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In many cultures, buying a home is seen as a necessary part of growing up – an Englishman’s home is his castle after all. For generations, people have been captivated by the idea of owning their own four walls – of having a little chunk of the world that’s theirs. So you’ll often hear people decry the very idea of renting and say that you’re throwing money away by not buying.
In a housing market where home ownership seems out of reach to many (hello London, New York, San Francisco, Paris, and Hong Kong), that can be disheartening. But as we’ll see in this Pack, it doesn’t have to be. Owning is the right choice for many, but it doesn’t suit everyone – and sometimes it might not even make financial sense.
That’s what this Pack is for. We’re going to walk you through things to consider when choosing between renting and buying, and explain the pros and cons of each. No matter which you choose, we’ll give you practical tips to make sure you have a lovely home in which to keep your heart – whether you stay there forever or just a few months. Ready? In the next session we’ll look at how buying a house actually works. Don’t forget your keys!
Most purchases in life are simple: you hand over cash, get the thing you want, and that’s that. But real estate is different: it costs a lot more. The average house price in London is over £460,000, and in New York it’s $680,000. Unless you’re fabulously wealthy, you probably don’t have a bank balance anywhere near that amount.
To deal with that, most prospective buyers turn to mortgages. These are giant loans, secured against the value of a house – the bank giving you a mortgage will have a financial claim to a big chunk of your house, and you’ll slowly buy that claim off them. You put down a deposit – 5% of the property’s value is usually the absolute minimum – and own that percentage of the house outright. You then start paying back the loan in small chunks, normally over many, many years. Each time you pay off a bit of the loan principal (the actual amount you borrowed, as opposed to the interest you owe), your absolute ownership of the house goes up slightly. (Unless you have an interest-only mortgage, which is slightly different: you pay the capital back in a lump sum at the end of the mortgage’s term). Hopefully, you’ll eventually pay it all off – congratulations, you’re now the proud, 100% owner of a house.
Lenders don’t just chuck a few hundred thousand your way out of the goodness of their hearts. Like all loans, you have to pay interest on your mortgage. Interest is usually incorporated into your monthly payments: to begin with, most of your money will go toward paying off the interest. But as you slowly start to pay off the principal, your interest payments will get smaller. So your monthly payments should decrease – or you can keep them the same to pay off more of your principal and become debt-free faster.
If you don’t keep up with repayments, things can go south very quickly. Because mortgages are secured against your house, the lender can take control of your home if you "default" on the loan. That means they’ll kick you out, sell the house, and use the money to pay themselves back. You, meanwhile, are left out on the street.
When you’re paying a mortgage, you’re not only guaranteeing a roof over your head, you’re also getting something in return – ownership of your property. That’s quite different from renting, where all your accommodation expenses are going to a landlord who’s not giving you ownership of your home. But that doesn’t mean buying is always the right choice. In the next session, we’ll look at how to decide if it’s right for you.
Firstly, you need to figure out if you can buy. To get a mortgage, you need two things: a deposit and a stable income to cover repayments. Most lenders will simply refuse to give you a loan without those things. The greater your deposit and income, the more they’ll lend you. If you want to live somewhere flashy, you’ll need a big deposit and a chunky income. Without either of those, you might want to look somewhere cheaper... but if you’ve got minimal savings and a low salary, you might not be able to buy at all. Online tools like this mortgage affordability calculator can help you figure out if buying is feasible for you.
If buying is an option, you need to calculate if it makes financial sense. The price of a mortgage is often less than renting in a similar area… but your mortgage payment is dependent on interest rates and will often fluctuate more than your rent. You’ll need to be able to afford the repayments if interest rates rise (and remember to take all your other expenses into account too).
The cost of buying a house is bigger than just mortgage payments and your deposit. There’s a lot of paperwork involved, which means four-figure legal fees are hard to avoid. Plus, there’s tax: some countries demand a levy when you buy a house, which can be upwards of 5% of the property’s value. That’s waived or reduced for first-time buyers in some countries though, like the UK.
That, plus the expenses of actually owning a home (when your boiler breaks, you’ve gotta pony up to fix it), mean that it can be a lot of hassle. If you’re planning on living somewhere for just a few years, you might be better off saving yourself the headaches and fees, and renting instead. But if you’re staying somewhere for longer, buying could win out – if only because it means you’ve got stability, rather than living at the whim of a pesky landlord (more on that in the next session).
There can be. Like all assets, your home could increase in value. Many people who bought homes in the ‘80s and ‘90s have seen massive returns from the property market boom in major cities, and are now millionaires as a result.
But there’s no guarantee that house prices will continue to increase. Across the UK as a whole, house prices didn’t rise as fast as inflation in the 10 years leading up to 2017 – so homeowners effectively lost money. And there can be a huge regional divide too: though some Washington D.C. property prices went up by over 90% between 2004-15, in parts of Atlanta prices fell by 25%.
If your house price falls, you’re out of pocket. Let's say you put down a $10,000 deposit on a $100,000 house, and house prices fall by 10%. Your house is now worth $90,000 total, and you owe the bank $90,000 – so that $10,000 deposit you put down is gone with the wind (or at least until prices rise).
