Renting may prove more cost effective than buying, says research

People who rent rather than own their home may actually end up the better off in the long run, according to research by the lettingsearch.co.uk website.

The research calculates the total cost of renting as £301,175, compared to £312,518 for buying a mortgaged property, both over a 25 year period. This would make a tenant £11,342 richer than a typical mortgage borrower, based on the Land Registry’s figure for the average UK house price of £164,455 as of February 2010.

The figure for renting assumes a rental return of 5% equating to a cost of £685 a month in rent, which is £8,222 a year. It also allows for the agents’ fees involved in a total of four property moves within the quarter century period. The calculation of the cost of buying, meanwhile, assumes that the homeowner remains in the same home for that period’s entirety. The figure for buying, however, includes £33,385 of costs of building insurance and maintenance, which is rarely paid for by tenants.  The reason why people take out landlord insurance policies.

A deposit of 20% on the aforementioned average home of £164,455 would be £32,891. Assuming that a capital repayment mortgage at 5.5% is secured by the buyer, the basic housing costs work out as £275,267. This figure increases, however, with the addition of costs such as stamp duty, solicitor’s fees, surveys and repairs to the property.

One obvious advantage of buying rather than renting, of course, is that the former will have the house as an asset, while the renter will have nothing. However, the research also points out that under current legislation, homeowners have to contribute to the cost of their own care in old age, whereas those without significant assets are likely to see the state pay for theirs. As the price of residential care of an estimated £550 per week (£28,600 per year) represents 17.4% of that of the average house, to bridge the gap, the homeowner will therefore in practice usually need to sell their home.

Evidence exists that the UK may be moving towards a model of long-term renting over homeownership akin to parts of continental Europe. According to the Government’s most recent English Housing Survey, the number of renters in England increased between 2001 and 2008/2009 by about a third. The Council of Mortgage Lenders (CML) expects the proportion of tenant numbers to homeowners to continue to rise.

Phil Calderbank, Lettingsearch.co.uk director, commented: “With sky high house prices, continuing problems over the availability and affordability of mortgages, and the prospect of being eventually forced to sell your home to pay for elderly care it makes sense that increasing numbers of people are turning to the private rented sector as a long-term and permanent lifestyle choice.”