Rent Now & Buy Later V's Buy Now - The calculations

kennyb3

So a few points before I start:

1. This not about never buying (i.e constantly renting) it's about when to buy. It obviously assumes house prices continue to fall as otherwise financially it would make sense to buy in nearly all cases. The level of fall is for you to try assess.

2. I've made this post as this debate regularly comes up. People make the point but rarely back it up with actual figures. I think some people intuitively know whether they should rent or buy but rarely sit down and work out the figures.

3. I've loosely based the figures around my situation - so i'm going to post this from my perspective. You can throw in your own figures.

4. It purely financial (doesn't consider what i call intangibles - flexibility of renting v's warm feeling from 'owning' home etc)

5. Hopefully i've got the figure right, if i make a balls i'll adjust with an edit.

Okay so i've used;

http://www.drcalculator.com/mortgage/ie/

and the post was inspired by the latest CSO figures showing a 1.7% drop in Dublin house prices in December 2012 and also 1.7% YoY.

http://www.cso.ie/en/media/csoie/releasespublications/documents/prices/2012/rppi_dec2012.pdf (pg15)

I've used a few different levels of falls, you can determine yourself going forward what you see as likely.

Example 1

So my first look is at a sit where house prices continue to fall at 6% per annum and loosely based on my own situation;

Looking for a modest 3 bed semi on DNS - circa €250k. 10% deposit (€25k).

Mortgage of €225k at only 4.5% (rough rate at present) is €1,250 p.m over 25yrs. €15,000 p.a or €375k total

Rent €1000pm in similar type of house where i live presently and am looking at buying. (12k p.a)

6% drop = €15k year one, €14.1k year two.

Renting I can add approx €1k interest (€25k deposit @ 2% after DIRT etc) to my deposit, plus approx €6k in savings in the interim period (in terms of rent being lower than mortgage repayments).

So in 2015 i've a €7k bigger deposit.

The house I want is now €221k - €189k mortgage as €32k deposit now.

Now the 189k mortgage @ 4.5% over 25yrs costs me €315k total. I've spent €24k rent, so total cost of €339k.

Mortgage of €225k @ 4.5% was €375k as outlined previously.

So that's a €36k difference. Worth it for paying back the mortgage 2 years earlier? Err No imho!

Example 2

So let's try 3% now. So the fall is only 3% above for both years.

Value of house in 2015 now €235k - mortgage of €203k required (€235k minus €32k deposit).

Total cost @ 4.5% interest over 25 yrs (consistent with above) is €362.5k (€338.5k mortgage + €24k rent).

Still €12.5k better off (€375k versus €362.5k).

That €12.5k doesn't come easily. Maybe some would pay that premium to own their home now and pay off that mortgage 2 years earlier but not me. That's a lot of after tax income especially if you're earning at the top rate.

Example 3

So we'll try 2% this time

Value of house in 2015 now €240k - mortgage of €208k required (€224k minus €32k deposit).

Total cost @ 4.5% interest over 25 yrs (consistent with above) is €371k (€347k mortgage + €24k rent).

So now we're getting closer - only €4k better off renting than buying.



Obviously the difference gets bigger:

a) The higher the value of the house
b) The higher interest rates go
c) The lower you can rent for in the interim period (save hard for a year or two while living in a apartment)

Gets lower if:

a) Fall is lower (6% diff vs 2% diff)
b) Value of house involved is lower
c) Paying high rent in proportion to house value/mortgage repayments
d) Deposit element is bigger therefore borrowing less


Summary


Anyway i just thought i'd throw that example out there and let people use it. The question I have to ask myself now is do I think house prices will fall by 2% or more each year over the next two years (or whatever period you want).

My own personal answer to that is yes but yours may be different.

The mortgage : rent ratio is a key consideration as above i'm adding to my deposit, others may find their mortgage less than their rent (especially if a decent deposit is involved)

There are plenty of intangibles too; for instance I like the flexibility of renting at present, I know I'll save more when renting because i've focus than if I buy now meaning i'm pretty sure I'll add alot more than the €6k to that deposit.

Anyway I hope this is useful to someone. It isn't a tool designed to show renting is better - as it isn't necessarily depending on the circumstances. It's just a thought provoking exercise.

RATM

I don't think any comparison is fair if you're going to leave out all the incidental costs of property ownership.

Within the €1000 rent you pay is included things like the property tax, rubbish collection, water, insurance, etc. Above all else maintenance is included- if the boiler breaks down and €2k needs to be spent replacing it then it is the landlord who pays, not you.

All that said you say in your post that this isn't about always renting and never buying- you're looking for the best entry point into the market vis a vis renting vs.buying. But before you get yourself into a loan of €375k over 25 years it is important to also realise that all the extras I have listed above will probably cost you another €60k-€100k over the life time of the loan, and won't stop when your mortgage is paid either.

kennyb3

RATM wrote: »

I don't think any comparison is fair if you're going to leave out all the incidental costs of property ownership.

Within the €1000 rent you pay is included things like the property tax, rubbish collection, water, insurance, etc. Above all else maintenance is included- if the boiler breaks down and €2k needs to be spent replacing it then it is the landlord who pays, not you.

All that said you say in your post that this isn't about always renting and never buying- you're looking for the best entry point into the market vis a vis renting vs.buying. But before you get yourself into a loan of €375k over 25 years it is important to also realise that all the extras I have listed above will probably cost you another €60k-€100k over the life time of the loan, and won't stop when your mortgage is paid either.

I take your points and you can add them into your own equation - i just didn't want there to be arguments about whether that cost is €500 per annum or €2k. I did say i'd save more money renting and that would be part of the saving.

Likewise rent may increase/decrease. House prices might decrease 1% next year, and 3% the year after.

I was just trying to keep it relatively simple and give a bit of an example to people to go about working things out.

Zamboni

Doesn't Ronan Lyons already have this done with the ability to change rent and inflation rates as you see fit?


Edit: http://www.ronanlyons.com/2010/04/20/your-very-own-rent-or-buy-calculator/

Theboinkmaster

kennyb3 wrote: »

Anyway i just thought i'd throw that example out there and let people use it. The question I have to ask myself now is do I think house prices will fall by 2% or more each year over the next two years (or whatever period you want).

My own personal answer to that is yes but yours may be different.

Nice post - we're renting and looking to buy a home in SDC but i think there'll be another 10-20% decline in the places we're looking at, so definitely holding off for at least 2-3 years.

D3PO

Good post Id agree with RATM though you have to consider all costs involved in owning.

Property tax, life assurance, house insurance etc. But the logic is sound.