Rent or buy your home?

Rent or buy your home?

Hello there. I’m Jason Butler. Thanks for
joining me in this video insight. Now today I want to talk to you about quite
an interesting and important question I get asked a lot. This idea of should I
rent or should I buy property? And this is particularly the issue for first-time
buyers, people who’ve not bought, haven’t sold houses, young people who are not
aware of how things can pan out. And on the face of it you’d think that if
you’re going to buy a property and live in it for 25 years it’s a no-brainer
that eventually you know by paying off the mortgage, you need somewhere to live,
you’ll end up with owning the property you’ve repaid the loan and you can live
there rent-free. Or you could sell the property or downscale to a smaller one
and release some cash in which to to meet your later life needs. But most
people do move two or three times throughout their property owning lifetime
and particularly in the first property you buy, often you’ll move out after 2 to
4 years. So that first 5 year period is really important which is why I want to
focus on the potential outcome for you if you buy a property now and compared
to renting. So it might make you think differently. So let’s just take you
through this. Now I’m sorry there’s a few numbers here but please don’t turn off,
it will be worth your while. You can stop the video and go back over it but it’s
well worth us looking at this because it all simplified and rounded ok? This
is based on a real case of one of my twitter followers who sent me these
details. He was considering buying a two-bedroom new really refurbished flat
in High Wycombe in Buckinghamshire so it’s north of London, quite an affluent
area commutable, it’s a quite desirable and he was being asked £325,000 for this flat. He could rent a similar flat round the corner virtually
the same quality literally on every level for £925 pcm. Now obviously there
may be some that were cheaper and dearer but essentially he said that was pretty
much on a comparable. So let us now think about buying. If we buy we’ve got some
cost that we’ve got to come up with in addition to any deposit we put down to
secure a mortgage. So, first of all we’ve got legal costs which I’m going to put in at £1,250. And that includes all the searches and all the
other permissions and things you’ve got to get. The stamp duty I’m assuming is
first time buyer rate which is £1,250. If you or someone
you’re buying with is not a first-time buyer. Which means you’ve owned property
at any stage in the past, then you’ll end up paying £6,250 stamp duty. So if you’re thinking of starting a new
relationship with someone, I jokingly say to people check out
whether there are first-time buyer if they’ve ever owned any property, so if
you meet them in a wine bar just say have you ever owned a property before,
because it could cost you five or six thousand pounds or seven thousand pound
more when you come to buy property not. I’m joking. Obviously you you choose
someone for love and compatibility if you’ve got to pay more stamp duty fair
enough. But it’s well worth thinking that. An in a survey you need to have a good
survey. Don’t just have the house buyers thing that the lender wants. So you might
have to pay £750 for a detailed survey of the property to see if it’s up
to standard so those total costs if you’re a
first-time buyer will be .£3,250 If you’re not a
first-time buyer then that’s going to mean more like eight thousand two
hundred fifty we need to put a 10% deposit down so we can get a
decent mortgage, so that would be £32,500, which is ten
percent of £325,000. So, our total outlays is that
deposit we need for to buy the house and then the rest is from mortgage and the
initial cost that we’ve incurred, and these initial cost we’re incurred, we’re never gonna get back, so we need a mortgage is the difference between £325,000, which
is what we’re buying the house for, and the £32,500 deposit. So we need a mortgage of £292,500 currently there’s a five year fixed rate
for that with 2.99% so we know exactly what we’re
going to be paying for five years. That comes out £1,386 a month and we need to make an allowance for property
maintenance and servicing etc but that’s gonna be at least £100 a
month which often people don’t put this into you know servicing the boiler
repairs etc.. So that brings us a monthly figure of £1,486. Now let’s now look at the renting option. So, if the rent is
£925 our renter has got to come up with some
outlay and that includes an agent fee which I’ve put down £500. That
could be more, it could be less but £500 seems reasonable and then a
deposit of say between one and a half to three times the rent so I put £2,000 of deposit. Now that money’s going to come back as long as
you don’t trash the property and that goes into the government protection
