The debate rages - is it better to buy or to rent and perhaps most mean by that is it cheaper to buy or to rent? Merryn Somerset Webb quotes some good research from Capital Economics in MoneyWeek. In fact the debate is rather more finely balanced than you might think.
"Capital Economics have had a good look at this and I think pretty much debunked the idea that buying is a better idea than renting for would-be first-time buyers (FTBs) at the moment. They've used the example of someone with a 20% deposit looking at a £140,000 house and assumed buying costs of £2,450. So the upfront capital needed is £30,450 (£28,000 of that is the deposit).
"They assume a typical FTB mortgage of 3.29%, rising to 4.99% in two years’ time, making the monthly payments first £548 and then £647. The maintenance and insurance costs of owning are estimated at £65 a month rising at 2.5% a year.
"Capital then compare that to renting a similar house at a rent of £595 a month (based on the current consensus rental yield of 5.1%). Under these assumptions, it is the case that over a five-year period, it costs around £3,000 less to rent than to buy. But this is not 'the whole story'.
"Let’s say house prices stay stable. By repaying some principle along the way, our buyer will have amassed equity of £13,943 to add to the initial deposit of £28,000. If he sells, he’ll pay fees. So he’ll probably end up with a gain of £9,000 or so in hand, for a total of £39,493.
"On to our renter. He’s kept the near-£30,000 deposit he could have used to buy a house in the bank on a fixed rate of 4% (3.4% post tax). So he has interest of £5,092. He pays the difference between rent and a mortgage into the account too, getting an interest rate of 2.4%. That gets him another £3,224. So he ends up with £38,719. He is worse off – by £729.
"However, given the tiny margin here, if house prices don’t stay stable - if they fall a few percent or even 5-10% - it won’t be the tenant that will be worse off in five years, it will be the buyer. By a long way."
Merryn asks "Is that a risk most first-time buyers should be taking?" The answer is down to individual purchasers but let's hope they don't ask for help if it all goes wrong.
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