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Interest rates are unusually low at the moment, they more often hover between 4-6% and have been as high as 8% (and this is the base rate - most people pay more

Interest rates are unusually low at the moment, they more often hover between 4-6% and have been as high as 8% (and this is the base rate - most people pay more than this, especially for fixed rate deals). In the long run owning your house may or may not work out to be more profitable than keeping the difference between rent and mortgage payments (plus maintenance plus taxes plus other fees) but it's not always the case. This is especially true if the gap between the mortgage payment (plus costs and fees) and rent is well invested. At the moment countering the low cost of borrowing is the fact that equities are also very cheap. Every pound invested in the FTSE 250 in mid 2009 was a great buy, more than compensating for the low mortgage rate. In the end buying vs renting is mostly a personal decision rather than an economic one. EDIT: Graph of the UK base rate back to '97 - most people pay 2-4% above the interbank rate listed here. http://www.housepricecrash.co.uk/graphs-base-rate-uk.php http://www.housepricecrash.co.uk/graphs-base-rate-uk.php

axod 17y ago
>> "This is especially true if the gap between the mortgage payment (plus costs and fees) and rent is well invested." Firstly, there often isn't a gap, or it's negative - mortgage payments are less than rental payments. Secondly, you'd be hard pressed to find a better paying investment than property. House prices always increase in the long term. It's an investment. You buy a property, then a few years later can sell it for quite a bit more than you paid. As long as it's a property that is attractive people will always want it. Personally I find the economics extremely clear cut. Mortgage payments here are comparable to rental payments, if not lower. So you can either give the money to a landlord and get nothing in return, or you can give it to a bank, pay off the balance (Long terms savings), and benefit when house prices increase if you sell it. Or of course just wait until mortgage is over and then live there rent free for the rest of your life. I've never understood why the economics are even debated online like this :/
- notauser 17y ago
  Because, I'm afraid, your assumptions are flawed. You are failing to account for the capital built up in the property which is only returning 5% (on average), whilst it could be earning a (historical) average of 12% elsewhere. (The average index fund growth.) You are also failing to account for maintenance costs, which are not cheap on a property of any size. Specific to the UK market you are also not calculating stamp duty and capital gains tax, which are either property specific or harder to minimize on property. The reason that the economics are debated on-line is because: - Rentals have hidden advantages (opportunity cost of invested capital). - Housing has unhidden advantages (capital growth of the property). - It's much harder to screw up a family-home-property based investment scheme. Which means that people invariably don't correctly account for all of the variables. If property investing were that clear cut then investment capital would buy up property until house prices had risen and rents had been depressed to remove the advantage! Markets seek an equilibrium. EDIT: I should probably point out that I have in front of me the yield data for four cities at the moment and the average return on capital for all of them is 4.8% - you personally may have found a better deal, but that's just an anomaly. I'd probably buy something if I had children, but it has nothing to do with the value of the investment.
  - axod 17y ago
    >> "You are failing to account for the capital built up in the property which is only returning 5% (on average), whilst it could be earning a (historical) average of 12% elsewhere. (The average index fund growth.)" Yes but with a mortgage you're effectively investing someone elses money (the banks). You get to invest a large amount of money into a pretty good return investment, with hardly any outlay from yourself. If you were renting and putting the (maybe £100 a month max) difference into some investment, you'd make next to nothing on that. But with a mortgage, you're 'investing' the banks money as well as your own. I've only bought 2 houses in my life (3rd one soon), but both were financially very good. Even in the current market.
    - notauser 17y ago
      If you have £100k of equity/capital in your house then on average (long term historical index investment) you would have made £864k investing over 20 years vs a historical average of £165k in a property. (Here's a source for the 12% figure - http://www.finfacts.ie/stockperf.htm http://www.finfacts.ie/stockperf.htm ) The money your borrow from a bank can (depending on relative cost) close or open the gap. If average return is 5% and the average cost of borrowing is 2% (over 20 years) then you would make an additional £80k per hundred thousand borrowed. However if the average mortgage rate is 8% then you would lose an additional £80k per hundred thousand borrowed. Capital growth will also add something - over the last 20 years it was about 100k per 100k invested/borrowed. 2% and 8% are both well within the historical mortgage rate trends. Renting helps reduce your exposure to this, whilst increasing your exposure elsewhere. All calculations are pre-inflation.

axod 17y ago

>> "This is especially true if the gap between the mortgage payment (plus costs and fees) and rent is well invested." Firstly, there often isn't a gap, or it's negative - mortgage payments are less than rental payments. Secondly, you'd be hard pressed to find a better paying investment than property. House prices always increase in the long term. It's an investment. You buy a property, then a few years later can sell it for quite a bit more than you paid. As long as it's a property that is attractive people will always want it. Personally I find the economics extremely clear cut. Mortgage payments here are comparable to rental payments, if not lower. So you can either give the money to a landlord and get nothing in return, or you can give it to a bank, pay off the balance (Long terms savings), and benefit when house prices increase if you sell it. Or of course just wait until mortgage is over and then live there rent free for the rest of your life. I've never understood why the economics are even debated online like this :/

notauser 17y ago
Because, I'm afraid, your assumptions are flawed. You are failing to account for the capital built up in the property which is only returning 5% (on average), whilst it could be earning a (historical) average of 12% elsewhere. (The average index fund growth.) You are also failing to account for maintenance costs, which are not cheap on a property of any size. Specific to the UK market you are also not calculating stamp duty and capital gains tax, which are either property specific or harder to minimize on property. The reason that the economics are debated on-line is because: - Rentals have hidden advantages (opportunity cost of invested capital). - Housing has unhidden advantages (capital growth of the property). - It's much harder to screw up a family-home-property based investment scheme. Which means that people invariably don't correctly account for all of the variables. If property investing were that clear cut then investment capital would buy up property until house prices had risen and rents had been depressed to remove the advantage! Markets seek an equilibrium. EDIT: I should probably point out that I have in front of me the yield data for four cities at the moment and the average return on capital for all of them is 4.8% - you personally may have found a better deal, but that's just an anomaly. I'd probably buy something if I had children, but it has nothing to do with the value of the investment.
- axod 17y ago
  >> "You are failing to account for the capital built up in the property which is only returning 5% (on average), whilst it could be earning a (historical) average of 12% elsewhere. (The average index fund growth.)" Yes but with a mortgage you're effectively investing someone elses money (the banks). You get to invest a large amount of money into a pretty good return investment, with hardly any outlay from yourself. If you were renting and putting the (maybe £100 a month max) difference into some investment, you'd make next to nothing on that. But with a mortgage, you're 'investing' the banks money as well as your own. I've only bought 2 houses in my life (3rd one soon), but both were financially very good. Even in the current market.
  - notauser 17y ago
    If you have £100k of equity/capital in your house then on average (long term historical index investment) you would have made £864k investing over 20 years vs a historical average of £165k in a property. (Here's a source for the 12% figure - http://www.finfacts.ie/stockperf.htm http://www.finfacts.ie/stockperf.htm ) The money your borrow from a bank can (depending on relative cost) close or open the gap. If average return is 5% and the average cost of borrowing is 2% (over 20 years) then you would make an additional £80k per hundred thousand borrowed. However if the average mortgage rate is 8% then you would lose an additional £80k per hundred thousand borrowed. Capital growth will also add something - over the last 20 years it was about 100k per 100k invested/borrowed. 2% and 8% are both well within the historical mortgage rate trends. Renting helps reduce your exposure to this, whilst increasing your exposure elsewhere. All calculations are pre-inflation.