scheme so it can’t just, the landlord can’t just help themselves to it. So,
assuming you look after the property and it’s just normal wear and tear you’ll
get that money back, but you’ve got to outlay it initially. So, the total outlay for our renter is £2,500 Now, let’s assume our renter started out
with the same money that our purchaser did £35,750. And we’ve taken off the outlay of £2,500. So they’ve
left in their savings account £33,250, bearing in mind our purchaser, that’s gone on the deposit and that’s gone on all the other
costs. And our renter can add to their savings account the difference that
they’re paying less than the purchaser. So, £1,486 a month is what our purchaser’s buying, less £925, which is or a renters
buying and that difference is £561 a month and that £561 a month will get added to the existing savings balance of our
renter. Now let’s assume that prices don’t change. They don’t go up they don’t go
down. Now you know we’ll come back to what that means in a minute but
if prices don’t change and the value of that property is what it is, in five
years time the equity that the purchaser has built in their property from
gradually repaying their loan – this is assuming a twenty five year mortgage –
after five years they will have £73,750 of equity give or take. Our renter with the savings that they started that
they hadn’t had to use on a property together with the difference in the
monthly amount they’ll have £69,400. That’s about £4,400 Now, I’ve
disregarded any increases in rent and I’ve also disregarded savings interest
on the initial savings amount that the renter keeps in their savings account
and the additions. So the two kind of roughly cancel each other out. You could
do a spreadsheet and do this really detailed, but it doesn’t look too bad does it? The purchaser is about four grand just over
four grand better off. But what if this property value, which is an all-time high,
falls? What’s the difference after the end of five years? Let’s pretend that
this property falls in value just twenty percent, which is about four percent of
the initial purchase value each year roughly okay? The equity value for our
purchaser will be reduced to £9,000. compared to our renter, who’s £69,000. So the renter is £60,000 better
off because this property’s fallen in value. Now I purchased my flat
in London in 1989 for £62,000 and I sold it five years later for £44,000. That’s a massive fall. That’s more than 20%, but from my
point of view is that was very painful and I had to pay that money I had to
actually come out of my savings to get out of that flat. So properties do
fall in value. Now I don’t know what property is gonna do over the next 5, 10 15, 20 years. I’ve got no idea. What I do know is that prices are all-time
highs, they’re starting to, they’ve fallen in London and the South East. They’re
starting to fall in the rest of the country and as a first-time buyer or any
kind of buyer you’re a very valuable commodity because when you buy a
property you’re giving someone liquid cash for an illiquid asset which needs
constant maintenance care and love. So, don’t be in a rush to buy and if you are
gonna buy don’t be afraid to do the analysis. Do the analysis between renting
and buying a comparable property. Think to yourself what if property prices drop
10%, what if they stay the same? Is it worth it to you? And and this
will be even, this position will be even worse if you’re not a first-time buyer
and your initial costs in stamp duty are even higher. So hopefully that’s been
helpful. I know there’s a lot of numbers there but it’s well worth you thinking
it through don’t just go with what people say – you must buy you know it’s
money down the drain if you rent. It makes sense to rent if you need flexibility, if
you’re in the early parts of your career, if you’re not sure where you’ll be in five years time, you don’t want to be stuck with a property, if there’s a
good chance or if you feel that property prices are going to ease back, or you want
to do other things with your money. It may be the best thing to do with that
money is to invest in yourself to increase your own potential. So you know
who knows? Hopefully that’s been helpful. Let me know how you get on, I’d love to
hear your personal stories. Thanks for joining.

2 thoughts on “Rent or buy your home?

  1. Thank you Jason. Great video. Best regards Martin

  2. This is an insightful video and it's very interesting to see you run the numbers but surely you have to look at the historical data of house prices. It's very rare to see a 20% drop in house prices and in most cases you shouldn't be selling at the bottom of dip, as the property cycle shows, you sit tight and watch it regain its value over time.

Leave a Reply

Your email address will not be published. Required fields are marked *