Can you believe it? My own sister uttering the dreaded words:
“I am just throwing money away by renting.”
Ouch! That’s up there with “renting is dead money”.
She might as well have added, “You Only Live Once!” and then spent her ISA savings on a YOLO tattoo.
Before we begin: I’ve learned that it’s impossible to write about UK property without provoking an outburst of emotion – from every faction – so a quick nod to the laundry list:
- Yes, people want to own homes for different reasons.
- Yes, at the end of 25 years of renting, you’re still renting.
- Yes, houses look cheap / expensive, depending.
- Yes, a homeowner must pay costs every year to stop the place falling down.
- Yes, an owner can make a big tax-free gain on their property investment.
- Yes, mortgage rates may go up / go down / do the Hokey Cokey.
But that is not what I’m talking about today.
What I’m questioning is the idea that renting is inherently wasteful and that having a mortgage is inherently productive.
Let’s unpack this to see why my sister has compounded the damage she did by watching The Water Babies on VHS 20,000 times and then crying and claiming I hit her when I tried to make it stop.
Renting is: paying for something valuable
First off, renting is nothing like throwing money away.
When you throw money away, then – unless you’re Robin Hood, Brewster, or in fear of St. Peter – you get nothing back.
In contrast, when you give money to your landlord, you get somewhere to sleep, eat, make whoopee, and write investing blogs.
Here is Maslow’s famous hierarchy of needs:
Hint: the big ones are at the bottom. (Click to enlarge)
Maslow rightly understood that ‘shelter’ was crucial to human beings. We tend to freeze, rot, dry out, get eaten by animals, or are plagued by packs of foreign exchange students without it.
In fact, Maslow stated shelter was as important as sex, food, and air – but maybe not in that order.
(In the modern world, you don’t get much sex without shelter. Although to be fair you will then get more than your fair share of air.)
Housing, in short, is a basic human need. This is what your landlord gives you in exchange for rent. An essential of life! Maybe my sister should send her landlord a thank you card, rather than a dismissal?
But what about home ownership? Is that essential?
Sadly, Maslow didn’t tell us where “ability to hammer a nail into own wall’ or “opportunity to take part in house price bragging” fitted into his pyramid. He lived in simpler times.
My hunch is – daytime property porn be damned – that Maslow would consider such things to be self-actualization, topping the pyramid alongside philosophy, ballet, and drinking mint juleps.
What is a mortgage in legal terms?
A mortgage is a loan used to buy property. It’s an agreement between you and a lender that involves the latter loaning you the money you need to buy a property (or else a way of raising money against the value of a property you already own).
When you take out a mortgage, you agree with your lender to pay it back the capital you borrow – plus any interest accrued – over some prearranged period of time – typically 25 years – and at an agreed interest rate.
The interest rate you’re charged may vary with market rates (a so-called variable rate mortgage) or more commonly be fixed for some years.
In the UK, fixed-rate mortgages typically run for two to five years. After that period you’ll go onto the lender’s variable rate mortgage, unless you take out a new fixed-rate deal.
Other types of mortgages are available. For instance, a discount mortgage varies with your lenders’ variable rate. But a discount is applied so you pay a little less.
Note that in the UK1 interest rates will fluctuate over the lifetime of your mortgage.
This means that when any fixed-rate mortgage or other deals expire – or on an even more regular basis with a variable rate mortgage – your borrowing costs will be recalculated. Hence your monthly payments will vary.
When do you clear the mortgage?
Most home buyers take out a repayment mortgage. Here the total borrowing cost – including interest – is calculated at the start of the arrangement. You steadily pay the interest and repay the principle via a schedule of monthly payments.
Interest-only mortgages are also available. These are particular popular when buying investment properties. With an interest-only mortgage you only pay the interest over the term of the mortgage. You pledge to repay all the capital at the end of the term (say 25 years).
Most repayment and interest-only mortgage agreements do allow you to make payments in excess of what was initially agreed, however. These extra payments can dramatically reduce how long it takes you to fully pay off the loan, and hence the total cost of borrowing.
Play with our mortgage calculator to see how you can reduce the cost of your mortgage. (It’s as close as it comes to getting exciting about a mortgage.)
Finally and crucially, note that a mortgage is a secured loan. It is backed by the value of the property you buy with it.
Putting up your home as collateral like this makes a mortgage much less costly than other personal loans. But the quid pro quo is that the mortgage agreement gives the lender the right to seize your property if you fail to keep up with your payments.
A mortgage is money rented off a bank
So far, so conventional. You take out a mortgage to buy a property in exchange for a monthly bill – and the risk of losing your home if you don’t keep up with your payment schedule.
However I believe it’s helpful to think a bit deeper about what a mortgage really is. Like this we can exorcise some of the dogma of home buying.
Because despite that aforementioned fabulous need-solving you achieve by renting, most people still aspire to swap paying the monthly rent for a new life as a mortgage-shackled wage slave.
Even I did the deed eventually.
And there’s nothing wrong with that. Buying their own home is the best investment most people ever make.
However there’s nothing magical about a mortgage.
And it certainly isn’t free.
Rentaghost in the machine
When you buy a house with a mortgage, the bank gives you money, as discussed.
Let’s say it gives you £200,000.
Party time! (I’m assuming hedonism for you is 30 days and nights on Rightmove.)
Once the initial euphoria of home hunting is over, a new mortgage owner begins the slog of paying the darn thing off.
And it turns out – obviously – that the bank didn’t give you £200,000 for nothing. As we’ve discussed it wants interest on the mortgage.
It’s as if it leased you the money. You’re paying to rent the money off the bank.
- At 5% over 25 years, borrowing £200,000 will cost you £833 a month in ‘money rent’
You have swapped rent payments to your landlord for rent payments to your bank.
