Is it cheaper to buy a house or rent?

The decision to rent or buy a house is a quandary that many people will face. Renting gives you more freedom allowing you to pack up and move anywhere you want when the rental agreement runs out. Whereas home ownership can make you feel tied down – forever routed to the one area, especially if you have a long mortgage deal.

However, owning your home gives you more freedom in your own property. You can decorate however you like, and you don’t need to answer to a landlord. Also, getting a foot on the property ladder is a long-term investment. All your mortgage payments bring you closer and closer to full ownership of a valuable asset. This is instead of paying rent each month with anything to show for it.

However, for some people owning a home isn’t even a reality. The current cost of living crisis means some people do not have enough disposable income to save for a deposit. For them, the only option is to scrape by and hope that costs become more affordable.

For those that can afford the upfront costs, there are plenty of pros and cons to consider when deciding to buy or rent. We’ll take a look at whether it is cheaper to buy a house or rent.

Why is it so hard for first-time buyers?

It is often speculated that it is now harder for first-time buyers to make it onto the property ladder than for previous generations. Older generations often attribute this to the hedonistic wasteful lifestyles of millennials. However, figures show it is financially harder for fist time buyers now than at any point in the last 50 years. This is because wages have not risen in line with mortgages. In 2021 the average home cost 58.4 times more than in 1971. In that same period, wages only rose 30.7 times higher. In that 50-year period, house prices rose nearly twice as much as wages. This means it was considerably cheaper to enter the housing market in previous years.

Rising house prices have continued into 2022 despite the Bank of England warning of a recession and rising living costs. Monthly rent also increased by 2.7% from 2021 to 2022. This means that whether you are renting a home or buying, you are still paying out more.

However, in 2021 a government-backed scheme was launched, allowing buyers to purchase property with only a 5% deposit. However, a 5% deposit mortgage presents a higher risk to lenders. So, interest rates will be higher, meaning you still pay more in the long run.

Rent vs mortgage deposits

As rental deposits are sums of money held as insurance that you continue to pay rent and don’t damage the property, you should, in theory, get it back when you leave. However, in reality, things can be less than straightforward. For example, if the landlord decides you have damaged the property, they may try and deduct or keep the full amount for damages. As reasonable wear and tear is subjective, even minor damages can lead to problems. Therefore if you rent, especially if you move often, you should always take into account there is no guarantee you will get your deposit back.

The average monthly rent in the UK is £1,113. So, as rental deposits normally equate to five weeks of rent, the average deposit is around £1,370. This means the average renter needs to put down nearly two and a half thousand pounds before they even step foot in the property.

Mortgage deposits are based on property prices. The latest figures show the average UK house price is £286,000. So, for a ten per cent deposit, a person will have to put down £28,600 – nearly 30 grand! Even with the new 5% deposit scheme that is £14,300.

However, even though mortgage deposits are much higher, you are paying towards ownership. So, in the long run, you are building an asset.

Monthly rent vs mortgage payments

Using Halifax figures Which? estimate the average monthly mortgage payment to be £759. However, this can vary wildly from one person to the next. This is because there are so many factors that can influence mortgage rates. For example, if you have bad credit, you will likely have higher mortgage repayments than someone with good credit. Conversely, someone with a bigger deposit will likely have smaller mortgage repayments than someone with a small deposit.

However, using these average figures, monthly payments are substantially cheaper for mortgages. Even if we reduce Statista’s average rent figure of £1,113 to Which’s estimation of £874, monthly repayments are still cheaper.

Also, as renting does not pay for anything but memories, you essentially pay more to own nothing. When you get a mortgage, you are paying towards complete ownership rather than essentially hiring a living space. So, arguably even if renting was cheaper in the short term, it buys nothing, meaning it is more expensive in the end.

