is more difficult for lenders to get you out of a mortgaged property.

Find out how our independent mortgage service works.

The 'joy' of house prices

House prices may be falling now but in the long term they will continue to rise - there is a structural shortage in the UK housing market. This is a crowded island and there are more households being created than houses being built. Over the years if you own your home, you are likely to benefit from house price rises whereas with renting your landlord would get all the capital growth.

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Karen Beavis
14 May 2008 © Moneyextra.com

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