Note again that if you only ever pay your ‘money rent’ and nothing else, then you must give back the £200,000 borrowed at the end of the mortgage term.
Just like you have to hand back a rented house to your landlord!
To avoid this – and to keep your home – then you must repay the capital also.
Effectively, with a repayment mortgage you’re buying £200,000 in cash off the bank, in monthly installments.
- With a 5% mortgage rate over 25-year repayment mortgage deal, you’d need to pay an additional £350 every month to ‘buy’ your £200,000 off the bank.
You might even think of a mortgage as a cash savings account that starts £200,000 in the red. With a repayment mortgage, you’re salting away £350 a month. After 25 years, the balance is £0.
Happy days!
Equally, if you can rent your home for less than you’d pay to buy, then you could choose to save the difference. You might even save up £200,000 that way.
Note: I’ve oversimplified here. As already flagged up, monthly repayments are in reality variable over the mortgage term as they fluctuate in some fashion with interest rates.2 Capital payments are a smaller share of the monthly bill at the start but predominate at the end, as your previous repayments reduce the interest due. Again, check out the graphs via the Monevator mortgage calculator.
Only money under a mattress is dead money
Of course no bank these days will lease you £200,000 without some security.
The bank tries to protect itself twice.
Firstly it demands a deposit of at least 5%, but frequently much more.
Secondly there’s that inconvenient fact that it can repossess your house should you fail to repay the money you borrowed (/rented) off it.
Let’s say my sister has had enough of ‘throwing money away’ and wants to buy a flat for £500,000.
She’ll likely need at least £25,000 as a deposit – and I’d strongly urge her to aim for £50,000 or more – in order to appease the bank’s money landlord.
Of course, you have to give a deposit to a property landlord to rent their house, too.
But when I last rented a place, I put down one month’s rent – or only about 0.25% of that property’s market value at the time. Bargain!
The opportunity cost of a mortgage deposit
As interest rates on cash have recovered, the situation has become even starker. Today, my sister’s would-be deposit cash is only dead money if she keeps her savings under a mattress.
I can think of little worse than looking under my sister’s mattress, but I’m sure there’s no money under there.
Instead, my sister has her money in savings accounts, bonds, and the stock market.
Even if she simply puts her would-be house deposit cash into a super-safe fixed-rate savings account, she can currently earn 4% or more.
That’s hardly dead money.
By the same token, it’s not dead money if the cash is used to get a mortgage.
If you’re paying a mortgage rate of 5%, then your deposit is effectively in the equivalent of a savings account paying 5% interest, tax-free.
That’s nice, too.
Again, I am not saying one arrangement is inherently better or worse than the other. I am saying these decisions have more in common than you might think.
The deal when you pay rent
Buying a house basically involves:
- Deposit + interest payments + (usually) capital repayments + other costs (legal fees, taxes, new boilers, renovations, and so on) + the gain or loss in house prices
Both private owners and landlords also get an income from leasing out their property.
As a home owner you get the better deal, since you rent it out to yourself, tax-free3, whereas a landlord leases it to a third-party tenant who might not pay and who won’t clean the gutters. Worse, her rental income is liable for tax.
In contrast, as a rental tenant your landlord handles most of the faff for you.
Renting simply involves:
- Monthly rent + a month’s deposit
Whereas the deal for the landlord looks something like:
- (Everything listed for a private homeowner above) + void risk4 + rent payment risk5 + some landlord-specific costs + income tax + (likely) capital gains tax
Your landlord also takes on risks on your behalf. There’s the risk that house prices will go down for starters, as well as the risk that interest rates will go up.
Of course landlords do all this in expectations of making a profit over time. I expect house prices will rise over 25 years, and rents too. But there’s no timetable – and it’s still a risk.
So a landlord deals with a lot of faff, takes risks, and satisfies a key human need.
That’s quite the deal you get for “throwing money away” by renting a home instead of buying.
You decide if it is a good time to rent money
Once more with feeling: none of this is to say that it’s not a good time to buy a property, or vice-versa, or to rent, or vice-versa.
When I wrote the first version of this article in 2013, house prices seemed very expensive to me, especially in London.
Luckily, I noted back then that I’d been wrong about prices for a decade. And now another decade has passed and prices are even higher again! But they’re apparently wobbling…
So who knows.
What I was confident about, however, was that borrowing was cheap in 2013.
I wrote:
I do think it’s a good time to rent money.
With five-year fixes under 3%, a big cheap mortgage looks a steal.
We saw money get even cheaper to rent for many years after that – as low as 1%!
The cost of money eventually did rise quite a bit in 2022, however, as the Bank of England hiked interest rates. Mortgage rates spiked further in October 2022 with the Mini Budget farrago.
But rates have since come down again. Indeed it’s interesting to see people (not me!) predicting 40% price falls when five-year fixes are available at 4%, given that ten years ago money already seemed very cheap with fixes not vastly lower at 3%.
Of course the difference today compared to 2013 is even-higher house prices.
Property prices have grown far faster than wages have increased, too.
Which way will you rent?
Sadly, banks will only rent money cheaply to most of us to buy homes, and homes seem expensive. There’s the rub.
But the point is: renting a home isn’t throwing away money. It’s paying for a service.
And a mortgage isn’t free. You pay to rent money.
It amuses me that the conventional thinkers who say renting is dead money are also often the same people who say paying off their mortgage was the best feeling they ever had.
Make your mind up! Do you like renting money or not?
Note: Original article updated in February 2023, so comments below pondering what is a mortgage and/or the meaning of life may be out-of-date. On the other hand this stuff is pretty timeless. See you in 2033, across a rubble-strewn landscape and so on!
