Should I rent or buy?

There’s no quick answer to whether you should rent or buy a home. A lot of people worry about buying at the wrong time for the housing market. Currently in 2021 there’s a lot to worry about, including: will house prices recover quickly from the Covid-19 pandemic? What impact will Brexit have?

But while it’s clearly best to avoid buying at the top of the market, the right move really depends on your personal circumstances; things like how much you earn, how long you plan to stay in the same area, and whether you are single or in a stable relationship.  

It’s your decision. And it’s definitely worth taking the time to weigh up the pros and cons of each alternative before deciding whether renting or buying is best for you.

Rent vs. buy: How to decide

To help you decide if it’s better to rent or buy your home, ask yourself these questions:

  1. Should I buy a house now?

  2. How much can I afford?

  3. What are the pros and cons of each?

  4. Could I benefit from a government Help to Buy scheme?

Should I buy a house now?

If you’re ready to buy, it could be a good time to if home prices in your area have been rising. Buying now can help you stay in a neighbourhood that you might otherwise be priced out of in a few years.

Even if you have no intention of staying there long term, a sharp rise in local property values could mean a large profit when you sell.

That said, we live in uncertain times. So if prices in your local area have become too inflated, you may want to proceed with caution and only take the plunge if you find a well-priced property.

As explained above, it’s more important to consider your own personal circumstances. If, for example, you have a job you like and a reasonable deposit, buying in your local area is probably a good idea. If you are considering moving to another area, or have very little savings, it probably is not worth buying a house.

Should I buy a house after Brexit?

The simple answer is, nobody knows.

The uncertainty of what’s going to happen post Brexit has many potential homebuyers wondering whether they should have bought before the end of the Brexit transition period.

It’s virtually impossible to predict the impact of Brexit on house prices - especially now Covid-19 has been thrown into the mix. And it’s up to you whether or not you put your life on hold as a result.

Generally speaking, if you think your quality of life would be improved by buying a house, and you can afford to buy a house, then you should probably buy a house.

How much can I afford?

Whether or not you can afford to buy a property will depend on:

  • How much you can borrow from a mortgage lender

  • Whether you can afford a deposit, and other upfront costs like stamp duty

  • Whether you can afford monthly mortgage repayments

How much can I borrow?

How much banks will lend you used to be based on a maximum of 5x your income. Or if you were applying with someone else, 5x your joint income.

Now, lenders must assess the affordability of your request - or in other words, how much cash you will have left over after paying the monthly repayments, and whether it thinks you could continue to pay if your circumstances change.

Using a mortgage affordability calculator is therefore the easiest way to get an idea of how much you can borrow.

Affording your deposit and upfront costs

Most mortgage lenders require a deposit of between 5% and 20% of the property price.

But there’s lots of other upfront costs to pay when you buy a house, including stamp duty, mortgage fees and legal fees.

Before you start the homebuying process, you should therefore work out if you can afford all the costs that are involved.

What will my monthly repayments be if I buy?

Your monthly repayments will differ depending on:

  • How much you want to borrow

  • The length of the mortgage term

  • The mortgage interest rate

So before you consider buying, get a rough estimate of what your monthly payments will be.

If you have a long mortgage term of say 25 or 30 years, your monthly payments will be lower. But it will cost you more in interest overall because you will have to make those payments for a longer period.

With a mortgage lasting say 10 or 20 years, your repayments will be higher, but the total cost of the loan will often be lower overall.

Either way, having a larger deposit to put towards the cost of a property should give you access to better mortgage interest rates.

While you might be able to afford your repayments now, it’s vital to think about whether this will still be the case if interest rates change.

Is it cheaper to rent or buy?

The upfront costs of buying a house are much more expensive than renting

For many people, the upfront costs are the biggest barrier to homeownership.

Most mortgage lenders require a deposit of at least 5% of the property price.

On a £200,000 house a 5% deposit would be £10,000, which is a lot more than most people have just lying around!

Sustained house price rises have pushed up the cost of a deposit over the last few decades, making home ownership a more difficult ambition.

And even if you have enough for a deposit, you’ll need to think about the other expensive fees and charges involved in buying a home.

Owning your home means you're responsible for maintenance costs

As a homeowner, you’re responsible for your own maintenance costs. That could mean paying a small fee to call the plumber out. Or shelling out thousands of pounds to fix a leaky roof.

If you own a leasehold flat, your lease will say for what repairs you're responsible. You may need to pay into a sinking fund to cover major repairs. On top of that, most leases ask you to pay a service charge to cover repairs of communal areas.

