You are here:

Buying beats renting by almost £200,000 over lifetime

18 Jun 2012 07:00 GMT

· Cost of owning home rather than renting is £194,000 lower over lifetime*
· Buying, paying mortgage and maintaining a home costs £429,000 over 50 years compared to £623,000 in rent

Stepping onto the property ladder has enormous financial benefits over a person’s adult lifetime. According to a new study from Barclays, owning your home rather than renting it will save you £194,000 over a fifty year period. And this figure doesn’t even account for the value of the home the buyer will own at the end of it.

While the total cost of mortgage repayments, maintenance, and other costs associated with owning the average home would come to £429,000 over fifty years (a person’s adult lifetime since a typical buyer purchases in his early thirties) renting a similar home over the same period would cost £623,000. Recognising that getting on the housing ladder, or trading up is still a substantial barrier to many, Barclays has created a new mortgage scheme (Helpful Start) which has a Family Affordability Plan incorporated into it, that lets parents help their children with loan affordability.

The Family Affordability Plan allows parents to help their children get on or move up the property ladder without being on the property deeds. Both incomes are used to calculate the mortgage amount and the scheme is available across all mortgage rates including NewBuy.

Initially, being a tenant is often cheaper than being an owner, as mortgage repayments tend to be higher than rental costs, but rents inflate over time. The home buyer of course also has one-off financial hurdles of deposit, stamp duty and solicitor’s fees, and permanent aspects such as maintenance and insurance for his home. However, most importantly, at the end of 25 years, the buyer will also own his home outright as the mortgage will have been entirely repaid. This increases the advantage of owning over renting to £595,000.

Andy Gray, Head of Mortgages at Barclays said: “The cost of stepping on or moving up the housing ladder can be a big barrier for many, but the long term benefits hugely exceed the initial expense. Not only will you save money by becoming an owner occupier, but you will also own a substantial asset once your mortgage is paid off, providing financial security for your old age. Those who choose to rent permanently will have to pay their landlord out of their pension income, while owner-occupiers will enjoy minimal housing costs.

“Many parents have already realised the return from buying their homes and want to give their children this important step towards independence, but they cannot afford to provide them with the deposit to buy their first home or trade up. Barclays’ Family Affordability Plan allows parent and child to pool resources and secure a larger loan, thereby helping generate much greater wealth and security for the child stepping on or up the property ladder.”

Over a fifty year span, roughly 50 per cent of the cost of occupying your own home comes in the form of mortgage payments - £210,000 out of the £429,000. Two fifths of that £210,000 is interest cost, while the rest is capital repayment. The next largest outlay is maintenance at £170,000. The initial purchase deposit is the next biggest cost, while insurance, stamp duty and other costs associated with buying the house in the first place make up the rest.

Figures vary enormously from region to region, due to the differences in rents and house prices across the country. For example, in London, buying a typical home would save the owner £396,000 compared to renting it over 50 years. This is chiefly because house prices in the capital are high. In the South West, by contrast, the advantage is very small (just £34,000) because rents are unusually cheap relative to house prices. The North West has relatively low house prices (the second lowest in the country), but rather high rents and so the advantage of owning over renting there is the second highest in the country at £300,000 (see table).

 

House prices

Year 1 Rent

Lifetime cash saving from owning over renting

England & Wales

£160,780

£8,361

£194,341

London

£343,522

£17,520

£396,049

North West

£111,264

£7,788

£300,456

Yorkshire & The Humber

£118,204

£7,801

£280,125

West Midlands

£130,212

£7,552

£220,671

Scotland

£148,764

£8,182

£216,463

East Midlands

£123,879

£7,185

£210,461

South East

£206,918

£10,139

£201,835

East

£173,227

£8,142

£137,270

North East

£101,676

£5,084

£101,301

Wales

£113,036

£4,974

£56,903

South West

£170,261

£6,810

£33,863

- END -

Notes to Editors:

* Methodology

Cash cost of homeownership is calculated as follows:

Total mortgage repayments over 25 years for an 80% LTV mortgage at an APR of 4.4% (average of 3 best buy 5 year fixed rate mortgages, reverting to lender SVR thereafter) on the average house price (source Land Registry for England & Wales locations) plus the initial deposit, plus stamp duty, plus solicitor’s fees of £1,200. Annual maintenance costs on the home (1.25% of initial value of home), plus annual buildings insurance (on typical 3 bedroom home) are calculated over 50 years. Maintenance and insurance costs are assumed to rise in line with inflation every year. House prices are assumed to rise with inflation over the long term.

Cash cost of renting is calculated as follows:

Annual rental charge on the average house is based on the typical yield in each region (source LSL Buy-to-Let Index for England & Wales, Findaproperty for Scotland) on the average home (source Land Registry). Rents are assumed to rise with inflation over the fifty year period. Renters are also assumed to invest the deposit that they do not need to spend buying a home. This investment income is deducted from the total cost of renting. The investment income is based on the average of the three best buy deposit rates and is calculated net of basic rate tax.

Key assumptions:

Assumptions

Mortgage Rate (average APR of 3 best buy 5 year fixed, 80% LTV)

4.40%

LTV

80%

Savings Rate (latest best buys - average top 3 instant access)

3.25%

Land Registry House price (April 2012)

£160,780

Maintenance cost - % of value

1.25%

Inflation - long term

2.0%

Buildings insurance - year 1 (£500k cover)

£160

Rental Yield (LSL April 2012)

5.20%

Tax rate on interest income

20%

· We assume a fifty year time span, on the basis that the average first-time buyer is in his early thirties and could expect to live around fifty years more. A longer life would increase the value of ownership relative to renting.

· For the sake of simplicity and conservatism, we assume the buyer and the renter never move once they occupy the home for the first time. Trading up the housing ladder as a renter or a buyer would increase the relative value of ownership over renting.

· House prices in England and Wales are sourced from Land Registry. Scottish house prices are sourced from Registers of Scotland.

Key sensitivities in the model:

Our assumptions are designed to be very conservative. We highlight some of the key sensitivities below.

· The model is most sensitive to inflation. Higher inflation significantly increases the value of owning your home compared to renting it. This is because rents will continue to increase with inflation over the long term, but after your mortgage is paid off, you only have maintenance and insurance costs on your own home.

· The model is moderately sensitive to LTV ratios. Higher LTV ratios increase the value of homeownership due to the gearing advantages of borrowing and because the renter has a higher notional deposit on which to accrue investment income if he does not buy a home with it. We have assumed a relatively conservative 80% LTV for the purposes of this calculation.

· The model is not very sensitive to mortgage rates. Rates need to more than double to make the cash cost of renting cheaper over the long term; this would still not compensate for the homeowner accumulating the asset value of the home, however. Furthermore, in the real world high mortgage rates would typically accompany higher inflation, so the value of ownership would still be significantly greater as rents inflated.

· Ongoing costs such as insurance and maintenance make little difference to the results, as the assumptions are already rather conservative. One-off costs like stamp duty and solicitor fees likewise make little difference to the long-run result.


About Barclays

Barclays is a major global financial services provider engaged in personal banking, credit cards, corporate and investment banking and wealth and investment management with an extensive international presence in Europe, the Americas, Africa and Asia.

With over 300 years of history and expertise in banking, Barclays operates in over 50 countries and employs approximately 140,000 people. Barclays moves, lends, invests and protects money for customers and clients worldwide.

For further information about Barclays, please visit our website www.barclays.com.