- Unlike the US where you typically lock in a mortgage rate for the entire term when you buy. [↩]
- Whereas, for example, dividing £200,000 by 25 years worth of monthly payments is £666 a month. [↩]
- It is called imputed rent. Please don’t complain to me, follow the previous link if you want to learn more. [↩]
- The income-less gaps between tenants. [↩]
- The money stolen by tenants who don’t pay. [↩]
Well written. Love it. Hope your sister still get you a xmas gift after outing her love of The Water Babies!
Sounds like your experience of renting is/was better than mine. I suffered from your sister’s viewpoint and rented the cheapest dives with others, because I preferred to spend the money on toys, partying and drinking beer than, er, throwing it away 😉
I think there’s a large part of the security aspect to buying – I was forever having to move because of other people’s changing circumstances and that got to really hack me off after a while. Once you do actually own the house, it also gives you the ability to hunker down for a relatively low cost independent of what the markets are doing. That falls into the security level for me.
In an inflationary economy your rent will keep rising every year while your sister’s mortgage gets smaller in real terms, even if it’s interest only rather than repayment. The differential will become huge over decades.
By choosing to rent rather than buy you are relying on your investments to keep pace with inflation and generate sufficient income to fund your basic needs indefinitely. Your sister will have a natural inflation hedge against the risk of this not happening.
@BeatTheSeasons is not the underlying premise of passive investing that you are buying into a slice of companies making up the economy? Since this is in fact real stuff, and ‘human ingenuity and ideas’, then as long as there is apparent growth then it’s an equally natural inflation hedge over the decades-long viewpoint. Possibly better, because it’s also diversified across asset classes far better than property – though you can add stocks exposed to residential property if you want some of that asset class in the mix.
It always gives me the willies when I hear people say that they are going into BTL for their pension because of the dreadful volatility of equities in that casino the stock market. I’ve experienced volatility in property of the downwards kind twice now, though the second time (now – outside London, real terms) doesn’t upset me as I have no leveraged exposure to it.
I like the term ‘renting money from a bank’!
ermine: The difference is that you can’t massively leverage on capital gains when you passively invest. I’ve crunched the numbers – we’ve all crunched the numbers! – and were it not for leverage, I would want to be in stocks every single time. But it’s there. And so – housing…
The argument here isn’t that a property or a mortgage isn’t a nice thing to own, most of the time.
It’s that “renting is throwing money away” or that it’s “dead money”.
It’s clearly not. 🙂
The renter also retains flexibility……the ability to move at short notice to take advantage of job opportunities for example. Owning property can be a ball-and-chain.
@BTS totally agree, but…… in today’s world with no ‘jobs for life’ (or very few, outside of maybe teaching), the idea of paying a mortgage of over a 25 year period is a risky business. with ‘offshoring’, ‘outsourcing’ or even ‘nearshoring’ aaaggghhh…your job is never safe. I’ve got 18 years left on my mortgage, but am beavering away to get this paid within 5 (hopefully less), for that very reason. The worry of having no work and losing the house (I have a family to house) grips me every day!
@TI…if i were single/a couple with no kids guy, I would share a rented place (I did this back in the day with 2 mates, our rent between 3 was dirt cheap ), save up as much cash as possible and by a house outright (no i didn’t)…..oh and hope house prices don’t outpace your savings….doh!
I guess your circumstances will dictate your decision, with a family dependent on me I wouldn’t rent, mainly because when the Landlord wants to sell, it’s time to move…sorry kids pack up again we’re off!
I think the answer, is to get a cheap as mortgage as you can and pay it off as quick as you can then squirrel your income away for retirement, unless your a teacher, then let the baby run, smash your ISA’s you’ve got a lovely ripe pension awaiting!
Other than that win the lottery (on a ticket someone has bought for you), or create the next Apple or Windows beast…..then who cares your loaded!
Sorry my first reply (longtime reader), got a bit carried away …love this site, it’s made regain focus on my finances. 🙂
@ ermine
Property has historically had a closer correlation with general inflation than stocks, I think because the latter have ‘slipped’ and lost value during short bursts of very high inflation.
Also we are talking about rent vs mortgage payments here, and rents ought to be less volatile than house prices.
@ The Investor
Clearly you are right that both rent and mortgage interest are basically payment for a service and therefore not a total waste of money.
However, you could equally argue that becoming financially self-sufficient is better than either proposition, but only buying leads you to that destination.
This is really no different from saying it’s better to plant an apple tree than pay ‘dead money’ for apples for the rest of your life, or it’s better to install insulation than pay more for heating, etc, etc.
Inflation and leverage are two extra ingredients that make the choice to own rather than rent a no-brainer in an inflationary economy.
A very interesting perspective, and one that I’ve never considered (having up until now held the ‘renting is dead money’ view). In fact it actually makes me want to pay off my mortgage even faster, to get away from that pesky (building society) landlord… though to be fair he doesn’t bother me much.
I’ve never rented (I want and look forward to the security, that I will eventually get when mortgage free), though Paul S’s comment is worth noting (both lack of flexibility, and ball-and-chain).
If you buy a house with neighbors from hell, it can be difficult to sell and move on. With renting it’s (usually) 1-6 months notice depending on where in the agreement you are – regardless of your reasons.
Also, maintenance isn’t just leaky roofs or broken boilers. If you’re unlucky you could suffer an issue with subsidence, which could cost tens of thousands to rectify – again deciding to sell at this point could prove difficult.
Whilst not everyone does have these issues, I do know a worrying number of people who have had them.
It’s a thing worth saying Mr Monevator!
Somebody tells me that renting is chucking money down the drain every week! They say it while eating dinner in a rented house, under a roof, inside from the rain! 🙂
@The Investor
I think people typically view rent as dead money because -it’s money that could otherwise go toward servicing a leveraged investment-.
I don’t think they think about it in those terms, but all the ideas are probably there if you grilled someone: you get the house in 25 years; house prices go up; you can get a £250,0000 investment for just £25,000 deposit.
