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Why buying a home is better than renting

In the long run buying a home is usually better value than renting.

Are cashback mortgages worth it?

Despite the large upfront costs that come with paying a deposit, legal and mortgage set up fees, and the fact that mortgage repayments are generally similar in size to rent, you will be gaining equity and reducing your monthly outgoings each month.

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Because a mortgage is comprised of the debt and the interest, each month that you make a repayment your interest will decrease meaning your monthly repayments will get smaller as you get closer to finishing your mortgage repayments.

On top of this, you will have equity, meaning the money you paid back doesn't just go towards repaying your mortgage provider – it also goes back into your home. This mean you can sell it and potentially make a profit if house prices have risen, but you can also use your home as a guarantee to get a loan. However, there are some drawbacks to be aware of too.

Owning home benefits and drawbacks

There are many benefits to owning a home, rather than renting:

  • You get equity as you continue to pay off the mortgage, allowing you to potentially sell the home for a profit or take out another mortgage or loan

  • Your monthly costs will gradually get smaller until you finish the mortgage and live in your home for free

  • Ability to rent out your home or a spare room for extra cash

  • More rights, to a certain degree, when it comes to altering fixtures and modifying or extending the home (see 'Types of property - leasehold vs freehold' below)

However, there are also drawbacks:

  • Your equity could fall if the housing market crashes, leaving you with less than what you paid for

  • There are plenty of upfront costs to pay to get a mortgage and complete the home buying process – far more than if you are renting

  • More responsibility to repair and modify things in the home, meaning your costs could add up if you need to make improvements

On the whole, owning a home is usually better value and a more sensible option than renting. It can depend on your financial circumstances too, but it does make sense to aim to make buying a home your goal.

How much does renting cost vs a mortgage?

Renting is generally cheaper than a mortgage in the short term. When you sign a contract to rent a home you will usually have to pay the first month's rent and a damage deposit, which is usually around the cost of one month's rent and you are not guaranteed to get all that money back at the end of the lease.

However, with a mortgage you will be required to have a large lump sum for a deposit. For example, if you want to buy a home worth £150,000, then you will need a deposit of at least £7,500, but it's more likely you will only be able to get a mortgage with £15,000 or more.

On top of this, you will need to pay for a range of other costs, which could end up adding up to an extra £5,000 to your outgoings.

Once you get these costs out of the way, your monthly mortgage repayments are likely to be similar to paying for rent, although your debt should get smaller (so long as your interest rate stays around the same) and therefore you will gradually pay less every month.

Your interest rate will determine how much your monthly repayments are, and this can fluctuate and make it a little harder to plan for your costs. However, at the end of your mortgage, you owe nothing, so you can continue living in your home without paying.

If you rent, then you pay rent all the time. There is no end to it. Therefore buying a home can make retirement planning a little easier.

Home buying costs

Along with the deposit, you will need to pay fees to set up the mortgage and pay for a surveyor to arrange all of the necessary legal aspects of home buying.

You may also need to pay Stamp Duty, which is a tax on the property's value. Stamp Duty begins at 2% on the value of a property over £125,000 and rises with the cost of the home you are buying. For example, if you buy a home for £150,000, then you would owe 2% Stamp Duty on the amount over £125,000 – £500 (2% of £25,000). This fee can be considerably higher depending on the cost of the home.

Then you will have an array of costs associated with moving into your home and renovating it. When you rent, many of the appliances and furniture are likely to be there and provided by the landlord. Repairs are usually paid for by the landlord too, so if you buy a home that will be your responsibility.

Save for a deposit

Saving for a deposit can be extremely difficult if you are already renting. Many first time buyers get some help from their family, either in the form of a loan or gift, or by moving back in with their parents for a little longer.

Compare the entire banking market for savings bank accounts and find one that can offer you a decent rate on your savings. Make a plan for how long you plan to save, and how much you can afford to put away each month.

Setting a goal is the most important part, and if you can stick to it then you will have a good chance of being able to buy a home.

Could Help to Buy help you?

The Help to Buy scheme which ran until the end of 2016 made it easier to buy a home with a deposit as little as 5%. The government would guarantee a portion of the mortgage to encourage lenders to accept applications from those with smaller deposits.

There are other schemes available to help first time buyers, and generally they come in and out of commission according to the government's economic agenda. It's always worth keeping up with the latest finance news to see what new schemes are coming up and which old ones are coming back.

Types of property - leasehold vs freehold

There are two types of property that you can own: leasehold and freehold. Freehold means you have complete ownership of the property and the land it stands on. This gives you flexibility to modify your home within reason, and depending on local planning laws and permissions. The land belongs to you until you die and is then inherited by whomever you leave it to.

With a leasehold property, you have to pay a fee to keep your property on the land. You will also have less rights to modify the property. If your property is in an apartment building, then there might be other rules you have to follow and you will probably have to pay a service fee.

Pros and cons of shared ownership

Shared ownership schemes allow you to buy a share of the property and pay a combination of rent and mortgage. For example, you can own a 50% share of the property and therefore get a mortgage to cover half the property's value, and pay rent to the landlord of the remaining 50% share.

You are then allowed to increase your share in the property over time by taking out extra mortgage or paying for it upfront.

Benefits of shared ownership:

  • Easier to own property with a small deposit

  • Relatively cheaper mortgage deals available

  • Rent is also relatively cheaper

  • Once you have completely paid off your mortgage then you will only owe rent, making it much cheaper to live in your home

  • Ability to own the whole property by paying for it as and when you come up with the money

Drawbacks of shared ownership:

  • Property value is likely to rise making it more expensive to buy the remaining share

  • Once you have completely paid off your mortgage, you will still owe rent

  • You probably won't be allowed to make any major home renovations and improvements as your landlord of the remaining share will still have a say

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