My BRB Mortgage › Renting or owning

Renting versus owning

The comparison is usually posed as rent against mortgage payment, which is not a comparison of like things. A rent buys occupation and nothing else. A mortgage payment buys occupation, an obligation, an asset and a maintenance liability, all at once.

What a renter actually pays for

Rent is the whole housing cost apart from utilities and contents insurance. It includes the landlord's financing cost, taxes, building insurance, maintenance, the risk of vacancy and a return on capital. Those costs exist under either tenure; renting bundles them into one predictable figure and transfers the variance to somebody else.

The renter also buys flexibility, which has real value that never appears in the arithmetic. Moving costs a notice period rather than a transaction, which matters for households whose work, family arrangements or preferences may change within a few years.

What an owner actually pays for

An owner pays interest, which is a pure cost, and capital, which is a transfer from cash into equity. Alongside those sit property taxes, building insurance, any association charge, and maintenance.

Maintenance is where estimates usually fail. It is not smooth: years of almost nothing are interrupted by a roof, a heating system, a service line or a structural repair. It is also unavoidable, in the sense that deferred maintenance is a cost carried forward with interest of its own.

Transaction costs and the holding period

Buying and selling are both expensive, and the costs are incurred at the start and the end. That gives ownership a break-even period: a number of years below which, on plausible assumptions, renting the same property would have cost less.

The break-even period is highly sensitive to inputs — to the rate, to local transaction costs and taxes, to maintenance assumptions and to what happens to prices. Any single published figure is really a statement about the assumptions behind it.

Equity, leverage and risk

A deposit is a leveraged position in one asset in one location. Leverage magnifies movement in both directions, and the asset cannot be sold in parts or quickly.

The offsetting advantage is that a fixed-rate loan gradually fixes the largest household cost while incomes tend to rise, and that the debt shrinks in real terms with inflation. Over long holding periods that mechanism, rather than price appreciation, does much of the work.

The questions that decide it

How long is the household likely to stay; how stable is its income; how much reserve remains after the deposit and costs; how large is the gap between local rents and local purchase costs; and how much of the maintenance can be carried in money or in time.

Those are household questions rather than market ones, which is why the same market can be a sensible place to buy for one household and a sensible place to rent for its neighbour.