Here’s a question we get asked quite a lot so I want to break it down into different points. That question is - what are the advantages of owning a home versus renting a home?
Wealth creation: Homeownership has typically been a source of wealth accumulation due to property appreciation over time.
Cost of borrowing: As a homeowner, other borrowing can be a lot cheaper than a non-homeowner will be able to achieve, as there is security for the lender when creating any secured loans.
Releasing value: In time, any value you have inside the property can also be released for other use. In May, 25 years ago, the average home in Northern Ireland was £60,380. Today that is £177,611.
Budgeting: If you buy your property using a fixed rate mortgage, you can budget for that cost as it’s fixed. Over time, inflation reduces the cost, as that fixed cost described as a percentage of income falls. Rent, however, rises with inflation and you are in the hands of the markets. A mortgage is a good hedge against inflation. Naturally if you want to have a fixed mortgage you should ensure it is portable to take to different properties as you move.
Impact of inflation: The amount you borrow is also being eroded by inflation. To buy the average home on a 90 per cent mortgage in 1999, the monthly interest would have been £256 as the average mortgage rate was 5.67 per cent. That’s the power of inflation, house price appreciation, and time combined.
Historically, houses have been seen, and have performed, as an inflation hedge because they increase at, or above the rate of inflation.
So what are the disadvantages of buying?
Properties need maintaining and these can be expensive. Home improvements aside, new rooves, boiler repairs, reinsulating and necessary costs mount up, but they are typically not the problem of the person who decides to rent.
Flexibility is also key. Houses don’t always sell, and markets can hit doldrums for no apparent reason other than sentiment which is no ideal way to plan your security. A flat market, coupled with your need to move home for a new job for example, can be tricky and force down the price you need to sell at.
Fees: It goes without saying that the fixed up-front costs of buying a home are significantly more than rent. A deposit, solicitor fees, valuation fees, stamp duty, essential furniture and improvements, alongside financial adviser fees are quite a different total to a ‘plug and play’ rental property.
Varying monthly costs: If you aren’t on a fixed rate mortgage, the economic vagaries can lead to a lack of security. That said, a homeowner does have the ability with some lenders to take mortgage holidays. Some lenders can allow a holiday for up to 12 months which can provide significant respite.
Negative equity: Property prices do fluctuate, and there is always the risk of needing to sell a home when the value is below the mortgage. This typically occurs when buying during ‘euphoric’ times.
Credit score: Renting is often more achievable than buying as the credit score target, and ability to rent, is a lower barrier than obtaining a mortgage.
And what are the disadvantages of renting?
A landlord might serve notice on you at any time to leave. This insecurity is one of the primary reasons people buy a home, something to call their own.
Rental properties can sometimes be used for housing emergencies, or as Airbnb’s at certain boom times in the market, and so the supply decreases, which can lead to a lack of decent offerings and increased rent rates due to excessive demand.
Owning a home will give you the most control, however. A little improvement alteration here and there on a rented property will be fine, but bigger changes are wasted money and may not even be allowed.
Autonomy seems to be the key to owning a home versus renting.
· Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. For a free guide on interest rates please email mortgage director Pat Greene on pgreene@wwfp.net