If you rent, there’s no need to pay anything towards maintenance costs. Your landlord is generally responsible for fixing any issues with the property.

Buying a house could be cheaper in the long run

Once you’ve paid off your mortgage, the home is yours. You’ll have no monthly repayments to make, leaving you more money for other things.

Buying a home can also be a great investment. Typically, properties will rise in value while you’re living there. And when your home value rises while the mortgage debt falls as you repay it, you’re building equity that you can use as a deposit on another, more expensive home in the future (or use for another purpose such as funding your retirement).

If you’re renting, you will not be building any equity. The money you pay in rent is gone forever.

Rent or buy: Pros and cons

Should you buy or rent? Here are some things to consider when making your decision.

Pros and cons of buying a house

Benefits of buying a house

  • Potential to build equity

  • More stability

  • Can improve or upgrade home to your tastes

Once you’ve paid off your mortgage, your home belongs to you. And even prior to that, if house prices rise, your house will be worth more than you paid for it - so if you sell it you can pocket the equity, or the difference in price.  

Having your own home also gives you the stability of being part of a neighbourhood and community. And if you have children, it helps secure a school catchment area for the future.

Finally, without a landlord to answer to, you’re free to decorate and style your home however you like. You might even be able to add value to the property through home improvements.

Disadvantages of buying a house

  • Requires substantial savings

  • Could lose money if house prices decline

  • Responsibility for repairs and renovations

Buying a home involves a lot of upfront costs. From finding a large deposit to paying stamp duty, as well as covering the legal fees and mortgage set-up charges. Buying a home is also not without its risks. When you own a property, you could suffer from negative equity. This is when the value of the property falls below the level of the mortgage you took out to buy it, and you end up owing more than you paid for it.

If anything - from a leaky roof to a burst pipe - goes wrong, it’s your responsibility to pay for it. So be prepared for unexpected costs.

Pros and cons of renting

Benefits of renting a house

  • Fewer upfront costs and paperwork

  • Flexibility and freedom to move

  • No maintenance costs

Renting is a much more flexible option: you do not need to sell the property before you up and leave; at the end of your lease, you’re free to go.

Unlike buying your own home, moving into a new rental property should not involve expensive estate agent and legal fees.

You can move out when you want - within the terms of your rental contract.

And you can call your landlord if anything goes wrong with the washing machine or the electrics. 

Disadvantages of renting a house

  • Landlords can raise rent or sell the property

  • Might have to move multiple times

  • Don’t build equity

Landlords can increase the rent whenever your tenancy agreement ends. And the chances are they will. They can also choose to end the lease so they can sell the property, meaning you’ll need to find somewhere else to live - potentially more frequently than you would like.

There might not be much difference in your monthly repayment costs. But when you rent, your money is going straight into the landlord’s pocket. 

Over the years, that means you’re paying thousands of pounds towards something you will never own.

Government Help to Buy schemes

If you have decided you want to buy, but you can’t quite afford to, there might be a government backed Help to Buy scheme that could help you get on the property ladder sooner.

Help to Buy: Rent to Buy

The Rent to Buy scheme, sometimes known as intermediate rent, gives you the option of renting a property at up to 20% below the market rate - to allow you to save more towards a deposit.

You are sometimes then given the option of buying the property using Shared Ownership at the end of your rental period.

To qualify, you must be a first time buyer with an income of less than £60,000. But finding a Rent to Buy property can be hard. Your local Help to Buy website should let you search for suitable Rent to Buy properties.

Help to Buy: Equity Loan

With the Help to Buy Equity Loan scheme, you pay a deposit of 5% and the government lends you up to 20% (or 40% in London) to get a mortgage to cover the rest. The government loan is interest free for the first five years. And because you approach the mortgage lender with a much larger deposit, you should be offered a much lower interest rate.

Help to Buy ISA

This is no longer open to new applicants. A Help to Buy ISA is an individual savings account (ISA) that offers a 25% bonus from the government when used to buy your first home. If you already have a Help to Buy ISA, you can keep it open until November 2029.

Lifetime ISA

A Lifetime ISA also offers a 25% government bonus and is open to 18 to 39-year-olds who are saving for a home or for retirement. You cannot access your savings or the bonus until you’ve had the account for at least a year and are ready to buy your first home (or retire!). You can continue to save until you are 50. 

Help to Buy: Shared Ownership

With the Help to Buy Shared Ownership scheme, you buy a share of a property, usually 25% to 75%, through a housing association and pay rent on the rest. You then have the option of increasing your share of the property in the future.