The point that interest on a mortgage is also dead money is how I rebut suggests I should buy as soon as possible, but it doesn’t cover all of the above.
Most of my renting was a room in a shared house. I always viewed renting a flat or house for my own sole use as being an extravagant waste of money, which would just make it harder to save up a deposit. In fact you’d find prices usually going up faster than you could save.
P.S. Sorry if a bit off topic but related to Elbow’s points, I’d be keen to hear how people split their ratio of savings to mortgage payments. I think I have been roughly 50:50 (mortgage:SIPP&ISA) for the last 6 years or so, but switching to 80:20 (mortgage:SIPP) now due to slight shift in goals, priorities and investment expectations.
Tax relief is all well and good, but have become more determined than ever to wipe out the mortgage in the next 5 years, while rates are low.
> Tax relief is all well and good, but have become more
> determined than ever to wipe out the mortgage in the
> next 5 years, while rates are low.
@SemiPassive – I think you have that backwards. You should be investing the money while rates are low, earning as much as possible at a rate higher than the mortgage, and then pay the mortgage off when rates rise.
Dead money… it’s dead money in the sense that your rent is paying the landlord’s mortgage instead of your own and likely a cushion above the cost of the landlord’s mortgage (or else your landlord is not very clever, though sometimes the landlord is relying on appreciation to provide long term capital gains instead of an income stream).
What we rent is usually a smaller property than what we buy, so a direct comparison between rents & mortgages is skewed unless you know the market value of your rented property.
Can’t really get a risk free rate higher than the mortgage, plus I may need to relocate in the next few years. That is too short an investment window to make a calculated gamble on shares and bonds that may be simultaneously hit by increasing rates anyway. Also anything invested in a SIPP I won’t be able to get back until 55. I intend clearing the mortgage way before then (I hope!). This is all personal preference and logic – I’m not suggesting it will offer the best returns.
Leveraged investments work very well until they don’t.
Inflation is not guaranteed.
@Robert
Inflation’s guaranteed, the question is whether your earnings will keep pace with it…
For those who like to compare notes, my current strategy is to max out my pension allowance first, then fill my and the wife’s ISAs, then any spare goes in savings accounts.
I reassess often, but at the moment the mortgage rate is lower than the post-tax return I get for instant access cash so I’m making minimum payments on an interest only basis.
In any case, I’d rather have a £100 mortgage and £50 of savings than a £50 mortgage and no savings. I think there’s cash to be made from outperformance and leverage while the low rates sun is shining, and when things chhange I can pay it down.
“Inflation’s guaranteed”: no. You can guarantee that our governments will want to promote inflation; you can’t guarantee that they’ll succeed.
In the days when I instructed bright young students, I’d tell ’em “interest is the rent you pay for money”. Mostly they were astonished by this revelation. Geeze, there’s a couple of generations horribly short-changed on their education.
A commenter in the FT put it succinctly, but I can’t find it, so I’ll repeat the argument here: when you leave your parents, you are short one house. Rent is the amount you pay to maintain a short position in the housing market. So hardly wasted money.
The non-economic case for home ownership hasn’t been made here, so I will make it for the sense of balance…. Why I enjoy my not-yet-fully-paid-for-home regardless of the financial sense or otherwise of owning it.
Even for us working-at-financial-independence types, surely sometimes there are things we do that are beyond the driest of financially ‘correct’ of choices.
1. I have been able to decorate & furnish it to my exact tastes (a lot more expense, yes, but as someone who enjoys cooking I gain much happiness for having built my perfect kitchen in which to spend time).
2. I can make changes to the house whenever I want: nails into walls, shelves up, cat flap in back door etc without needing to seek permission.
3. I can make long term decisions that benefit my family & I as a result of home ownership. Examples: taking the effort to level the front garden to put a bike shed up for the kids bikes. Or when the boiler breaks I can choose to replace it with the best (most efficient) the market offers rather than just the cheapest thing a landlord feels they can get away with).
4. you can be more protected from rental price increases as a growing family if you buy well. I’ve got a couple of kids now, so if renting the place I own I would have needed to have moved locally to rent a larger property within the same school catchment….. this would have costed hideously more money in rent over the next 8+ yrs of my life…. in comparison I was able to add rooms in our loft for about 35K, which in the long term I will recoup either by downsizing in retirement (or my kids benefit from the inheritance of a larger more valuable property).
I could go on, but I think that makes the point. My house is certainly my most illiquid asset in my portfolio, but it’s certainly my favourite.
@ dearieme
OK, my inflation comment was a little glib, but consider some specifics for the UK right now.
The UK has its own currency and central bank. The Bank of England is mandated to target CPI inflation of 2.0% p.a. Whether the levers they pull actually change the direction HMS UK is travelling in is debatable, that’s their aim and they have a suite of tried and as yet untried options to achieve it, e.g. base interest rate changes, QE, gilt cancellation, money printing, FLS, exhange rate interventions, currency pegs, devaluation, reducing additional capital requirements for lenders etc etc.
We are in the midst of one of the most severe economic downturns seen in the last century (complete with many possible causes of deflation) however the Governor of the BoE has written a ‘Dear Chancellor’ apology for inflation being over-target for the past 46 consecutive months. It’s in the UK’s blood: there’s been persistant recurring bouts of high-inflation since the end of WWII.
The UK government issues predominantly fixed interest debt. This can only be dealt with by repaying it with tax receipts funded by economic activity, inflating it away, or default. Inflation is an easy way out and offers a ‘soft-default’ means of welching on debt without actually ‘defaulting’ by not meeting a coupon or principal payment.
Globally, central banks are engaging in a race-to-the-bottom currency devaluation, which has lead to tidal waves of liquidity sloshing round the economic system. This is funnelled into asset price increases, and is manifesting in increasing costs of commodities and energy, hence fuelling increasing imported inflation.
