While home ownership rate in the UK has increased to 65.10% in the recent years, there are nearly 4.7 million households that live in privately rented accommodations. So, there is no one answer for the question “Is it more economically rational to rent a home or buy that dream house?”
The decision depends on a handful of shifting variables that are particular to your circumstances. For instance, the area you’re moving into, the interest rates, returns on investment, and your credit history.
Let’s look at some factors you need to take into account to make an informed decision:
1. How Long Do You Plan To Stay?
The intended length of your stay is a significant contributing factor in deciding whether it makes sense to rent or buy.
Home buyers often overlook a number of hidden costs that are involved in buying a home—including the valuation fee, conveyancing fee, surveyor fee, the broker’s fees, homeowner’s insurance, the household bills, and of course, the upfront cost of the house. Buying is a better option if you plan to stay for a longer period because the upfront fee is then spread out over the years. However, if you decide to sell the house within a couple of years, the value of your house may not appreciate enough to offset these costs.
If you’re using a mortgage to buy a house, be sure to keep in mind that mortgage is a risk, and your property will be repossessed if you fail to make monthly repayments.
So, if you’re planning to stay less than three years in your house, and wish to reduce your financial risks, then renting is a better decision from a financial point of view.
2. Take Into Account The Changing Home Prices
Before purchasing a home, consider what impact your (increasing or steady) home value will have on your finances. If your home appreciates by 3% annually, a £250,000 property will be worth over £337,000 over a period of 10 years. However, if the annual price increase is only 1%, the same property’s value will only rise to £276,000 in 10 years.
Just keep in mind that the changes in stock prices, rents and home prices can drastically impact your outcome, because they’re some of the hardest factors to predict. Consult a mortgage broker before finalizing your purchase.
3. Building Up Equity In Home Buying
A common argument that’s in favour of purchasing a property is that it gives the owners an opportunity to build equity by investing in a valuable asset, which ultimately increases their net worth. Conversely, paying rent to a landlord every month end seems more like spending instead of saving.
Of course, you’ll have to budget for maintenance costs and property taxes, which is why experts recommend you to budget at least 1% of the home value every year in order to cover routine maintenance.
Therefore, consult a mortgage broker to ensure that you’re actually building equity in your asset, rather than paying high amounts in interest rates. Mortgage advisors can help you get the best deals depending on your financial situation.
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