In real estate, there’s often a fierce debate about the better living situation from a financial perspective: renting a home or purchasing one. There are pros and cons to both options, and, sadly, many people feel pressured into one path, only to find out that the other one may have suited them better. Some may think owning a home is the “right” action since it builds equity. Others may feel that renting is the “right” action because it has a much more predictable financial path as there are no massive unexpected maintenance costs. As we’ll see, both of these lines of logic are true, and when considering whether to rent vs buy a house, you need to weigh the pros and cons!
Rent vs Buy a House: A Mathematical Breakdown
Before getting into a list of the pros and cons in more detail, it’s worth first reviewing the financial outlook for each option in the current market here in the UK. Put another way, what can one expect to be paying for each option?
The average selling price for a home has increased significantly in previous years, partly thanks to inflation. Indeed, according to ONS, the average cost for a home in the UK is now £295,000. Given the current trajectory, that number is likely rapidly climbing. And, in London, that figure nearly doubles to £542,311.
Assuming good credit, 20% down, and a 25-year term, the monthly payment on the average London home would be approximately £2,451.50.
By contrast, the average rent price in the UK was £1,162 per calendar month outside of London, and within the greater London area, that rate doubled to £2,343.
Superficially, on a per calendar month basis, it would appear as though renting and buying are about equal, just that with buying, you’ll need the initial down payment, and you’ll build equity.
However, not included in these calculations are Council Tax rates, general maintenance costs on the property, utilities, and other miscellaneous expenditures that go into owning a house. The general rule of thumb is that people should budget between 1% and 4% of their home’s value for maintenance. These additional fees and “hidden” costs can easily average a few thousand pounds per year on top of the mortgage.
With this mathematical breakdown in mind, here are three pros and three cons of owning a home.
Pro: You Build Equity
As mentioned above, the most obvious pro to owning a home is that you build equity. Unlike rent, you pay off the house when you pay your mortgage. Eventually, after 25 years, you won’t even have a mortgage! For some, this may not seem like a huge deal. However, when you approach retirement, many people find it significantly easier to reduce their income when they don’t have a mortgage. With rent, you’ll have that expenditure for life.
That equity can have other advantages, too. You can use the equity in your home as a down payment toward another house. You can also take a home equity loan if you ever find yourself in a financial pinch or you need to finance a large purchase. Of course, if you tap into your home’s equity, you’ll have to pay it, so it doesn’t jeopardise your homeownership.
If you have children or plan to have children at some point, it is also worth noting that you can pass the home, and the equity within it, to your children.
The equity stored in a home has many uses and can be very beneficial in numerous scenarios. It’s one of the most substantial pros of owning a home!
Pro: You Can Customise Your Home as You See Fit
If you’ve ever rented a flat, you likely know you don’t have substantial control over the unit’s customisations. For example, if you don’t like the unit’s countertops, you cannot buy the new ones you want.
When you buy a home, you’ll be able to customise it however you want. If you want to add or remove rooms, update fixtures, or change the interior paint colour, the only limit you have is your budget.
As many people like to customise their homes to make them feel like, well, home, this tends to be one of the more significant pros of buying a home.
Pro: One Day, You Won’t Have a Mortgage Payment
If you stay in the same home for 25 years, or however long your mortgage amortisation period is, you won’t have any mortgage payment to make one day.
While 25 years may sound like a very long way away, not having a mortgage payment can make retirement significantly easier. In fact, not having a mortgage payment can be the difference between retirement being possible and impossible.
Recall the average rent and mortgage payments for a London home, £2,343 and £2,451, respectively. The full State Pension is only £185.15 per week, which is not even 50% of the average rent on a London flat. However, if you’ve paid off your mortgage, you could use that money towards your basic necessities instead of putting a roof over your head.
Con: There’s Less Flexibility
With a flat, you can choose not to renew the lease if you want to move elsewhere. Vacating the premises is a more substantial endeavour with a mortgage, as you need to sell your existing property and purchase another one. If the market isn’t good, interest rates are high, or your area has been experiencing a slump, you may find it challenging to sell your existing home at a price you want.
If you have a temporary job or don’t expect to live in your new residence long-term, renting can make a lot of sense as it will give you the flexibility to leave whenever you want.
Con: Owning Can Have Huge Maintenance Bills
While the average person might spend between 1% and 4% of their home’s value on repairs, it’s important to remember that’s an average. You might need a new roof, which can cost tens of thousands of pounds. Or, you might need to replace the insulation in your home, which can be expensive.
Repairs add up quickly. And while you can defer some repairs, others need to be done immediately. For example, if you accidentally put a hole in the wall while moving some furniture, you can probably defer that. However, if your roof leaks or your faucet breaks, and water’s gushing out, you’ll need to address those immediately before further damage happens.
Since you don’t know when you’ll need to do these substantial repairs, many people recommend saving a significant cushion “just in case.”
The landlord is responsible for these repairs with a rental, not you. All you need to pay is your monthly rent cheque!
Con: Homeownership Is More Expensive per Calendar Month
Owning a home is usually more expensive per calendar month than renting. Of course, this doesn’t consider living space, but the average flat cost in the UK is less than the average mortgage cost, even after factoring in a 20% down payment.
Then, you’ll need to consider maintenance costs, taxes, and other fees for owning a home.
If you find yourself on a bit more of a fixed budget, renting is a great way to ensure a fixed housing cost per calendar month that’s usually a bit less than owning a home. While you’re not building equity, renting can sometimes be a great way to save a cash cushion or a “rainy day” fund. Depending on your financial circumstances, having cash might be more valuable than having equity.
Rent vs Buy a House: There’s No Clear Winner
There’s no clear winner when it comes to the decision of whether to rent vs buy a house. Buying a home allows you to build equity, customise it, and eventually never have a mortgage payment.
However, there are a couple of crucial assumptions here.
First, there’s an assumption that you will live in the same place for 25+ years to pay the home off. Many people “trade up” their homes at some point. You may get a 25-year mortgage when you’re 20, buy a bigger house at 30, and then move again at 40. Before you know it, you’re signing up for a mortgage for most or all of your life, just like rent.
Second, the equity you build is not cash, per se. Equity is valuable long term, but it’s not as impactful as having a six-month cushion for unexpected expenses. Yes, you can sell your home to “cash out” that equity, but you still need somewhere to live. And if you tap into your home’s equity via a second mortgage, you may jeopardise your home if you cannot pay that extra debt off.
With that all said, generally when debating whether to rent vs buy a house, buying is the smarter option. Buy a home if you believe where you are now is where you’ll want to be at least 5-10 years from now. However, if you’re unsure of what you want in the future, rent for a year or two to save money while making that decision. You’re better to rent for a little longer and make an intelligent home purchase than rush into a purchase you regret!