To rent or buy: Should you get a mortgage?
The past few years in the UK have been tumultuous in the mortgage market, with many people finding themselves in a vulnerable position after their existing fixed term ends and they’re hit with dramatic interest rate hikes.
Despite this, the UK is still very much a nation that aspires to home ownership. In fact, recent research by the Homeowners Alliance showed that 86% of our population have this goal.
However, when house prices are rising and salaries aren’t keeping pace, many individuals can find it difficult, sometimes impossible, to make the numbers work when they’re trying to get a mortgage.
Is renting an option that may suit some people’s circumstances better? In this article, our experienced team of mortgage advisers at PIL Southampton compares renting a property with home ownership via a mortgage.
Owning your own home is, in most cases, a way of building a nest egg for your future. As long as the value of your home increases rather than decreases, every mortgage payment you make is a contribution to your assets, that you can benefit from in the future. For most of the population, equity gained from rising property values will be the most money they ever make.
Being a homeowner also gives you the security of knowing you can stay in that home as long as you can afford the mortgage payments; you’re not at the whim of a landlord who may decide not to continue renting to you.
When you own your own home, you don’t have to answer to anyone else. You have the freedom to make whatever home improvements you choose (planning permission aside!) and can decorate to suit your personal taste.
There is also the element of cost control – if you have a fixed-rate mortgage you know exactly what your regular payments are going to be rather than being in a rental situation where a landlord may choose to increase your rent.
There is no doubt that buying a home will be by far the biggest financial commitment most of us will ever take on.
Coming up with a deposit can be a huge challenge – in today’s market, 10% is often the norm, which is a substantial £30,000 on a £300,000 purchase price.
To avoid potentially having your home repossessed, you need to make sure you can meet your monthly mortgage repayments over the long term; the current standard mortgage term is 25 years and many people are extending that period to make the monthly repayments more affordable.
It’s obviously not something we want to think about happening, but losing your job, getting seriously ill or splitting up with a partner you may be sharing mortgage payments with could leave you in a vulnerable position.
Mortgage payments can be a real stretch for a lot of people’s finances. They can potentially swallow up a lot of your disposable income, which could have a significant impact on your standard of living and restrict your spending choices.
Another important factor to consider is that it is not guaranteed that the value of your home will increase. Trends suggest that house prices do increase over the long term, but the housing market can be volatile and you may find yourself in a negative equity situation (when your house is worth less than the mortgage on it) just when you would have liked to sell.
Being a homeowner comes with extra costs other than the mortgage payments. You will need to pay for buildings insurance, contents insurance, perhaps life insurance if you have dependents and want to make sure their home is protected if something happens to you. There are also the costs of maintaining your property, from decorating and furnishing to faulty plumbing, replacing a boiler, fixing a leaking roof. The list goes on!
When you move house, the process will incur legal fees, estate agency fees and potentially stamp duty. Also, if you share a mortgage with a partner and you decide to go your separate ways, it can make the situation more complicated if you can’t agree on what to do with the property. Selling a property is also a longer process than simply going from one rental property to another.
Sometimes, renting can be a more affordable way to live in a desired location – a sought-after area where most people are priced out of the housing market.
In most situations, you sign a rental agreement for 12 months. If, at that point, you fancy a change of scene, you want to move area, move in with someone, away from someone, or you are struggling to make ends meet and have the opportunity to move in with family or friends to ease your financial pressure, you have that choice.
Tenants are not responsible for paying for any maintenance or repairs for a rented property, or for taking the time to arrange for anything to be done. You just let your landlord know and they should take care of everything.
Paying a fixed rent means you know where you stand with your ongoing expenses. Some rental agreements cover utilities, too. It can be very helpful knowing how much disposable income you have, each month.
You have probably heard the phrase ‘dead money’. A clear downside of renting is that you’re handing over your hard-earned money to your landlord every month and it is money that you’ll never see again, unlike mortgage payments which enable you to capitalise on any increases in the value of your home.
When you rent, you need to follow the rules set by your landlord. This could affect whether you can own pets, modify or decorate your home, or even nail a painting to the wall.
When you are renting, you never know when your landlord may end your tenancy agreement, leaving you having to find somewhere else to live which may be tricky – you may not find somewhere you like at the right price, or in a convenient area for work or school runs.
Generally speaking, renting can be cheaper in the short term as you don’t need to come up with a large deposit, or pay for fees and surveys and so on.
Regarding monthly repayments, it depends on mortgage interest rates – if they’re low then mortgage repayments could be lower than renting but, when interest rates are higher, then paying rent can sometimes be the cheaper option.
If you are able to come up with a large deposit, or are able to pay off lump sums to reduce your mortgage, this can result in lower monthly mortgage repayments.
It’s fair to say that your rent is unlikely to go down, it’s only likely to increase.
Plus, when you’re paying rent, you’re not making financial contributions towards an asset that you can hopefully benefit from in the future, as you can do when you’re a homeowner.
To summarise, buying a property incurs higher upfront costs and all the responsibility and time that comes with the upkeep of a home, but it should hopefully give you a substantial investment opportunity as property values can dramatically increase over time.
Renting can give you more freedom to move around, and to live in places where you may not be able to afford to buy. And, although your monthly rent isn’t providing you with a financial return, you still have a home of your own and, with it, independence.
Owning your own home means that you can choose how you want your home to look, whereas in rental properties you are restricted by what your landlord will allow you to do.
It’s also important to note that owning your home means you get to choose how long you live there, whereas with rental agreements there are usually no guarantees that you can live there as long as you like.
Whether you choose to rent or buy may be dictated by your financial circumstances, but it can also be a lifestyle choice or be influenced by where you are at in life.
Whichever route you choose, think carefully about what’s important to you, and make sure you do your research and look at every angle before you commit to any major financial decision.
A professional financial adviser can help you to work through your financial circumstances and add a useful objective opinion looking from the outside in, with your best interests at heart.
How PIL Southampton can help you
You can trust our expert team of financial advisers to give you honest, personal and genuine advice. Whether you need mortgage advice, general financial advice, or help in planning for your future, they will take the time to get to know you and your individual circumstances.
Then, with their extensive and up-to-date knowledge of the marketplace, they can help you to find the most suitable financial solutions that should best suit your needs.
How you can contact PIL Southampton
You can email us, fill out the contact form on our website or call us on 02380 668407. We look forward to hearing from you.
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