Home-Owning Still Beats Renting
Owning your own home is still cheaper than renting, but the two are getting closer than ever before.
The savings made by owning your own home rather than renting have dropped spectacularly by more than three-quarters this year. Although homeowners are still better-off on average, tenants are hot on their heels.
Let's compare the monthly cost of paying a mortgage with the cost of renting a home over a 25-year period. I'm using the latest results from Abbey's annual UK 'Rent versus Buy' index. This index reveals that although it's still better to buy than rent overall, the savings are dramatically lower than they were last year.
This year the average saving made from buying instead of renting is just £5,811 over a 25-year term. This has plummeted more than 75% from the savings made last year of over £24,000. The study has found that month-on-month, the average cost of renting a home stands at £443,746, whereas the average cost of paying a mortgage remains lower at £437,925.
But only just. A combination of rising house prices alongside rising interest rates are making mortgages ever more expensive. This has meant that, on average, buying is now only 1.3% cheaper than renting, down from 6% last year. And the cost of owning your own home has even risen above renting in some areas of the UK.
Mixed Bag
Regionally the results are a real mixed bag. Tenants are the clear winners in Northern Ireland, Wales and the North West. Indeed, in Northern Ireland tenants are making a huge saving of more than £180,000 over buyers which means they are paying 46% less. The region has experienced a 50% rise in house prices in the last year alone accounting for the significant difference in costs between the two.
In fact, of the 12 regions covered by the index, tenants were better off in half of them. This suggests the case for renting is becoming more convincing than ever, particularly for would-be first time buyers who are finding it increasingly difficult to get onto the property ladder.
Meanwhile in Yorkshire, London and the Midlands it's all square with renting and buying costing more or less the same. But homebuyers in East Scotland and the North are enjoying an easier time of it with average savings of £117,600 and £68,033 respectively over tenants.
That said, although the advantages of owning your home are diminishing, it's probably still better to buy a property overall. After all, at the end of your mortgage term you'll have an asset to your name while tenants will end up empty-handed. Plus homeowners can benefit from any capital appreciation on their property during the 25 year period and beyond.
What's more, owning your own home could help your finances in your retirement. Firstly, mortgage repayments will no longer be a significant drain on your monthly outgoings. And you'll have more options open to you including downsizing or releasing equity from your home. These options can help to ease the pressure on a tight budget later on in life.
*In calculating the costs Abbey assumes a lifetime mortgage rate of 6.5% for a 25-year term. Associated property maintenance costs were included. Rental costs and maintenance costs were inflated in line with property rental element of the retail prices index (RPI).
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