Should you buy or rent a property in the UK?
The UK is a heavily populated country with density more than twice that of our nearest neighbour France. With restrictions on building in National Parks and Green Belt areas, cumbersome planning rules, and a shortage of quality residential property in places where people actually want to live, there is fierce competition for land and housing.
Where demand exceeds supply, prices generally rise. The greater the shortage, the greater the increase. So much so that the cost of land in the South East is now 40% of the total cost of a new build, and rising.
Not too much of a problem if you already own a house or flat. But if you are new to the property ladder, you might struggle to find a home that’s within your budget.
Reviewing your options
Buying – The big obstacle for a first-time buyer is finding a deposit. Suppose you are looking to buy a two-bed flat for £300,000. If you get a 30-year mortgage at 5% interest, with a £30,000 deposit and £270,000 loan, the monthly repayment will currently be £1,450.
Renting – The same two-bed flat, rented out unfurnished in the Brighton area, would cost (conservatively) around £1,400 per month, plus an initial deposit equivalent of at least two month’s rent, and possibly an ongoing hefty service charge for provision of cleaning and maintenance of common areas.
What’s the better option?
Initially, there’s not a huge difference in monthly cost between the two options. However, with a house purchase (provided you keep paying the mortgage) you have much greater security of tenure. And, with each mortgage payment, you own a gradually increasing share of a valuable asset, which should over time increase in line with inflation. So, if you can get over the deposit hurdle, buying is a no brainer.
Breaking down the figures
Five years after purchase, at say 3% annual inflation, the property value will have risen to £348k. You would have made a paper profit of £48k on your £30k investment (the deposit). On top of that, around £16k of the loan capital will have been repaid, adding to your profit. (In stark contrast, the renting option over 5 years shows not a profit, but instead an inflation linked increase in monthly rent).
What’s more, interest rates are likely to fall during the next 5 years meaning monthly mortgage repayment should by around £80 for every half percentage point. Even if interest rates remain at their present 5% and you continue paying £1,450 per month, it should still become easier to meet the repayment because your income will rise with inflation.
Getting on the ladder
For most of us, finding £30k is a tall order, but the government have a number of schemes to help, for example:
- A “Lifetime ISA” for property purchase only. Save up to a maximum of £4k a year and the government will put in an additional £1k
- A 5% mortgage deposit scheme in which government, subject to the usual checks on creditworthiness, gives guarantees to mortgage lenders.
- Shared ownership schemes (usually with local councils or housing associations) where you buy a part share, and pay rent on the balance.
- Combine forces with a partner and jointly buy half each – but be sure you can put up with each other’s bad habits, and make sure you have an agreed exit strategy.
What to check before buying your first home
Let’s suppose you now have the savings and finance in place to buy your first home, and you have shortlisted a couple of properties. Here are some questions to ask yourself:
- Can you afford the mortgage repayments, council tax and utility bills?
- Does the property need renovating and how much might that cost?
- Does the property meet your accommodation needs, not just for now, but for the next few years?
- Have you considered buying in a less desirable area and getting better value for money?
- Is the location suitable for commuting, socialising and lifestyle choices?
- Are there problems with traffic noise, neighbours or parking?
- If leasehold, how big are the associated costs for ground rent and service management?
As surveyors, we can’t help you decide whether the location is right for you, but we can support you on whether the property is a safe investment. So before you commit to a purchase, we strongly encourage you to get a HomeBuyer Survey RICS Level 2 or Full Building Survey RICS Level 3 from a qualified and experienced surveyor.
Get in touch
If you have any questions about our pre-purchase surveys, feel free to call our team today on 01273 031646. We’d be glad to help.