Why Buying a Home is better than renting a Home in the UK.
Despite the large upfront costs that come with paying a deposit, legal and mortgage set up fees, and the fact that mortgage repayments are generally similar in size to rent, you will be gaining equity and reducing your monthly outgoings each month.
Because a mortgage is comprised of the debt and the interest, each month that you make a repayment, your interest will decrease. This means your monthly repayments will get smaller as you get closer to finishing your mortgage repayments.
Owning your home: Benefits and Drawbacks
There are many benefits to owning a home, rather than renting:
You get equity as you continue to pay off the mortgage, allowing you to potentially sell the home for a profit or take out another mortgage or loan
Your monthly costs will gradually get smaller until you finish the mortgage and live in your home for free
Ability to rent out your home or a spare room for extra cash
More rights, to a certain degree, when it comes to altering fixtures and modifying or extending the home (see ‘Types of property – leasehold vs freehold’ below)
However, there are also drawbacks:
Your equity could fall if the housing market crashes, leaving you with less than what you paid for
There are plenty of upfront costs to pay to get a mortgage and complete the home buying process – far more than if you are renting
More responsibility to repair and modify things in the home, meaning your costs could add up if you need to make improvements
On the whole, owning a home is usually better value and a more sensible option than renting. It can depend on your financial circumstances too, but it does make sense to aim to make buying a home your goal.
How much does renting cost vs a mortgage?
Renting is generally cheaper than a mortgage in the short term. When you sign a contract to rent a home you will usually have to pay the first month’s rent and a damage deposit, which is usually around the cost of one month’s rent and you are not guaranteed to get all that money back at the end of the lease.
However, with a mortgage you will be required to have a large lump sum for a deposit. For example, if you want to buy a home worth £150,000, then you will need a deposit of at least £7,500, but it’s more likely you will only be able to get a mortgage with £15,000 or more.
On top of this, you will need to pay for a range of other costs, which could end up adding up to an extra £5,000 to your outgoings.
Once you get these costs out of the way, your monthly mortgage repayments are likely to be similar to paying for rent, although your debt should get smaller (so long as your interest rate stays around the same) and therefore you will gradually pay less every month.
Your interest rate will determine how much your monthly repayments are, and this can fluctuate and make it a little harder to plan for your costs. However, at the end of your mortgage, you owe nothing, so you can continue living in your home without paying.
If you rent, then you pay rent all the time. There is no end to it. Therefore, buying a home can make retirement planning a little easier.
Home buying costs
Along with the deposit, you will need to pay fees to set up the mortgage and pay for a surveyor to arrange all of the necessary legal aspects of home buying.
You may also need to pay Stamp Duty, which is a lump sum tax that is paid when purchasing a property or land that is valued over a certain amount.
From 1 July 2021, a first time buyer in England and Northern Ireland will receive a discount that means they will pay no stamp duty when purchasing a property priced at £300,000 or less.
If purchasing a property costing between £300,000 and £500,000, you will pay stamp duty on the excess at the normal rate (5%).
So, if you bought a home worth £500,000, you would still be liable to pay stamp duty at 5% on the remaining £200,000.
If you purchase a home worth more than £500,000, the first time buyer exemption does not apply and you will have to pay Stamp Duty at the same rates as other buyers.
Then you will have an array of costs associated with moving into your home and renovating it. When you rent, many of the appliances and furniture are likely to be there and provided by the landlord. Repairs are usually paid for by the landlord too, so if you buy a home that will be your responsibility.
Save for a deposit
Saving for a deposit can be extremely difficult if you are already renting. Many first time buyers get some help from their family, either in the form of a loan or gift, or by moving back in with their parents for a little longer.
Compare the entire banking market for savings bank accounts and find one that can offer you a decent rate on your savings. Make a plan for how long you plan to save, and how much you can afford to put away each month.
Setting a goal is the most important part, and if you can stick to it then you will have a good chance of being able to buy a home.
Help to Buy Equity Loan scheme for New build properties
The Government backed Help to Buy Equity Loan scheme can help buyers purchase a new build property with a 5% deposit.
The scheme works by the Government lending you 20% of the purchase price of the property to add to the 5% you have saved yourself, meaning you now have a 25% deposit. You then take out a mortgage for the remaining 75% of the purchase price.
So, to purchase a house costing £200,000, you would need a £10,000 (5%) deposit, to which the Government would lend you a further £40,000 (20%). You would then need a mortgage for the remaining £150,000 (75%).
Buyers in London can borrow up to 40% of the property price.
As you need a smaller mortgage, lenders are likely to offer you a more competitive mortgage rate, so your monthly costs will be more manageable.
The Government loan is interest free for the first 5 years, during which time you pay a £1 monthly management fee.
In year 6 you continue to pay the management fee, plus you start to pay interest on the loan at a rate of 1.75 per cent (this will rise each year with the Retail Price Index (RPI) plus 1%).
Repaying the Government loan
The loan must be repaid when you sell the house or at the end of the mortgage term, at which point you will need to repay 20% of the property’s current value.
So, if your property has increased in value to £300,000, you will need to repay £60,000. If it has decreased in value to £150,000 you must repay £30,000.
You can also choose to make a partial repayment of 10 per cent, which is called ‘staircasing’.
To take part in the scheme you will need to apply through a Help to Buy agent.
The current Help to Buy scheme is due to end on 31 March 2021.
However, a new Help to buy scheme that is only for first time buyers will be available for 2 years from 1 April 2021.
There are other schemes available to help first time buyers, and generally they come in and out of commission according to the government’s economic agenda. It’s always worth keeping up with the latest finance news to see what new schemes are coming up and which old ones are coming back.
Types of property – leasehold vs freehold
There are two types of property that you can own: leasehold and freehold. Freehold means you have complete ownership of the property and the land it stands on. This gives you flexibility to modify your home within reason, and depending on local planning laws and permissions. The land belongs to you until you die and is then inherited by whomever you leave it to.
With a leasehold property, you have to pay a fee to keep your property on the land. You will also have less rights to modify the property. If your property is in an apartment building, then there might be other rules you have to follow and you will probably have to pay a service fee.
Shared ownership schemes: Pros and cons
Shared ownership schemes allow you to buy a share of the property and pay a combination of rent and mortgage. For example, you can own a 50% share of the property by getting a mortgage to cover half the property’s value, and pay rent to the housing association or landlord for the remaining 50% share.
You are then able to increase your share in the property over time (staircasing) by increasing your mortgage, or paying for it upfront.
Benefits of shared ownership:
Easier to own property with a small deposit
Relatively cheaper mortgage deals available
Rent is also relatively cheaper
Once you have completely paid off your mortgage then you will only owe ground rent, making it much cheaper to live in your home
Ability to own the whole property by paying for it as and when you come up with the money
Drawbacks of shared ownership:
Property value is likely to rise making it more expensive to buy the remaining share
Even though you are only buying a share of a property, you will still have to pay all the maintenance costs
Once you have completely paid off your mortgage, you will still owe rent
You probably won’t be allowed to make any major home renovations and improvements as your landlord of the remaining share will still have a say.