Never say never and all that, but I’m certainly not currently positioning a significant part of my portfolio to protect against deflation.
@mcwooster
I first heard that on the Zikomo letter website via Mr Money Mustache but the original site is down.
His premise was that you are born needing somewhere to live but don’t have it, hence you are short ‘housing’. My own take on this is that to hedge your position you need only the most basic provision and you can achieve this either by renting or buying. Buying a house bigger than you need makes you ‘long’ housing rather than neutral. Disclosure: I’m long housing, not down to any particularly bullish financial outlook but from the more intangible perspective of wanting a nice house to live in.
I don’t see a great deal of difference financially speaking between paying rent to a landlord (representing the cost of the landlord acquiring and maintaining the property plus a little extra for covering voids and profit) and renting cash from a bank in the form of a mortgage (representing the cost of the bank aquiring and capitalising the funds plus a little extra for covering defaults and profit). Indeed, if you own your house outright, you are still paying for it indirectly through the opportunity cost of not investing the capital tied up in it – but you keep your own profits at the expense of underwriting your own risk. These costs will all change over time so the skill (or luck) comes from deciding which is best.
@ The Edge
You say inflation is inevitable and then you add:
“I don’t see a great deal of difference financially speaking between paying rent to a landlord (representing the cost of the landlord acquiring and maintaining the property plus a little extra for covering voids and profit) and renting cash from a bank in the form of a mortgage (representing the cost of the bank aquiring and capitalising the funds plus a little extra for covering defaults and profit).”
How do you square these two views? Surely in an inflationary economy the rent will keep getting bigger and the mortgage will keep getting smaller. Or to put it another way, compounding is working against the Investor but in favour of his sister.
And that’s without even considering leverage and house prices.
I am a landlord and I find it frustrating that Banks after 20+ years of advertising seem to get better thought of than a landlord,maybe it is because nobody fights our corner.
I like the way you have explained renting and owning and this is very close to how I explain renting.
Most people don’t link the price of rent to the price of property and one of the most moaned about things is the high price of rent,how I explain it is that they are borrowing my equity at x% a month.
Let’s face it if I could buy a property for £50,000 it would be let out for a far less rate than if I bought at £200,000 so rents are a consequence of high property prices which in turn are a consequence of the banks over lending and loose government policy to push prices ever higher.
But who is it that gets the blame for high rents,the greedy landlord that gets 6% return on the equity in his rental property.
Also many rents are cheaper than deposit and mortgage rates,I have worked one of mine out to be £200 per month cheaper than buying.Now that’s not to be sniffed at!
@BeatTheSeasons
I was trying to make the point that rent and mortgage interest are both recurring housing expenses that I would classify in the same way – regular money out of the door in exchange for housing. The opportunity cost of capital tied up in a property to live in is really an absence of money in, which I think amounts to the same thing…not making £10 is the same as spending £10.
Contrast with making a mortgage capital payment which can be thought of as a transfer between one’s current account and mortgage account; it’s a cash flow but it has no impact on balance sheet/net worth.
“Surely in an inflationary economy…the mortgage will keep getting smaller. ”
Not sure I completely agree with you on that.
My understanding is that an economy experiencing inflation simply means that the purchasing power of the currency is falling. This *can* be accompanied by rises to nominal wages to compensate, like in the 70s, but not always.
This current recession is a clear example of one where wages are not keeping up in real terms with prices, leading to a fall in discretionary income. For the 70s debtor, as wages rose, the apparent cost of the fixed mortgage payments fell, but someone experiencing average wage growth who locked into a 5 year interest-only fix at the end of 2008 would have had a very different experience.
What’s quite strange though is how the second most biggest purchase we have in our lives seems to be rented with no such issues or alarms ringing. A car. Most people I know rent their car for two years then trade up after the two years without ever owning the car. Is renting a house that much different?
Home owner’s in the last 10 years have been blessed with low and stagnant interest rates subsidized by savings account owner’s, the risk is this can’t last forever. High inflation is supposed to be fought with increased interest rates but this will be avoided to inflate the national debt away and to stop people getting there properties repossessed, the question is for how long.
It’s OK to use hindsight to say you have done better than renting. But on the other hand if someone buys a London property at the top then the interest rates sky rocket sending prices spiraling down then it’s the renter who will gain. The government might have kicked the can down the road but when the London bubble bursts (this might be saved for after the next elections) it might look different.
Buying is always good at the right price but what and when will that be. Property has been manipulated for so long it’s hard to tell what a good price is anymore.
@mcwooster
> when you leave your parents, you are short one house
Yes, I need to live somewhere, but I also need to eat. Am I therefore also short of a farm and a vineyard? I reckon that most people would agree that I do not need to own a farm, now or ever, in order to eat three square meals a day. By the same token, I do not need to ever own a house in order to have a roof over my head: both food and housing are basic needs of millions of people, served by well-developed respective markets, so essentially the same logic applies. The ‘naturally short of housing’ argument is a fallacy that sounds convincing because it implicitly utilises the fact that many people will eventually own a house, while very few people will ever own a farm or a vineyard. Of course, if we assume that eventually buying a house is the natural order of things rather than a habit of the previous generation or two, then renters can be reasonably seen as shorting the housing market. But I do not agree with this assumption at all (which has not prevented me from owning several properties :-)).
@ Emanon ltd, I think the key difference in most people’s minds between house and car purchase is that historically at least the former has appreciated (over mid to long periods and nominally speaking) whereas the latter is notorious for depreciating quickly.
These facts alone don’t make it a wise choice to buy one and rent the other but I do think they play a large part in the emotive psychology that we see around these issues especially in the UK.
@the investor, thanks for the post, I will sign post a few friends this way as I get ever more exasperated by people who claim rent is throwing money down the drain!
