Should I buy a house? When to rent vs buy

Are you in a position to buy?

If you’re Googling ‘rent vs buy', a good place to start is to look at your financial situation. Are you mortgage ready?

You’ll need at least a 5% deposit, but to unlock the best interest rates aim for 20%. 

You’ll need a good credit score, especially if you only have a small deposit. This means you need to have a history of responsibly managing your debts, no missed payments, and a track record of being registered on the voter’s roll. 

Having no debts at all can damage your credit score but having too much debt will reduce the loan amount the mortgage lender will offer. If you have a high amount of personal debt a low credit score or a small deposit, it’s a good idea to rent until you’re mortgage ready.

Read more: How much do I need for a house deposit?

You can sign up to a service like Credit Ladder which collects information about how well you pay your rent and sends it to the two main credit agencies, Experian and Equifax so it can be used in your credit score. 

Confused as to why credit matters when buying a home? Check out our blog.

Your salary, or combined salaries if you’re buying with someone else, needs to be high enough to pass a mortgage lender’s strict affordability checks. Renters are often surprised that they are turned down for a mortgage that costs the same amount a month as their current rental payment.

It’s because mortgage lenders are bound by regulations to check you can afford the mortgage if interest rates should rise. 

Struggling with affordability? An Income Boost can get you on the ladder, faster.

Here’s an example.

The mortgage you want has an interest rate of 3%. On a loan amount of £200,000 over 25 years, your monthly payment will be £948 a month. 

You’re thinking: 'great news, I already pay £950 in rent so the lender will be satisfied I can afford it.'

Wrong. The lender has to check you can afford to pay the mortgage at 3% above their standard variable rate (SVR) which will be around 7.5% in total. This means you must be able to afford a monthly payment of £1,478, even though it’s much cheaper in reality.

The affordability check you must pass to be approved for a tenancy is much easier, so if you’re at the start of your career in a trainee role but know your salary will rise rapidly in the coming years, renting is a good idea until your fully qualified. 

For a breakdown of confusing mortgage acronyms (like SVR), read our guide here.

Are your current circumstances temporary or permanent?

One of the biggest selling points of renting is flexibility. You can get a tenancy for as short as six months and when this is up, you can give notice and move if it’s not right for you. 

That makes renting a great way to try out a new area without fully committing to living there or even trying out living with your partner before you buy a home together. 

If you’ve moved to a new area for work but plan to move back home after a few years, renting is quicker and less hassle than buying. In the short term it costs less because you won’t have to pay legal fees and estate agent costs when you come to sell.

Renting is often a handy stop-gap for recent divorcees who are selling the marital home or getting back on their feet.

But with flexibility also comes insecurity. Your landlord can choose to hike your rent when your tenancy comes up for renewal or they can refuse to renew your tenancy at all which means you have to move out.  

Investing in your own future

If you’re ready to put down roots of your own, and you’re financially fit – buying a home makes more sense than renting over the long term because you’re investing in your own future, not your landlords.

More than 350,000 first-time buyers took the plunge in 2019, the year before the pandemic, with the highest number of fledgling buyers since 2007.

If you’re starting a family, you have peace of mind that you can live in the property for as long as you choose, not as long as the landlord allows it. You have the freedom to renovate, decorate and improve your home: a luxury renters do not have.

And if you want security over your monthly payments, you can fix your mortgage rate for five, seven, or even 10 years.  

The sooner you buy, the sooner you can be mortgage-free which is a huge advantage when you retire and are relying on pension income to support yourself. 

And you benefit from rising house prices which means your home is increasing in value while your debt is shrinking. The equity you build-up, which is the difference between the value of your debt and the value of your home, can be used to buy a bigger house in the future. 

Or you can use your property wealth to support you in retirement or pass it on to your kids as a living inheritance to help them get on the property ladder.

Talking to family about money can be challenging. Our guide to inheritance etiquette can help.

So to answer the question, ‘is buying better than renting in the long-term?’ a recent report that compared the costs of buying and renting over a 30 year period ruled categorically yes. 

It found that renting costs over £300,000 more than owning over three decades. Homeowners would also benefit from building up equity of close to £210,000.

Yes, homeownership comes with more responsibility but is it better to rent or buy a house in the long-term? It’s clear buying a home pays off.