Renting vs Buying

A long-term survey reveals renting may be a financially wise decision, writes Stephen Pritchard
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The Independent Online

As recently as last month, both the chancellor, Gordon Brown and the deputy prime minister, John Prescott, confirmed the Government's commitment to widening home ownership. By 2010, ministers hope that there will be 2m more home owners in the UK than in 1997.

But from a purely financial point of view, home ownership is not the automatic first choice most buyers think it is. In fact, according to a long-term comparison of rents and house prices by Abbey, the mortgage lender, it can sometimes pay to rent.

Abbey has compared the cost of buying a house with the cost of renting an equivalent property for eight years, but its latest figures, released last week, show that the gap is the narrowest on record.

Renting an average property in the UK for 25 years would cost £364,499. Buying an equivalent property, Abbey calculates, costs £329,849. The difference between renting and buying is by no means as great as most buyers might expect. Once interest and maintenance costs are taken into account, buying saves £37,000, or just 11 per cent, over 25 years.

Ironically, it is those at the bottom of the property ladder, who are least able to afford to buy, who stand to gain most from doing so. Based on national average house prices, Abbey calculates that the 25-year cost of buying a two-bedroom flat is £224,298. Renting the same home costs £287,925 or 22 per cent more.

But move up the property ladder and the savings dwindle. A three-bed terraced house is 18 per cent less expensive to own, and a three-bed semi costs nine per cent less to buy. But a four-bedroomed detached house actually costs one per cent more, or £6,245, to own.

Buyers who are able to afford property of that type are likely to consider £6,000 a small price to pay for the security that comes with ownership.

Abbey's calculations assume that there is no value in the property at the end of the 25 years. Instead, it simply compares monthly outgoings.

In reality, even a dramatic fall in house prices would not wipe out all equity buyers build up during the lifetime of a mortgage. In all probability, over 25 years house prices will rise.

The research also assumes that buyers take out a 90 per cent mortgage. Buyers with a larger deposit to put down will have lower monthly mortgage payments, even though they will lose the interest income from savings used to buy.

The bank also assumes interest rates of 5.5 per cent for the lifetime of the mortgage. This seems reasonable at current rates, but a dramatic shift in interest rates, either up or down, would have an immediate impact on the calculations.

Many families would prefer to own their own homes, however. Lal Tawney, Abbey's head of mortgage marketing, says that buying a house is often an emotional rather than a financial decision.

Ownership brings stability. Landlords can terminate most modern tenancy agreements after six months, and can impose restrictions on what a tenant can do.

House price inflation – homes rose in value by 12.6 per cent last year – is forcing more people to rent, and for longer. "The desire to buy is still there," says Tawney. "But it is harder to do because prices have risen so much."

What Abbey's figures do show, though, is that it is not necessarily a financial disaster to put off buying. House price and mortgage lending statistics suggest the market has cooled, and it looks likely that prices will remain stable, if not fall , in the near future. Would-be buyers might be able to improve their position if they rent and save for a deposit.

Even so, financial experts caution against delaying for too long. One reason for buying – and one that remains valid, despite higher prices -- is the prospect of owning a property outright in retirement.

"When you retire, you will no longer have the same income," says Anna Bowes, of independent financial advisers Chase de Vere. "If you are renting, you will have to rent for the rest of your life." It pays to be cautious and not over-borrow, but the prospect of owning an asset of real value means that for most people, buying still makes sense.