Rent vs Buy Calculator for Which Saves You More Money

Before you decide whether you want to be a First Time Buyer and a home owner, you need to figure out whether its better for you to rent or to buy, financially. Which one is better for your pocket and for your long term financial goals?

You might have heard phrases like “renting is like throwing money down the drain” and others that make it seem like a no-brainer to buy your own property instead of rent. And while sometimes it makes sense financially to own, sometimes it does not. Therefore before you start on your First Time Buyer journey, you need to work out whether its right for you.

The headline costs

On a high level, at the moment buying is better than renting, but it might not always be like that in the future, especially if things like mortgage rates rise or interest rates on savings rise too.

Lets see how it stacks up at the moment. When comparing, we want to of course take the same property, and compare in terms of outgoing costs that is incurred every year.

Renting: you need to figure out the rental cost of the typical property you are going to buy. Typically, this is around 3-5% a year of the value of the property. This is called the Rental Yield. Lets take an example of a £200k property, and a 4% yield. Therefore, your rent each year will be 4% of £200k, which is £8,000.

This is the amount you would expect to pay in rent every year for that property. You do not incur any other costs, for example maintenance, management fees, renovation, etc as that is all taken care of by the landlord. In this example, I assume as well that the property comes not furnished, to make the comparison to a house purchase easy, but typically you’ll need to bear in mind that the landlord has also incurred substantial cost furnishing the property.

Home Ownership: There are four parts to calculating the cost of home ownership, that you need to consider in order to get a fair comparison to renting.

Firstly, there is of course the mortgage cost, but only the interest payments. Why not the capital repayments? That’s because the capital repayments are towards buying an asset, not for the cost of using the part of the home that the bank owns.

The second cost is the transaction fees – stamp duty, survey, conveyancer, etc that you had to pay to purchase the property. And then at the end of your home ownership, the cost of selling the property.

The third cost is the opportunity cost for the deposit, which now does not generate any interest or returns. Not directly anyways (I’ll touch on property appreciation later on).

The fourth cost is the maintenance cost. As a home owner, you’ll have to pay for all costs of the property – from boiler replacements to fixing doors, roof repairs to re-decorating and re-carpeting.

Home Ownership Calculator

So how do we calculate the four costs of owning your own home? That’s the tricky part – every one will have a different set of assumptions and numbers, but here I give you an illustration of my thoughts and the calculator process to use to arrive at your yearly cost of home ownership.

  1. Mortgage Interest Cost. Here I assume that you have a decent deposit, say 20%, so you can get a 80% LTV mortgage. Interest rates currently are 1.7% for a 5-year fixed mortgage. So on a property cost of £200k, you’ll be borrowing 80% of it (£160k), and your yearly interest at 1.5% comes up to £2,700 a year.
  2. Transaction Fees. There is no stamp duty to pay as the property is under the £300k threshold for First Time Buyers. However, you still have the mortgage arrangement fee (lets assume £1000), conveyancing fees (£500), HomeBuyer survey (£400). There is also building insurance annually, lets assume around £150 a year. And then of course, you’re going to be selling the property at some point, and a typical agent fee would be 1.3%, so that is £2600 (assuming the property price hasn’t gone up or down). So a total sum of £4500. Most First Time Buyers end up moving house within 5-10 years, so assuming 7.5 years as the average, that comes up to £750 a year in transaction fees.
  3. Your Deposit & Opportunity Cost. This is the interest and earnings you have given up, had you decided not to buy and used your 20% deposit to invest into a savings account, shares, etc. This is really hard to measure as it depends where you would have put your money, but lets assume you put it into a multi-year fixed rate savings account, as this mimics locking up your deposit in a property. You could probably get around 2% interest on a 3 to 5 year fixed savings deposit. So on a yearly basis, you’d be giving up 2% interest on your £40k deposit, which is £800 a year.
  4. Maintenance Cost. This is all the works that you have to do to the property over time. It is the hardest to estimate, as it depends on the standard of the property you’re trying to upkeep, the materials you use, and sometimes down to luck (i.e. the roof leaking). A combi boiler, for example, lasts about 10 years. A cost of a new boiler is around £2000, and then you also have the annual boiler servicing (around £100 a year), so you’re spending about £300 a year on your boiler over time. Roof replacement works can come up to £10k or more, but that you do every 20-30 years. There’s the furniture, like the mattress, bed, sofa, dining table that probably needs replacing every 5-10 years. THe kitchen appliances are the big ones – a washing machine might cost £400, and that lasts for 5-10 years too. My gut feel, having owned several properties and lived in them, is that you end up spending about £20k to £25k every 10 years just to maintain it to a reasonable standard. So taking an average of £22.5k, that’s £2,250 a year that you should set aside for maintenance costs.

So what do you get when you add up the four above? £6,500 in total every year, in terms of the cost of owning a property. This compares to a rental cost of £8,000 a year to rent the same property.

Therefore, if all the assumptions I’ve used above are true, then owning is £1,500 a year cheaper than renting, and therefore financially it makes more sense to buy your first home rather than keep renting!

However, as you have probably seen in how I worked out the figures above, there’s alot of assumptions I’ve used, and not all of them might apply to you. For example, the money for the deposit, you might decide that you could earn more by investing in shares, say 5% or 10% a year. The maintenance bit could cost much more if you do all the sums correctly for your dream home. Your mortgage interest might be much higher, if you only have a 10% or 15% deposit.

You only have to play around with the assumptions a little bit to come up with scenarios where potentially owning a home costs more than the rental!

But what about house price appreciation?

I get asked this question a lot when I present my Renting vs Buying financial calculator above. It is a fair question, as financially, based on the trends over the last 30-40 years, you’ll also make money from your property when you come time to sell, as house prices have been increasing steadily.

However, it would be foolish to assume that any financial asset – which also includes property – will always perform in the way it has in the past. If it did, then everyone could be a billionaire like Warren Buffett – if investments could only go one way in the future and we could all predict what is going to happen to prices.

So rather than try to guess where house prices are going to go in the future, I subscribe to the theory that when you buy a property, and buy it for a fair price, it has an equal chance to go up or down in price, as no-one can predict which way it will go.

What about the non-financial benefits of owning your own home?

So far in this Rent vs Buy guide, I’ve only covered the financial benefits of owning your own home. But there are also non-financial benefits – such as the assurance that you won’t be kicked out with 3 months notice, that you don’t have to wait 4 weeks for the landlord to fix the boiler, and that you can really decorate and tailor your home to exactly the way you want it to be. There are many many non-financial benefits to being a homeowner, and this will be covered in a future article on First Time Buyer Help!

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