FISCUS MORTGAGES - INFORMATION AND ADVICE

Renting versus Buying

In recent years, booming house prices have made it harder for first time buyers to purchase a house – the Council of Mortgage Lenders (CML) March 2004 market briefing (pdf file) shows that the number of new mortgages taken out by first-time buyers has remained at 27% for several months now. This is against a backdrop of a long-run trend of over 45% of new mortgages taken up by first time buyers.

We will consider why this happens (and how it impacts you) in our “How much can you borrow?” section, which look at the barriers to attaining a mortgage. These factors are principally the increase in house prices, making it harder to get a mortgage based on first-time borrowers’ incomes and the need to save a substantial sum of money before you can get a competitive mortgage.

Alongside this, the take-up of buy-to-let mortgages has increased. This increase in the supply of rental property will further affect the market dynamic, as it is likely to lower the average rental cost of property, thus distorting the picture against first-time buyers further. After all, if the cost of buying is higher and renting lower, then the incentive to buy falls.

For the time being, let us consider the basic factors to ponder when deciding on whether to buy a property or rent:

RENTING A PROPERTY

Advantages

• The landlord of the property will be responsible for all maintenance of the property. The only exemption with repairs would be if you were at fault, which led to damage to the property (i.e. accidental damage).

• Flexibility. Depending on your contract (there is usually a minimum lease term of 3-12 months) it is relatively straightforward to change properties if you are renting. Many people that rent do so due to relocation for work or other reasons, and renting is a simple way to obtain a property for the period needed.

• Particularly applicable for those that would become first time buyers are the start up costs of the various options. The costs of renting are much lower, as a sizeable deposit is not required. However, landlords will typically ask for a bond to insure themselves against damage to the property or in case the renter attempts to leave the premises without paying rent. This is usually refunded at the end of the rental agreement, after a post-rental inspection.

Disadvantages

• An issue of equity. The money paid as rent becomes the profit of the landlord. This is considered by some as “lost money”, as it has not been used to gain equity in any way.

• There will always be a mild feeling of insecurity when renting, as there is always the chance that the landlord may terminate the contract. This may be due to your behaviour within the property, or factors outside of your control, such as bankruptcy of the landlord. However, your agreement with the landlord is a legally binding contract, and as such, is difficult to terminate without good cause.

• A problem that comes up time and again occurs when a property is subdivided but there are shared facilities, such as a kitchen or living room. There may be personality clashes and individuals may find it affects their “home life” when they live with individuals that they dislike. However, if you have signed a binding contract for a set period of time, it may be difficult to leave immediately. Always meet the people you would be living with if you plan to rent such accommodation.

• Although most landlords are keen to look after their property (it is their investment, after all), some may be considered “cowboys” that will attempt to solve problems with the minimum possible outlay. This can obviously affect your quality of life, so it is important to try and find out about the landlord and how the property will be maintained. There are legal requirements on landlords to ensure the adequate maintenance of their rental property.

BUYING PROPERTY

Many of these are simply the flip-side of the rental pros and cons, but for the sake of clarity we have again laid them out:

Advantages

• Equity. Rather than the “dead money” argument of renting, by purchasing your own property and repaying a mortgage, you build up equity over time, in what can be considered a valuable investment. The property is likely to be your most valuable asset and, if necessary, can be sold or remortgaged at any time to realise capital for the homeowner.

• Unlike a rental property, this is yours to do with as you wish. The tenant of your old property didn’t let you have a satellite dish? Not a problem anymore. This extends to all facets of the property, although bear in mind that any major changes will probably require planning permission from your local council.

• Related to making changes to the property is the ability to maintain it yourself. Rather than having to wait a week to fix a leaking tap, you arrange it yourself. There are obviously downsides to self-maintenance (see disadvantage below) but there are instances when ongoing annoyance drives many renters to want to pay for maintenance, but they choose not to as they expect the landlord will eventually pay for the repairs. If this drags on in a rental property, it can adversely impact your quality of living.

Disadvantages

• The obvious problem is the concern over arranging such a large and complex procedure of buying and then financing a house. The initial legal and arrangement fees, along with the cost of estate agents, surveyors and stamp duty can add up to a substantial bill. On top of this is the basic knowledge that there is a sizeable debt obligation in your name. This can obviously concern first-time buyers and this stress can put off many individuals.

• We referred to the benefits of being able to maintain your own property, but we should also consider the downside. It will clearly be financially demanding if you discover any major repairs need to be carried out on your property.

There will obviously be some maintenance required throughout the life of the property and you should be prepared for this. However, as stated above, the initial burden on a new borrower can be high, and the last thing you want is to find out that major repairs are required within months of moving in. You should therefore ensure your house is adequately surveyed, with a “full structural survey” ensuring that everything major has been checked. If something comes up, it need not put you off the house; you should be able to negotiate a discount with the seller, reducing the property price to cover the cost of repairs.

• You lose the flexibility of renting. The actual flexibility of a rental contract could be debated, but needless to say it is easier to relocate if you are renting than if you have purchased a property. That said, relocation does not necessarily involve selling your house and buying another. If a temporary move, there is nothing stopping you from letting your current house while you temporarily rent elsewhere. This is a particularly popular option with individuals that move overseas for a period of time.

• The booming house market has relegated this from the public conscious, but we shouldn’t forget that property has an element of risk – house prices can go down, as well as up. Negative equity was a major problem in the recession of the early 1990s, but since then house prices have soared and it seems to have been long-forgotten. In a nutshell, if the economy went pear-shaped (or more specifically the housing market), then you may find that your mortgage debt is greater than the value of your home. It is for these sorts of circumstances that lenders sometimes ask for a Mortgage Indemnity Guarantee (MIG).