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In the UK, it is largely taken as gospel that buying a house is better than renting. After all, the argument goes, this does not involve “giving money to a landlord” with nothing to show for it at the end. With a mortgage, at least you gradually build up equity and end up owning your home outright after 25-30 years. Yet are these arguments fully sound? Can there be instances where renting makes more sense than buying? Below, our financial planning team at Hanson IFA will address these questions in more detail.
Life station & lifestyle
One factor which can influence your immediate decision to rent or buy a property is where you currently are in life. If you are an 18-year-old looking to move out of your parents’ home, then it is likely you have not saved the necessary deposit to get onto the housing ladder yourself. This likely means you have little choice but to rent, for the time being at least.
Yet, for some people, renting is more than just a “stop gap” between moving out and getting on the housing ladder. It is a long-term strategy. This may be due to vocation and lifestyle factors. For instance, if your career involves frequent relocation and travel, then you may not want to “put down your roots” by buying a house – at least not for the foreseeable future.
Others might like the flexibility and lower responsibilities that often come with renting. If you suddenly decide you want to move, then (in normal times) you just need to give a short notice rather than move through the long-winded process of selling a house. Moreover, if there is an issue with the flat or house you are renting, then you can raise the matter with your landlord. When you own a home, this responsibility falls largely on your shoulders.
Of course, the rent-vs.-buy debate does not simply come down to such matters. There is also a complex financial picture to discern. On the one hand, many people call rent “dead money” – i.e. you pay a landlord each month, getting nothing back for your investment. However, a mortgage barely involves paying off the principal on the loan at the beginning; most of the money you pay each month just goes towards the interest (although this gradually changes over the years). It is also possible that buying a home in a desirable area may simply be unaffordable, but renting there may be realistic – giving you access to better, higher-paying jobs nearby.
There is, however, another aspect to this debate which few people consider. This is whether buying a house or renting presents a bigger “opportunity cost” compared to the other. In other words, would you be financially better-off in the long term by buying a house or by renting. Here, the answer is not clear-cut and depends heavily on your investment strategy and horizon. Let’s take an imaginary case to illustrate how this could work.
Suppose Annie (25 years old) has found a well-paying job in a nearby area and is considering whether to buy or rent there. For the property she wants, the former will be around £300 more expensive than the latter. Yet, over time, she hears her friends tell her that she will slowly build up equity in the property and, eventually, own it outright. However, Annie also tries to consider whether there is an “opportunity cost” by choosing to spend that extra £300 on the mortgage, rather than investing it elsewhere.
For instance, what would happen if she rented her place and put that monthly £300 into an investment portfolio? Over 25 years (e.g. the length of a mortgage term), assuming it achieved a 6% annual return after fees and taxes, this could eventually lead to her portfolio containing over £202,886. In other words, choosing to rent does not mean that Annie necessarily is left with no other option for building up her wealth. In fact, she may even find that it is easier to save more than £300 per month in the years ahead, compared to if she bought a home. The latter, after all, would involve covering, herself, the expensive maintenance costs that would naturally arise over 25+ years and eat into the “returns” made from build up equity (e.g. £12,000 on replacing a leaky roof).
In short, buying a house is not necessarily better than renting. There are pros and cons to each approach which involve weighing your personal goals alongside financial and lifestyle factors. At Hanson IFA, we can help you craft a financial plan which outlines some of these different paths, and how they might affect your future income and net worth.
Are you interested in talking to a financial adviser about your pension and investment planning needs? We’d love to assist you here at Hanson Financial Services.
Please contact us to arrange a consultation with our team – free and without obligation – to gain more clarity and peace of mind over your financial plan.
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