The economic comparison of owning or renting a home

How much would you benefit - or lose - by buying over renting? Peter McGahan explains all

Work out which type of account would best fit your needs, whether you’re saving for the short or long-term
Are you saving to buy a home or will you just be renting? (Alamy Stock Photo)

This week I want to look at how owning or renting a home compare. I’ll have to be broad with the comparison by looking at house prices across the whole of the UK. I’ll compare average rents, repairs, mortgages and see how the numbers work out.

The average property value in 1999 (25 years ago) was £81,628. The average rent for that property was £450 per month. The interest rate was 6%.

If you rented the property, you would have had average rent increases of around 2% to 3% a year and be paying around £1,200 a month now. Your total expense was £172,964. Your financial gain is zero.

If you bought a home, you have an extra layer of costs which is repairs and maintenance.

If you bought in 1999 and fully mortgaged the home (to try and keep the comparison fair), you would have been borrowing at 6%. The correct comparison would be to compare just an interest only mortgage, but I’ll do a capital and repayment comparison below. However, just comparing the interest at the time of purchase, the mortgage would be £408 a month. So, at that time, mortgaging was cheaper.

I have calculated the weighted average mortgage rate over the 25 years to be 4.29%. At that, the monthly payment would have been £444 a month and the total mortgage payments would have been £133,212 over the 25 years. We calculate that the average repairs on a home are close to an annual average of 1% of the home’s value. This is a total of £20,407.

So, the total cost of buying would be £153,619. This is a saving against renting of £19,345. However, the property would have increased in value, so the cost would be netted down by this amount. The average house price, using the same examples above is now £285,000. If the starting point was £81,628, the total gain is £203,372.

Therefore, the total benefit of buying versus renting would be £222,717. Let’s go a little further. The average age a person buys a home at is around 32 years old. If they pay off their mortgage above at age 57, and their life expectancy is 81, they will live 24 years rent free and mortgage free.

There continues to be a wide range of people who want to buy their first home, move house, or remortgage
The overall benefit financially of buying versus renting is £479,997, according to calculations by Peter McGahan

The total rent saved over the next 24 years is £257,280 (only using 2% inflation here). Therefore, the overall benefit financially of buying versus renting is £479,997.

The profits can be higher by avoiding the obvious mistakes of buying in euphoric times. For every action there is an equal and opposite reaction, and just after euphoria, there is always a lull where prices are fairer, and, as such, factoring them into the above numbers there could be much greater gains.

Looking back at the UK’s peaks and troughs, the key drivers were interest rates, economic growth or recession, government policies such as subsidies, relaxing tax or introducing austerity measures, financial deregulation or availability of credit, global economic events, and speculation/investor behaviour.

In the 1920s you had a boom, then the 1930s bust driven first by a post war boom followed by the great depression (there was nothing great about it actually). After World War Two, due to housing shortages, there was another boom, and the late 50s to early 60s the market cooled after new home supplies increased.

In the 70s, economic growth, relaxed lending, and rising wages fuelled another boom. The oil crisis of 1973 and the subsequent economic downturn led to high inflation and then interest rates, and a crash. Financial deregulation and easier access to credit drove the 80s boom with the 90s recession, triggered by high interest rates and a global slowdown, leading the crash.

Peter McGahan
Peter McGahan

In the late 90s, low interest rates, a surge in buy to let investments and economic growth drove that market, with the financial crisis of 2008 hitting it flat in the face. From 2010 onwards, low interest rates drove house prices higher due to affordability, and a surge during ‘Covid times’ led the last big push.

Recognising downturns and being brave with purchasing is key to not buying in euphoria and having your financials stacked against you.

  • Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. For a complimentary mortgage guide, call 028 6863 2692.