Over the long term – property prices have usually risen in the past and may well do so in the future. In the current declining property market would you be worse off or better off renting a house rather than buying?
Here are some figures for buying versus renting based on different scenarios over a 5 year period. The interest rates quoted are based on fixed rate mortgages and savings available in May 2012. Of course – buying a house that you are planning on staying in for a longer period of time is a different matter altogether. This comparison is really just for someone who is planning on moving after 5 years.
Ownership Costs
On a house priced at €230,000 – the cost of purchase would include extras – Stamp Duty of €2300 , Legal and other fees of €2500.
With a 25% deposit of €57500 that would leave a mortgage loan of €172500.
This mortgage would mean monthly repayments of €958.81 on a 5 year fixed rate mortgage at 4.5% over 25 years . Total payments over 5 years of €57528.
Of these mortgage repayments – €36583 would be interest and €20945 would be paid off the capital. This would leave an outstanding loan of €151555 after 5 years
We have assumed annual costs for maintenance and repairs and building insurance for the owner of 1% or €11500 over 5 years.
Total cost of ownership over 5 Years = €131328
Cost of Renting
Rental charges on the same property based on a 5% gross return would be €950 a month 0r €57000 over 5 years.
You would still have your €57500 deposit – which at 3.6% a year on deposit would earn €10791 interest over 5 years.
Net cost of renting over 5 years = €57000 – €10971 = €46209
Scenario 1 – House prices remain the same over 5 years:
Tthe Equity in the house would be €78445 (The difference between the value (€230,00) and the outstanding mortgage (€151555).
If we deduct this from the cost of ownership – that leaves the net cost of ownership as €52833.
In this scenario the cost of renting is lower than the cost of buying by €6674
Scenario 2 – House Prices Fall by 10% over the 5 years
The value of the house would be €207,000 after 5 years and the outstanding mortgage would be €151555 – leaving equity of €55445. The net cost of ownership in this case works out at €75883 over the 5 years .
If we also assume a drop in rent of 2% a year – bringing the total rent over 5 years to €54720 – after taking into account the interest on the savings – this ends up working out at €31954 cheaper when renting compared to buying.
Scenario 3 – House Price rises by 10% over 5 years
The house would be worth €253000 after 5 years . The equity would now be €101455 meaning a net cost of ownership of €29883.
Assuming rent rises in line with property prices – the total rent over 5 years would be €52980. Deducting the interest made from the €57500 deposit left in savings – we arrive at a net cost of rental of €48489
In this scenario – renting would leave the tenant worse off by €18605 after 5 years.
Of course – even higher price increases will make buying even better – but hopefully it has been a useful exercise in showing that sometimes renting a property can work out better than buying .
Over longer periods – renting will be more likely to be more expensive then buying . After the mortgage is paid off there will be an asset you own and no more payments to make – whereas the renter will have some cash in the bank but will still have to pay rent until they die.
This comparison could of course be affected by things like mortgage relief , rent supplement and other things that we have not considered. Please feel free to comment .
Good analysis and food for thought. However, the analysis pre-supposes that rent v buy is a 5 year decision – it is a lifetime decision – a similar analysis over 40, 50, or even 60 years might be a fairer comparison.