Buyers are Better off After Five Years Than Renters

21st November 2014 posted in Buyers

Property buyers in the UK are now better off than renters within five years on average.

Mortgage repayments for someone with 10% equity in their home come in at around £316 a month more than renting the same property. However, even though renters pay less a month and can save money, Zoopla has found that buying a home is more cost effective after just five years.

Research by the property website found that the average monthly rent for a property was £856 in comparison to an average monthly mortgage repayment of £1,181. But while renters may be paying less each month, homeowners recover their initial costs over time, as a result of equity exceeding savings.

After seven years the average homeowner is £13,850 better off, in comparison to an equivalent tenant. Lawrence Hall, from Zoopla, said

"People who invest in property are playing the long game. While buyers have to swallow the initial upfront costs of purchasing a property, they ultimately reap the benefits over renters down the line from building up equity in an asset that they will own by the end of the mortgage term.”

There are however quite big variations of this figure across the country, because of the different property markets. Aberdeen, Dundee and Glasgow topped the list of places where buying a house would quickly become more cost effective than renting, while Bournemouth, London and Huddersfield had the longest wait to become better off when purchasing a house.

If you were to buy a house in Aberdeen, it would only take one year for you to become better off than a renter, but if you were in Bournemouth, it could take you up to 18 years for your decision to buy to be cost effective.

It’s not good news for those living in the capital either, anyone who decides to buy a house in London can expect to face a 12 year wait before their purchase becomes more cost effective than renting.

The main reason behind buyers ending up in a more cost effective situation is because they are building up equity in an asset that they will own by the end of the mortgage term, rather than paying rent and ending up with no asset.

The research was conducted using various assumptions though, including the idea that someone renting would have cash the equivalent of a 10% deposit in their savings, instead of putting it into their rental costs.

They also assumed that a home buyer would have an average mortgage rate of 4.62% and that property will increase in value by 4% year on year, while rent prices would only go up by 2.75% each year.

Renting can be a great option while you make long term plans to buy a house, as it is important to not dive straight into the property market and get blinded by Help to Buy loans. Those interested in buying should try and save up a good deposit while renting using a cash ISA, as this will make the house buying process much easier.

Once the decision to purchase a house has been made, buyers should shop around for the best mortgage and consider speaking to a broker about their best options. In the long run this should leave homeowners in the best financial situation possible.

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