Rent vs mortgage maintenance costs

This is one of the main areas that renters really benefit from. This is because if any major repair work is needed on the property, it is the responsibility of the landlord. This includes:

  • External and interior structural repair (walls, windows, external doors and stairs)
  • Guttering drains and external piping
  • Bathroom repairs – sinks and basins, toilets, and baths
  • Gas appliances such as boilers and cookers
  • Electric repairs (lighting/wiring etc)
  • Heating and hot water

When you buy a property, you are entirely responsible for these extra costs if something in the house goes wrong. For example, the cost of replacing a broken boiler can range from £600 to £2,500. These additional costs could stretch a homeowner’s budget beyond their means. Especially first-time buyers who have put every penny they earn into saving for and buying a property.

Additional costs of buying a house

When you buy a house instead of renting, you also need to take into account any extra costs. For example, depending on the property value, you may need to pay stamp duty. The rates at which you pay increase incrementally along with property prices. The stamp duty rate and the rate-free amount varies across each country in the UK. The average UK property is in the 5% range. By law, you cannot use a credit card to pay for this. So, you will likely have to pay upfront, take out an additional loan, or add the cost to your mortgage deal.

You also need to pay legal fees when buying a house. These conveyancing fees ensure solicitors complete paperwork to make the purchase legally binding. This is typically around £850-£1,500 with an additional £250-£300 for local searches. Mortgage providers will perform a valuation on properties before they lend out money. This can cost anywhere in the region of £150-£1,500, with more expensive properties costing more. A mortgage lender may charge you for this, or in some cases, this service is completely free.

To ensure a property is in a good structural state and, therefore, a good investment, you should get a survey done on the building. Survey fees cost around £250 – £600. You also even have to pay the cost of transferring the mortgage amount from the lender to the solicitor. This usually costs around the £50 mark. If you are selling your old property and buying a new one, you will also have to pay estate agent fees. This could be a percentage of the sale, usually between 1-3%, or it could be a fixed price.

Renters and home buyers may both need to hire removal specialists. The cost of this is normally around £300 – £600. However, renters may not need to do this if they move into a fully furnished home, as all the furniture and appliances they need are already there. Both parties could also reduce the cost of this by hiring a van themselves or contacting a friend with a van that is willing to help.

What are the disadvantages of renting?

All these alarming extra costs totalling thousands of pounds can put a first-time buyer off. It all depends on how much disposable income you have. You may have enough to comfortably absorb the extra charges, you may have enough to take a risk, or it may not be financially possible. For those still trying to weigh up buying a home versus renting, let’s take a look at some of the disadvantages of being a tenant.

Firstly there is a psychological element. For some people, the thought of paying the monthly cost just to pay the landlord’s mortgage is aggravating. This is especially so if you do not like your landlord. You also have less freedom to live your life the way you want to. Tenancy rules may dictate that you cannot redecorate or own pets. So, if you love animals or the decor is not to your taste, you may be stuck in that sad scenario.

There is also a higher degree of instability when renting a home. For example, if your landlord wants to sell the house at the end of your agreed tenancy, you have no choice but to move. For example, the average price of housing may spike as it did in 2021 – 2022. Landlords may choose to sell at an inflated price while the market is still high. They may also choose to increase rent prices at the end of your tenancy. If you cannot afford or do not agree to the new rent price, you will have to move.

What are the disadvantages of buying a house?

One of the key differences between buying and renting is flexibility. For example, it is not as easy to move when you own a home. The selling process can be lengthy, so renting may be better for globe trotters. Also, if you have a joint mortgage with a partner and you separate, it complicates things. You will both have to reach an agreement about whether or not to sell the property or whether or not someone can take over the mortgage.

If anything goes wrong with the property, you will have to incur the costs of repair. Also, you run the risk of the property losing value, making it worth less than what you paid for it. This is known as negative equity. As there was a property buying frenzy during 2021-22 ahead of a predicted recession, this is a possible scenario for many.

Also, if you lose your job or for any other reason cannot afford to pay the mortgage, you could face additional charges. This can quickly spiral into an unaffordable debt cycle. If you fall too far behind, your home could be repossessed. Plus, unless you have a fixed-rate mortgage, your repayments will become more expensive when the term ends, and interest rates rise. Interestingly, a recession may actually improve the affordability of mortgage payments. This is because interest rates normally decline during a recession.