Although homeowners claim that renting is 'dead money', it can make perfect sense to rent. One ex-homeowner reveals all...
The received wisdom that 'renting is dead money' really grinds my gears. Usually, this bold claim is made by homeowners to tenants, without any logical thought to accompany it.
To buy or not to buy?
As a sell-to-renter, I've been on both sides of the rent-versus-buy divide. The rewards of homeownership have been done to death, so I won't repeat them here. Instead, I'll put the case for renting to what I suspect is a sceptical audience!
Renting can be cheaper
Years ago, I rented a small flat for £6,300 a year when starter homes locally cost about £75,000. With yearly interest payments of £5,000, I stood to save £100 a month by buying, so I did. When I sold this house 12½ years later, the housing boom had increased my 10% deposit by a factor of 25. Wow!
Since then, I have yet to buy another home, because humble arithmetic hints that renting is cheaper. For example, the yearly rent for my first tenancy worked out at 2.6% of the property's value. Since mortgage rates were much higher than this, it made perfect sense to rent.
Today, with the Bank of England base rate at a lifetime low of 0.5%, tracker mortgages at around 3% are available, but only for the best borrowers. Even so, this is similar to my rent and, as I believe the housing crash is far from over, I'll sit on the sidelines until at least 2011.
Renting is more flexible
Buying a property can be a long, drawn-out affair with many legal hurdles to clear, whereas renting a home is fairly simple and painless. What's more, if your career requires you to relocate, renting won't tie you down to an area. Conversely, buying a property requires real commitment -- not least, a hefty home loan.
Also, when renting, there's no stamp duty to pay, nor solicitors' fees, surveyor's report, Home Inspection Packs, mortgage arrangement fees and all that malarkey. In addition, when moving to a new area, renting before buying adds up, especially if you've one eye on school catchment areas.
Crash, what crash?
When house prices are rising, home ownership makes great sense. You get a roof over your head, plus you benefit from rising housing equity (the difference between a property's value and the mortgage secured on it). What's more, buying a house with a mortgage introduces 'gearing', with the borrowed money magnifying the return on your deposit.
In boom times, this gearing can produce spectacular returns. With a 90% mortgage, a 10% gain in the value of your home doubles your deposit, producing a 100% return (ignoring interest on the loan). Likewise, in housing crashes, this 'leverage' becomes a nightmare, as a 10% drop in house prices wipes out all of a 10% deposit!
Having sold my family home almost exactly 4½ years ago to the day, I missed out the housing crash which began in the summer of 2007. I also missed out on two years of further gains, but I'd rather exit a bubble early than late. Thus, for me as a tenant, there has been no housing crash!
No negative equity
When the post-1989 housing crash got under way and property prices plunged, I was a tenant. The crash caused huge financial problems for my landlord, an architect and property developer. Unable to keep up his mortgage payments, all of his investment properties were repossessed.
As I had no financial interest in the flat I rented, I suffered no loss when property prices crashed and lenders seized my landlord's portfolio. Thus, tenants are immune to negative equity -- when a property becomes worth less than the mortgage secured on it.
Rentals are more stable
Rents always go up, right? Wrong! My first tenancy renewed twice with no yearly rent increase. Also, I negotiated a £150 drop in the monthly rent in my latest move. However, mortgage rates move up and down due to outside forces, making them more volatile than rents.
Furthermore, choose the right landlord and life can be very peaceful. In three tenancies since selling up, my landlords have lived in New Zealand, the Isle of Man and California respectively. Indeed, absentee landlords and a professional letting agency make for a welcome combination!
No maintenance costs
One of the great benefits of renting is that you are not responsible for the maintenance and upkeep of a property. So, that means no buildings insurance, breakdown and servicing costs, replacing or repairing appliances, decorating expenses, etc.
Since moving into my latest rented home, I've called out a plumber for a boiler breakdown, water-tank problem, annual gas service, and for water leaking through a ceiling. These repairs were free, as the letting agent promptly arranged them and then billed the owner.
Do the maths
Don't automatically assume that buying always beats renting, as this smacks of mindless snobbery. There is no gold standard and no holy truth which makes one better than the other. Housing markets are first and foremost local and so the maths always varies from one location to another. Hence, do your homework before deciding to buy or rent.
Finally, thanks to their personal circumstances, millions of adults have no choice but to rent. On the basis that you should be content with what you can't change, these people should -- like me -- be happy tenants!
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