But it could be worse – and you could wind up with something called negative equity. If house prices fall by 20%, your house is only worth $80,000 and you still owe the bank $90,000 – so you owe $10,000 more than your house is worth (plus you’re down the $10,000 from your deposit). In this case, it becomes very hard to sell – you’d have to actually pay the bank that "extra" $10,000 to settle your mortgage – so people often get stuck waiting and hoping for house prices to rise.
Even if house prices do rise, you still face an “opportunity cost”. Property is an illiquid asset, which means you can’t sell it very easily. That means you’ve got an awful lot of money tied up, and there’s a chance you could use that money for something else – putting it in the stock market, for instance – that could give you a better return in the long run.
Because it can be better than renting. In the next session we’ll look at all the problems with renting – let’s see if it’s the bedbugs or the urge to buy that makes you itchier…
In places where you can’t afford to buy, you might still be able to rent because rental security deposits are normally much, much smaller than mortgage deposits! That means you can move somewhere slick and live life like you’re the star of your own TV show (Lena Dunham would be proud). You’re also not tied down, so if in six months you want to pack up and find yourself in Bali for a year, you can do just that – whereas if you owned a house that might be a harder decision.
While home ownership is expensive, renting isn't always cheap, however. In places where housing supply is limited, landlords might try and squeeze every last penny out of you – and your rights in these situations vary from place to place. You’re often largely at landlords’ mercy: if they decide to hike rent or even kick you out, you might just have to do what you’re told. If you’re being bumped from place to place every few months, moving costs (like your security deposit, first month’s rent, and broker fees) can add up quickly. And if your landlord wants to hang on to your deposit over a tiny wine stain under the sofa, you might be left out of pocket.
Perhaps the biggest problem with renting isn’t a financial one: it’s an emotional one. When you’re renting, your place isn’t yours. Your landlord might not let you decorate the way you want to or have pets, and it’s difficult to feel truly at home when you know you might be moving out in less than a year. When you’re young, that might not matter so much. But as people get older, they usually start to value the stability of home ownership a lot more.
You need to think about a few things: the varying costs of renting vs buying, the advantages of being able to move, the changing needs of future you, and whether you want the security – but also the responsibility – of having a place of your own.
If you’re based somewhere you plan to live long-term, have savings piling up, and like the idea of a place of your own – you should be looking to buy. But if you ever plan to motor West, are living paycheck to paycheck, and value flexibility – you should probably rent for now instead.
For many people, the right answer is a combination of the two: renting when you’re younger and buying when you’re older. In the final session, we’ll look at how to rent and buy smart, giving you tips to use now so you can get what you want later.
The best thing you can do when both renting and buying is research. The more you know about how much you should be paying, the more easily you can avoid being ripped off. Fortunately, websites like Zoopla and Zillow have tons of data on properties, so you can accurately gauge prices in your area. Consider too how much space you actually need – it’s a bit pointless paying for a two-bedroom apartment if one room is going to be unused. Bigger doesn’t always mean better.
One of the priciest parts of renting can be the fees you might pay to a broker in exchange for finding you somewhere to live. Brokers charge both tenants and landlords – so if you can find a way around them, you could try to negotiate cheaper rent.
That might mean asking around or looking through Facebook groups and Craigslist ads for direct listings. Make sure everything’s above board though: never live somewhere without a legal contract protecting you.
If you’re renting with a view to buying when you’re older, you’ll want to use your renting years to get your finances in tip-top condition. That means paying off any existing debt (more on that in our Dealing With Debt Pack) and saving for a deposit. Putting small amounts aside each month can quickly build up – plus, if you’re not planning on buying for a decade or so, you could see that money grow nicely with the right investments (more on that in our Investment Choices Pack).
When it comes time to buy, you’ll need a good credit score and a decent income along with that deposit for a lender to loan you any cash. Building up a credit score can be tricky depending on what country you live in. To prove that you’re a responsible borrower and boost your score you should make sure to pay your bills on time, take out credit cards (even if you have to stump up some cash to secure them in the beginning) and pay them off in full each month, and avoid defaults at all costs.
As for your income, think about whether the career path you’re on will get you to a point where you can borrow enough to buy your desired property (and bear in mind that property prices could increase significantly between now and then). If it won’t, have a think about your priorities – perhaps you’re willing to change jobs for a shot at owning a home. But remember that it might not be all flowers and rainbows owning a beautiful home if you’re working a job you hate to pay for it...
More than any other financial decision, deciding whether to buy a house is an immensely personal one. Only you can know if it’s right for you. But now you know what to weigh up when you do make that choice – and maybe you’ll end up with a castle of your very own 🏰
🔹Neither buying nor renting is right for everyone – each suits different people
🔹Most people buy homes by putting down a deposit and taking out a hefty mortgage
🔹Buying a house can be expensive: fees, mortgage repayments, and property repairs all add up fast
🔹Renting can end up even pricier than buying – and you don’t have the stability of owning your own home
🔹Research is really important regardless of whether you rent or buy – and if you do want to buy, you should start saving for a deposit yesterday 😉
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