- Homes are extremely expensive to own and maintain in the U.K.
- The lifetime value of ownership may not be worth the financial and lifestyle cost.
Here is a comparison of how home ownership and renting stack up over a long period of time.
Home owners can profit from selling
Historically, homes have tended to go up in value, so you could make a tidy profit if you sell years from now. Alternatively, many people rent their whole lives and manage to stockpile lots of savings. How much profit you make, if any, depends on a couple of things:
1. How long you owned your home
Most mortgages are amortized over 25 years, broken up into smaller terms so that you and your lender can renegotiate the interest from time to time. Terms are typically five years and during the first term, most of your monthly payment goes toward the interest portion of your loan. After about 10 years, a greater percentage of your payment is applied to the money you borrowed (called the principal).
By the final five years, almost the entire portion of your payment is applied to the principal and it starts to melt away fast. Eventually, you own your home outright and you’re done with monthly mortgage payments.
If you sell in the first five years, when most of your payments went to paying the interest, you may not make a big profit because you’ll owe the bank almost as much as you borrowed. You’ll also have to add up the money that went toward property tax, renovations and upgrades.
2. Balancing the costs
Selling your home and buying another property involves a lot of major costs, including:
- Possible stamp duty when buying
- Solicitor fees when buying and selling
- Estate agent fees when selling
- Removals costs when buying and selling
To calculate the profit on the sale of your home, you have to deduct the money that went to interest payments, land tax, renovations, upkeep and repairs. These are costs that a renter avoids because the landlord pays them.
On the flipside, rather than paying interest, savvy renters can earn interest by saving on all sorts of home ownership costs, and investing those savings for solid annualized returns. And while you lose flexibility over your space by renting, you save on maintenance costs and gain greater flexibility over where you get to live. While homes are in high demand, and a prospective homebuyer's budget might limit their options, renters can more than likely find a place whereever they look.
Home owners build home equity
Equity is the value of your home that belongs to you. The calculation is simple.
The value of your home (minus) what you owe the bank = your equity.
Your home equity builds slowly in the first five to 10 years, when most of your monthly payment is going to the interest portion of your loan. But it goes up quickly from there.
Equity is a good thing because it gives you some bargaining power if you ever find yourself needing cash for something unexpected, such as home repairs. It can be used as collateral for an offset mortgage and often helps you qualify to borrow larger amounts.
Some home owners treat their equity as a piggy bank they can raid every time they crave a new experience. Borrowing against home equity only adds to your debt load. A renter who invests regularly and establishes a good credit rating can find it just as easy to access emergency funds through a loan or line of credit.
Home owners enjoy greater security
You can’t predict what life will look like in 25 years. Go back a quarter of a century and few could have imagined social media, cryptocurrency, free access to the stock market, or billionaires going to space on their lunch breaks. Give yourself a break.
The security that comes with owning your home is certainly rooted in the long-term financial benefits of potential profit and home equity. But there are many short-term advantages that you can feel good about.
You control your own costs
The average London monthly rent jumped 14.3 per cent since last year to £2,193 pcm, according to Rightmove, setting a record for the largest annual rent jump. By comparison, with mortgage terms parceled into 5-year segments, home owners have greater control over the cost of their mortgage, even if interest rates rise slightly, by negotiating fresh terms with their lenders.
You’re in charge of your castle –
You’re free to renovate, decorate, and update your space on your terms so long as you respect building codes. You’re in charge of how and when money gets spent.
Financial security really boils down to having lots of options when life throws a curve ball. A renter can downsize their expenses in a matter of months, or move much easier for a higher paying job. In a world where jobs and careers can take you anywhere in the world, not being tied to a 25-year mortgage is its own form of financial security.
What now? Buy or rent?
Profit, home equity and a sense of security are all good reasons to consider buying a home. You might not know whether it was the right decision for another decade or two. But this is a reversible decision. If you discover that home ownership is too onerous or too restrictive on your lifestyle, you can change your mind and sell.