@ everyone, interesting article on page 2 of the FT today about how London’s house prices may have peaked. Let’s hope so, something has to change before the life and soul is sucked totally from this great city of ours…
@ oldthinker
That’s an interesting perspective and I hadn’t thought about it like that. Of course, until a few generations ago it was quite common to keep chickens or rabbits, grow your own vegetables, collect your own firewood, etc – as it still is in many parts of the world.
You could say that the general progression from self-reliance to specialisation, whilst making us all richer overall, does increase risk for individuals by making us ‘short’ on a lot more necessities.
When I look at the ermine’s simple-living-in-suffolk set-up with his paid for house, wood burning stove and community farm I see far greater financial resilience than you get from a portfolio of financial assets designed to cover expenses for the rest of your life. I think he calls it ‘seizing the means of production’!
@BeatTheSeasons
Sidetracking somewhat but you could argue that capitalism/consumerism has made us less dependant on our own ability and has made us more reliant on the ability of others to provide for us – at a cost?
I’m not a very political person but whoever can make us more reliant on ourselves (not the state) and bridge the gap between rich and poor gets my vote. Sadly no appears to have the guts to go against the grain..
“I think he calls it ‘seizing the means of production’!” That will work against him when King Anthony gives Peter, Duke of East Anglia, permission to seize Ermine’s patch. Having a shotgun won’t be much help. Nor gold buried under the dung heap.
I have a general morgage related enquiry that I am not sure where to post, so thought here was as good as anywhere…
I have c. £20,000 in cash that I am saving up to go towards a housing deposit at some point over the next 3 years hopefully. My question is whether I should leave this money in cash (it is currently getting c. 3% interest on average, invest it in a socks and shares ISA or do some mixture of the two? I understand that the latter is risky, and you should not really invest if you are likely to need the money in the next 5 years, but I would just like other people’s opinion on what they would do in my situation. I am currently living at home, so not paying any rent , and there is no pressure for me to move out, so if I did invest and it did go badly, and I had to delay my housing purchase it would not be the end of the world.
Really stuck on this one so any opinion would be greatly appreciated!
Actually, a mortgage, and all forms of debt are money rented from your future self. The interest is the bank’s fee on money you borrow from yourself.
I agree that “home ownership” which is really “mortgage paymentship” is a horrible financial choice that too many people make.
Welcome back after 10 years! What a ride, eh? I’ve updated this article slightly to reflect the situation prevailing in 2023.
Also, both myself and my sister have bought our own places since 2013.
But I left my sister in renting as a writer-ly device, which is pretty useful by her standards… 😉
Our experience in the UK is mostly one of seeing a property purchase as “the grown up option” make loads of money for free, minimal taxation for owner/occupiers, minimal perceived risk whilst deploying huge amounts of leverage, alongside the rental option being perceived as poor quality, insecure and the losers option.
It goes wrong from time to time but long term home ownership always seems to work out, will it always be this way though ?
The downside of buying is a huge loss of choice, as time goes by and you are tied down by commitments, the flexibility of renting may be sorely missed.
The fixing of future housing costs against inflation is becoming more noticeable in the current environment, so probably the right choice for many but I can see that if renting was more attractive in terms of costs, quality and security it could be a great lifestyle choice, particularly for those who are older, the advantages of buying go into reverse as you get older, far better to sell and rent rather than equity release.
@HariSeldon there’s an interesting topic for discussion – sell and rent rather than equity release .. my late father sold and rented when he was around 80 and it worked out well for him.
(He sold a place that was too big for him on his own and moved into a flat on the high street of a lively and fair sized village that he couldn’t have afforded to buy.
Great article. The other point about houses is the opportunity cost.
its not quite akin to putting money jn a car by buying outright as that’s a depreciating asset but for example I have circa 300k in equity sat in my house.
There is ample evidence I’d be better wacking up the mortgage and using this elsewhere for better returns .
I have in fact done this with the rest of the money I have by doing much like you and going interest only on a mortgage ( not brave enough to leverage any higher) but it does amuse me that people don’t seem to realise you’re actually risking more yourself by having more equity in your home .
Until you’ve paid the damn thing off the ‘safest’ thing from a networth pov is having as little as possible in your house. That way if your house is repossessed you only lose the deposit .
Or as you say renting and using the returns on equity to pay the rent
Although you wouldn’t get much round my way for 4% on 300k
@fatbritabroad — alas that’s not correct. In the U.K. you remain liable for the outstanding mortgage balance even if you sell your home with negative equity!
The way to think of it is you get your exposure to the property market when you buy the home (the price you pay and what you get for it).
Everything after that is a financing decision.
Ahh yes quite I hadn’t allowed for the negative equity scenario
But the point remains if there’s enough to clear the mortgage . You still lose what equity you have in the house
@Brendan
The “leveraged investment” thesis doesn’t hold water for a house that you live in. You can’t realize those gains, because that would mean you are now homeless. And another home you buy will have gone up in value just as much. In fact, around here you pay some 10% in taxes and fees, so a even quick like-for-like swap after ten years of gains will fill that mortgage back up by >20% of the original value. At the same time, I know plenty of people who have gone without rent increases for 20 years.
@HariSeldon #40
> if renting was more attractive in terms of costs, quality and security it could be a great lifestyle choice, particularly for those who are older
I wouldn’t necessarily be averse to the idea, and I never understand why people buy retirement flats rather than rent them, but the reality is that the experience of renting in Britain is horrible, because all the advantages accrue to the landlords who until recently had captured politicians, and many in the space are amateurs too, in the sense of rank amateurs. The devil is in the detail – private renting in the UK is dear, quality is crap and security of tenure is non-existent. I hated it in my twenties, and renting seems to have gotten even dearer and more vile in the intervening three decades.
