Thinking about your first home is very exciting. But there are lots of questions you have to ask yourself. “Where should we live?” “How far can we afford to commute?” and most importantly “Do we rent, or should we buy – what can we afford?” We’re here to help you answer that last question. Most of us are so keen to buy our own house, but is it right for you? We’ll compare the costs and show you the advantages of each to help you make the right decision.
First home affordability
Sometimes, the amount you’ve saved and your personal circumstances will definitely make the decision for you. But if you’ve put some money away and do have the choice, what do you do? Could a mortgage be the answer? Or are you better off waiting a few years, until prices settle down and you know where you want to be.
The Telegraph revealed in September 2014 that people in their early 20s can expect to pay £66,800 in rent by the time they turn 30. However, Aviva’s most recent Family Finances report revealed that the average value of a family home is the most it’s ever been at £244,100. So it’s unsurprising we’re hearing a lot from the government about investment and commitment to new-build properties; new
schemes to help first-time buyers, and plans to make sure fair rents are charged by all landlords. Making the choice between renting and buying your first home a difficult one.
The advantages of renting vs. buying
Believe it or not, there are some. Buying a home is one of the largest financial commitments you can make in your lifetime, but with property prices showing no signs of coming down yet, how will you save the deposit for a purchase?
Then, can you afford the monthly payments if something happens to your income later on? If interest rates go up, repayments on anything other than a fixed term deal will probably go up too – whereas rental payments are likely to stay the same for the agreed length of your contract.
There’s the on-going cost of looking after a home too. Although you can paint a kitchen any colour you want if you own it, there’s the downside of having to cover all the maintenance costs on your own home.
However, tenants – even if they’re paying service charges – can usually ask a landlord to chip in when it comes to improvements for things like roof tiles, gutters, drains or even eco-saving measures that could bring your bills down.
What’s more, if you buy a property instead of renting it, it becomes much harder to move, especially with a mortgage. If you’re renting, you can leave almost whenever you want. You’ll have an agreed notice period, but for everyone involved, it’s much easier to relocate.
Finally, if you’re renting, there’s the overall short-term saving in those moving costs. A removal firm may charge the same amount to relocate your tables and chairs, but at least with a rental property you won’t have these fees to think about.
If we compare the costs we see:
|Deposit||5% to 20% of purchase price||
1 to 3 months' rent
|Stamp Duty||Variable percentage over £125,001||£0|
|Valuation Fee||£0 if you are buying a property||£0|
|Survey Fee||£250 to £1,200||£0|
|Legal Fee||£500 to £1500||£0|
|Electronic Transfer fee||Around £50||£0|
|Agent's Fee (estate agent/letting agent)||£150 to £1,500||Around £350|
|Inspection Fee||£0||Variable (often 1 month's rent)|
The advantages of buying vs. renting
The advantage of buying, for most people, is that the bricks and mortar belong to you (once you’ve paid off the mortgage). You can do what you want to the property, any money spent improving your home isn’t ‘wasted’, and any gains in equity belong to whoever’s names are on the deeds. But there’s more to it than that:
- If your property does increase in value over time, then you may be in a position to ‘trade up’ later on. Or you could ‘downsize’ to release some of those locked-away funds and spend them on almost anything.
- When you do retire, the likelihood is your mortgage will have (or be about to) come to an end – which means you’ll have fewer outgoings (no rent to pay).
- You won’t have to worry about a landlord giving you notice, or having to deal with periodic property inspections by a letting agent.
- You’re also in control of the amount you’re spending on home improvements or maintenance (and your personal taste is what matters, not your landlord’s).
Of course, you still have to weigh up the pros and cons of mortgage types: repayment (capital-and-interest), versus interest-only. For more information go to our Mortgage Jargon Buster.
Top tips to help you decide
Nobody knows your circumstances better than you. Your decision should take several practicalities into account – including not only how you feel about each option, but what you can realistically afford in the short and long term. Even if, in the short term, it’s financially more sensible to rent for a while … which means you may not be able to save a deposit quite so quickly.
Before you decide to rent/buy:
- Assess your savings – do you have enough for a deposit, could you ‘hang on’ for a few months and save some more? It’s worth talking to a mortgage broker in depth, as there are several deals around (and first-time buyer schemes) that may be useful.
- Use your bank statements to work out your current average income – will you have enough to take on the maintenance and upkeep of your own home, on top of the mortgage payments, council tax and other expenses?
- Now, estimate the outgoings on a rental property such as bills and insurance costs – and compare that expense to the estimates you’re given by a broker for monthly mortgage payments.
Finally, talk to family and friends. Share your plans for the future. You may find there’s a welcome, unexpected source of support – such as some help to increase your savings, or even a ‘step forward’ towards independence, renting a property you know for a short while.