House prices: Is it better to rent than buy?

For an awful lot of people, the question of whether to rent or buy isn’t something they need to give any thought to – because sky high house prices mean renting is their only option for the foreseeable future.

However, for those who are in the lucky position to be able to consider buying, the rapid rise of mortgage rates has raised a question that potential buyers haven’t faced for years – whether it’s actually worth buying any more.

Zoopla has just revealed that on average in the UK at the moment, it’s 10% cheaper to rent a property than it would be to buy the same place with a mortgage.

There are some striking differences across the country, so that in Scotland and the North East it’s still at least 18% cheaper to buy and in London it’s 24% more expensive to buy, but overall rental wins.

The problem is a toxic combination of high house prices and runaway mortgage rates, which mean the average two-year fixed rate deal has shot up to 6.7%, according to Moneyfacts. It’s a world away from the rock bottom rates we’ve got used to since the financial crisis.

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However, the decision isn’t quite this straightforward. If delaying a purchase is a short-term plan, while you wait for mortgage rates to fall and house prices to stabilise, you’re putting this aspect of your life on hold.

It means you’ll spend another year paying your landlord’s mortgage rather than your own, and may well mean you’ll be paying your own mortgage later in life. This may not be a concern, but needs to be factored into your decision.

If it’s a permanent choice to rent for life, you need to consider the finances further ahead. There’s the question of what will happen to rents in future. While your mortgage rate may rise and fall over the years, if you stay where you are, and don’t borrow any more, the current mortgage payment is likely to be as bad as it gets for a while. The same is unlikely to be true for rents.

You also need to think about what you’ll do in retirement. One of the key benefits of home ownership is that either you’ll have paid off the mortgage in retirement, or you can downsize to clear the remainder of the debt. It means your retirement income doesn’t have to cover the cost of putting a roof over your head. If you’re still renting in retirement, you will need a far bigger pension to cover the costs.

Then there are the logistics for all the years in between. For some ages and stages in life, renting works brilliantly. If you want the flexibility to move at the drop of a hat and relocate without breaking the bank, then it’s undoubtedly easier to do so as a renter.

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It’s one reason why living with anyone for the first time is far less risky when you’re renting. However, if you’re renting later when you’ve put down roots and possibly have children in school, being uprooted becomes a much more serious issue, so the less secure nature of rental starts to work against you.

You also have more control over how you live in property you own. You can deal with any maintenance or repairs quickly, redecorate or make changes. On the flip side, you will be responsible for making this happen and for paying for it, so this freedom comes at a cost.

It’s not a straightforward equation, but clearly it’s more complex than just what mortgages and rents cost today. Given that rental is cheaper in much of the country right now, it might persuade you to put your buying plans on hold for the short term. However, it’s worth considering all the implications before you pause your plans for the long term.

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