Perhaps the way to do it is the ageing film-star model – long-term rent a suite in a decent hotel in your dotage 😉
> The downside of buying is a huge loss of choice
If that’s the case as people get older perhaps they’re carrying too much house. They could do worse than follow Jake’s FIRE-side chat lead and move out of the hyper-expensive parts of the UK. My ISA is worth more than my house, that’s not because I am a hot-handed investing whiz but because I live in a modest provincial town rather than London, and geo-arbitrage works within the UK too. I’m not well off enough or old enough to do the ageing film star thing, but I don’t regard the capital tied up in the house as a huge sterilisation of net worth, most of it earns me money through investment income rather than the part that saves me paying rent to a BTL slumlord.
I think this is an interesting way to look at home ownership but certainly in most of the UK the odds are stacked against renters, so it’s in my view a no brainer that buying is better if you can do it. Not only is the experience of renting horrible, as Ermine says, but in many areas it’s actually cheaper to pay a mortgage (or rent the money) than to pay rent on an equivalent property. And by getting a mortgage you also benefit from any increase in the capital value of the property, and ultimately if you have a repayment mortgage your housing costs will reduce considerably towards the end of your life, when your income might also drop. The downside is of course whether you are able to save a sufficient deposit to be able to access a mortgage- tougher still for those who don’t have access to a solvent bank of mum’n’dad
On a different note my medium term plans also include some domestic geo arbitrage- ridiculously my house on the south coast has recently been valued at £325k more than we paid for it a bit less than 5 years ago- considerably more than we have had to shell out on fixing some of the issues (although that didn’t feel cheap at the time). And the kids have relocated to the north of England, so we are likely to move to be closer to them, not just to release some equity
@niwax on the flip side, today I was in a bit of south west London that I used to rent in. When I left a 2 bed was £1200 pcm. It’s now between £2000 and £2300. If you didn’t want to leave due to a job, or family commitments e.g. aging parents or children in a good school, you would be really struggling. When it takes nearly a median salary to just pay to keep a roof over your head, something is very broken.
I was lucky to buy right place right time out of London, then leverage that to get a flat in North London as well.
An interesting and important topic, and one I first read 10 years or so ago when I first came across monevator. Then it certainly opened my eyes to the upside of renting. I was looking to paying off my interst only home loan at my early-ish retirement at 60, but facing the problem of how to move from the Midlands to an expensive small town just west of London to be near my youngest daughter as she was planning to start a family and I wanted to be a hands-on grandad. Selling my lovely Edwardian villa in a smart part of Birmingham was going to downsize me to a 1-bed studio flat above a kebab shop. No thanks.
Turns out the solution, so far, has been renting property. I’ve had two places in six years: a three-bed, new-buiold terrace with a loft conversion and 2 bathrooms smack in the centre of town just off the market square, and now a huge 1-bed modern warehouse conversion over two floors also in the town centre. Nether of these properties is anywhere near what I could afford to buy outright. However, investing my house sale proceeds wisely (thanks Monevator!) and being sanguine about memes such as ‘rent is throwing money away’ and ‘property is the best investment’ has served me well, so far. I think after rental and associated outgoings, my portfolio has 1-2% real returns over the past 6 years. So I’m at least breaking even and maybe a bit better off. But I get to live in properties much more expensive than I could buy myself, just down the road from my daughter and growing grandchildren.
So this sort of bears out what @HariSeldon #40 said:
“if renting was more attractive in terms of costs, quality and security it could be a great lifestyle choice, particularly for those who are older, the advantages of buying go into reverse as you get older, far better to sell and rent rather than equity release.”
However there is something in the view expressed by @ermine #47
“..the experience of renting in Britain is horrible, because all the advantages accrue to the landlords who until recently had captured politicians, and many in the space are amateurs too, in the sense of rank amateurs. The devil is in the detail – private renting in the UK is dear, quality is crap and security of tenure is non-existent. ”
I did have one forced move already – BTL landlord decided to sell up (then didn’t, but by then I’d already moved, ffs). There really is something wrong with UK property all round, buying and renting, in all manner of ways. With the increase in interest rates and changes to taxation that affect BTL landlords I imagine it is a far less attractive propsition than it was and that there might be a lot of landlords that decide to divest themselves of their properties in the next couple of years. From my perspective I could be facing rapidly escalating rental costs, that maybe I will be able to bear, but maybe it will become too much of a stretch. The other thing that is tricky is that the number of suitable rental properties is very small, i.e. there is very little choice at my price point – or any price point to be honest – there just isn’t that much rented out in my town.
One valuable feature of renting not brought out in the article is that you can easily walk away from a rental property. Neighbours parking on your front lawn or chucking crap over your hedge? You don’t have to put up with it or fight with them, simply push off to a quieter location. It turns out your lovely street is a popular late-night racetrack for local pistonheads or a cut-through for multitudes of pissed up teenagers on their way back from Wetherspoons? Same solution.
To ramble off on a final tangent…
@HariSeldon #40 mentioned equity release:
“as you get older, far better to sell and rent rather than equity release”
Coincidentaly just the other week I came across an article (that frustratingly I can’t put my mouse pointer on now) that pointed out that you can get an equity release style product on a property other than the one you are in. The deal is the lender will currently put up 33% (at my age, 67, +1/-1% per year older/younger) with an interest rate of about 5%. This is an intest only deal, but crucially the interest is accrued in the repayment outstanding when the property is sold (on death or whatever). So in my circs I can put down 67% deposit and live ‘rent free’ in the sense that people tend to use when you’ve paid off your mortgage. Payments against the oustanding amount are allowed, but I don’t see much point in that TBH. Given house prices will inflate at about the same rate as the repayment outstanding I think roughly my estate would end up with about the same real value it has now. The effect for me is I can buy a property that is about 50% more expensive than I can afford without this finance scheme. Now, I’m not totally sold on this, but it does provide an alternative to having to leave the area if rents become too expensive or the available pool of suitable rental properties dries up totally. Or if longer term I just get to the point where the risk of a forced move are just unacceptable. For now I’ll stick to renting and consider purchasing as a last resort.
