If 'rent' is a dirty word, then be rude until you're ready to buy

Ultimately, says Sam Dunn, it's much cheaper to own a home, but in the short term don't be beguiled by the property ladder
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The Independent Online

Our love affair with home ownership has turned the alternative, rent, into a four-letter word. Socially, in a land where getting on the property ladder seems to be viewed as an imperative, some people can feel that they're being left behind if they don't own their home. And from a financial perspective, there is always the nagging concern that in renting a house or flat for years on end, you're throwing money down the drain.

Renting often means spending thousands of pounds each year simply putting a roof - albeit one in your favourite part of town, perhaps - over your head. You end up with nothing else to show for it as any rise in the value of the property goes straight into the landlord's pocket. On top of that, how much you pay in rent is subject to the whims of the market.

Consider, too, that if you reach retirement without an investment in bricks and mortar, you might be depriving yourself of a valuable asset that could have been passed on to your family. And, of course, you will have to carry on paying rent, whereas mortgage debt tends to be cleared by retirement.

A key factor in the decision to purchase a property is buyers' wish to break the habit of handing over money to a landlord, according to Alliance & Leicester's index of Britons' home-buying intentions. Yet is renting always a bad thing?

"If you have a first job in a new area, it is a good step to take," says Jane Harrison, marketing director at mortgage broker London & Country. "You need to know that you'll settle and you also need to know the best place to buy. Renting allows you to experience a place where you would like to live."

As well as providing flexibility, renting can be cost efficient when house prices fall or interest rates rise, says Richard Hair, president-elect of the National Association of Estate Agents. And tenants certainly have plenty of choice, with the buy-to-let boom in recent years producing a substantial increase in the number of landlords.

Meanwhile, the surge in house prices during the past three years has put the first rung on the property ladder out of reach for thousands of potential homebuyers. Saving enough for a 10 per cent deposit, in order to avoid paying mortgage indemnity guarantee (MIG) as well as to get a lower rate of interest, now takes longer - particularly if you are on a low income and have university debts to pay off first.

Yet we are the "smallest [nation of] renters in the Western world, brought up to think that buying is the right thing to do", argues Richard Donnell, head of residential research at property agent FPD Savills. That's because, in the long run, it is much cheaper to own a home, according to Abbey's annual report on the financial difference between renting and buying in the UK. The cost of renting an average two-bedroom flat over 25 years, for example, is £277,819. If you bought such a flat outright instead, you'd pay around £185,557 - a saving of £92,262, or a third of the cost of the rent.

Although Abbey's survey also reveals that the average saving you can make from buying rather than renting slipped from 30 to 24 per cent in the 12 months to April this year - because of rising house prices - ultimately, it is still much more cost effective to be a homeowner.

In the short term, however, renting is cheaper, so it suits many people at some point in their lives.

"The upfront costs for renting are lower - no worries about maintenance or decorating, for example," says Paul Cooper, head of mortgages at Alliance & Leicester. "But, when you buy a home, you hopefully won't have any mortgage to pay later in life and you have the home's equity."

Ray Boulger, senior technical manager at mortgage broker Charcol, agrees that having a financial stake in your house or flat is vital in the long term. "Paying for something that doesn't bring you any equity is at the heart of the conundrum. If you buy, you build up equity and are more likely to do [the property] up, adding value."

This can pay off in retirement when, possibly on a limited income, your mortgage is cleared and equity release offers the possibility of getting your hands on some of the cash to use elsewhere.

If you are trying to make the leap from renting to ownership, be prepared for a heavy financial hit. Ms Harrison at London & Country warns: "The transaction can be very expensive, with stamp duty, legal fees, valuation fees and the lender's administration fee to pay - and then there's the deposit."

Stamp duty starts at 1 per cent of the purchase price on properties between £60,000 and £250,000. It then rises to 3 per cent on homes between £250,000 and £500,000, and to 4 per cent on properties over £500,000. And expect to pay several hundred pounds for broking, arrangement or completion fees. Brokers who don't work on a commission basis can charge you anything up to 1 per cent of the mortgage for their services, while legal and valuation fees can easily add another few hundred pounds to the tally.

If you don't have a deposit, you'll also have to pay a higher rate of interest on your loan; a 10 per cent downpayment will give you access to more competitive deals, says Ms Harrison.

Many people want to move into their dream area immediately but this is not always possible, she adds, recommending that they buy in a cheaper location and then trade up when they can afford to do so. This will help them to avoid overstretching their finances, which could be devastating in the event of further rises in interest rates.

Mr Cooper at Alliance & Leicester says: "Renting is a stopgap; most people want to buy when they have stability with a job or relationship. When they have that certainty, that's when buying makes sense."

'I like being able to live in different places'

Matt Huggins doesn't expect to buy a property any time soon.

The 29-year-old, who works at the Royal Veterinary College in London, spends £800 a month renting a two-bedroom flat in Blackheath, south London, with his girlfriend Andrea Dewhurst.

"I have been renting since I was at university, so that's for the past 10 years," he says.

Mr Huggins has rented properties in different parts of the capital, including Hackney, Arnos Grove and Muswell Hill. He and his girlfriend say they cannot afford to save up enough to enable them to buy their own place in London.

"I haven't really tried to buy. I know it will be very difficult, if not impossible, to do so," he explains. "We are more interested in waiting for a few years - in London, you don't get much for your money."

Although many of his friends and peers have long been in the same position, a few are now taking the plunge and buying. But his salary, even though it includes London weighting, falls far short of what is needed for Mr Huggins to make any kind of purchase.

"I get paid a lot more than people doing the same job in other parts of the country, but the difference is that house prices here are that much more," he says.

However, renting does have an upside. "I do like the flexibility of being able to live in different places and to move around the city," he adds. "For example, if a problem were to arise with neighbours and noise, it's not as expensive to move away and to live somewhere else as it would be if we had bought the property."