@IanH (50) A former work colleague of mine, whom I meet up with quite regularly, has just moved into a new-build property part-financed by equity release in the manner you describe. I’m not sure of his exact age but is around 65.
It isn’t something I would be comfortable with, but it seems a feasible approach for those more relaxed about carrying a lifelong debt than I am.
This reminded me of my favourite love-to-hate phrase: “we’ve just bought a house!”…oh really? Stop paying the mortgage and you’ll see what you’ve actually ‘bought’. I suppose, “we’ve just agreed to rent from the bank!” doesn’t have quite the same ring to it though 😛
I took one of the less obvious routes of renting crap places in cities with good jobs, saving up enough to buy a modest place outright (it took 10 years) in a cheaper area. I did this by the time I was 40.
Would I do it again? I’m not sure. I saved rather than invested which might have meant I got there earlier. I’m pretty sure the average place in my target area went up by at least 40% over those ten years (but at the time, my employer wouldn’t have considered working from home an option, and tbf I probably wouldn’t have considered my eventual target area as one either – it turns out what you want from life is different at 40 than 30). Also my income went up by well over 40%, and I benefited from a motivated seller, a dip in the market and a few other bits of luck which meant I wasn’t really subject to that level of house inflation.
Then there were the other aspects as it turns out that renting crappy places at the bottom of the ladder while doable, isn’t always fun. It was a times, utterly dickensian. Remember the tough winters around 2010? We were living in a house with only a single gas fire for heating – and then the gas engineer disabled it as unsafe. We had ice on the inside of the wooden front door, never mind the windows… I’m amazed my missus kept the faith, and frankly she was questioning my unorthodox approach at least several times a month, sometimes daily! In some ways, we didn’t have a choice – both of us have health issues which meant we couldn’t guarantee to be working for 25 years and I suspect a mortgage would have only added to them.
But as they say, endings are more important than beginnings and the contrast between renting those crappy places and the house we’ve owned for ten years is papable. I still regularly wake up and have to pinch myself.
It is nigh on impossible to describe just how rubbish renting in London is, and I don’t think that there is even a golden age to look back too.
Just this week I have had one person on a hard to get management track quit for a more junior role in Brum. Partly to be nearer family but mostly because his rent in Wembley has jumped by over 25% in a single year to over £2K a month. To stress, over £2k in bleeding Wembley!
This same week I met a new customer who is on secondment for two years from Australia. Within minutes we veer from the exciting subjects (ITIL, SLA’s etc) and they start asking me how real Londoners find homes, because firm supplied accommodation is for four weeks, they have not found anything yet, and that’s just not possible in a city this big. My first thought was to suggest looking beyond Clapham, but she had been looking as far out as Surbiton.
In theory market forces should do their thing and enough people will move out refuse to move in, but it’s really rubbish in the here and now.
@all — I’m happy for people to discuss the pros and cons of renting here, but I want to reiterate — as I said in the article — that this is not a piece in favour of renting versus buying, or vice-versa.
It is simply a different prism to looking at the decision, when it involves a mortgage, and a bit of a disentanglement of the platitude that ‘renting is dead money’. I think we make better decisions usually when we see what is taking place on an underlying level.
Fully agree renting in the UK is at best a mixed bag. I did it for 25+ years, and I noted those who championed it almost invariably owned.
@BillG you raise an important question:
If the market is so broken that incomes don’t cover rents, at what point does it fall over, taking down house prices – which affects both BTL landlords as well as those with residential properties they were hoping to borrow against/sell to fund retirement?
Even if you own your home outright, you’re not living there for free. That’s a bunch of money tied up in a non-productive asset (indeed, a cash-consuming asset), which could be invested in productive assets instead.
The money tied up in a fully-owned £500k house for example might reasonably produce £35k a year if invested alternatively in the stock market.
Looking at it from a clinicial financial point of view is all well and good but the article fails to mention the downsides of renting.
Most rental contracts come with strict stipulations that dictate what you can and cannot do during your time in your landlord’s investment vehicle. Painting the walls is out of the question, owning pets is a no-no and don’t put pictures on the wall or make holes.
Landlords and their agents have the right to enter the property for any matter as long as 24 hours notice has been given. Landlords can evict you through no fault of your own, and raise rents to meet market rates.
It’s fine for 12 months, but once you’ve been renting a shoebox in London for 10 years, renting kinda sucks, you never feel like you have a home.
I’m a homeowner, and I’ve never rented, but you neglect to mention the most important point in all of this, the one that makes renting in the UK suck, which is that there are far more bad landlords than good landlords – so, given that this is the case, who in their right mind wouldn’t rather be their own landlord (even if it is with money rented from the bank, as you put it)?! I suggest a listen to Michael Walker’s excellent podcast Crash Course to see the other side of the coin just a wee bit more.
@all — Thanks again for the comments. I don’t know how many times I have to write in the article and in the comments that this article was not about the case for renting over buying or vice versa, but this article was not about renting versus buying or vice versa.
The way that everyone expects discussions of any aspect of housing finance (see also the comments on my articles on whether your home is an asset class, interest-only mortgages, etc) to become an emotional discussion about the practical vagaries of the UK property market is a big tell about how people think about this asset class IMHO 🙂
Here’s an article about the benefits of being, effectively, your own tenant:
https://monevator.com/why-you-might-be-your-own-diamond-of-a-dream-tenant/
@TheInvestor how is property treated in other countries eg EU, USA etc?
Good article, quite clear there are a lot of “renting is dead money” advocates in the comments. Regardless of the security and the bad landlords renting allows you to move to get away from bad landlords and if bad neighbours move in you can always go leave