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Are you weighing up whether to rent or buy a home? Both have upsides and drawbacks.

Ultimately, the answer depends on multiple factors, including your finances, your long-term plans and the housing market in your area.

Here are five questions to ask when deciding to rent or buy a home:

  1. What can you afford and how much savings do you have?
  2. How long do you plan to stay in the home?
  3. Do you want stability or flexibility to move around?
  4. Do you want to be responsible for repairs/maintenance?
  5. What are your financial, career and family goals?

Calculating the costs

The first consideration in the rent vs. buy decision is often how much each will cost.

If you rent a home, your monthly costs are generally fixed for the term of the lease. Your monthly rent may or may not include utilities such as electricity, gas, water, and internet. Most leases require at least the first month or two of rent and a sizeable deposit, which can add up to thousands of pounds. Keep in mind, though, that landlords can (and will) increase the rent whenever your tenancy agreement ends – though the government is currently proposing to increase the minimum duration of leases to three years. Landlords can also decide to sell the property.

The good news: when you’re a tenant, your landlord is generally responsible for fixing any issues with the property, whether it’s a leaky roof, a burst pipe, or a broken washing machine.

How much house can I afford?

When buying a home, most mortgage lenders require a deposit of between 5 and 20% of the home’s price. There are also other significant fees and charges when buying a property – most notably stamp duty, which can be tens of thousands of pounds unless you’re a first-time buyer.

A mortgage calculator can give you a rough estimate of your monthly payments, including your interest and principal outlays, and whether you can still afford repayments if the interest rate goes up (or down).

A housing affordability calculator can help you determine how much house you can afford. But your financial responsibility doesn’t end with your monthly mortgage payment: you also need to pay for utilities (gas, electricity, water, internet), maintenance, council tax and repairs, whether it’s a few pounds to fix a leaky tap or thousands to replace a roof.

Should you buy or rent? Here’s what to consider

Buying

Advantages

  • May build equity and credit
  • No landlord to answer to
  • More stability (especially with schools)
  • Can improve or upgrade home to your tastes

Disadvantages

  • Requires substantial money, paperwork upfront
  • Could lose money if home values decline
  • Extra expenses beyond mortgage payments
  • Responsible for repairs and renovations

Renting

Advantages

  • Fewer upfront costs and paperwork
  • Freedom to be more mobile
  • Not responsible for maintenance, repairs
  • No need to worry about falling home values
  • Build up your credit rating (in some cases)
  • No property tax bills

Disadvantages

  • Landlord can raise rent or sell the property
  • Choices may be limited depending on vacancies
  • Might have to move multiple times
  • Don’t build equity

Reasons to buy a home

Buying a home can be a great investment. If home prices in your area have been rising, buying now can help you stay in a neighbourhood that you might otherwise be priced out of in a few years. And even if you don’t end up staying long term, a sharp rise in local property values could mean a sizeable profit when you sell.

Some indications that buying may be right for you:

  • You plan to stay in the same place for more than a few years
  • You’d be willing to rent out part or all of your home, should your plans or finances change
  • You’re eligible for a market-leading mortgage with affordable repayments
  • You’re willing to put some “sweat equity” into a fixer-upper, allowing you to buy something more affordable. You can increase the home’s value with improvements over time

Reasons to rent a home

Though owning your own home can offer a sense of security, homeownership has its drawbacks, such as having to replace the roof or getting the brickwork re-pointed. Getting out of a lease is also much less of an ordeal than selling a house, so if you’re not sure where you’ll be next year, renting can save you some costly headaches.

Some indications that renting may be right for you:

  • You aren’t sure how long you’ll be in the home because of work, changing family circumstances or other reasons
  • You won’t be able to afford – or don’t want to bother with – the maintenance or repairs a house may need
  • Your finances are variable or likely to change soon, potentially making it difficult to keep up with mortgage payments

Want flexibility? Then rent

You are more mobile when you rent because you can move out at the end of the lease. Buying a home entails a lot of upfront costs, from the deposit to stamp duty to all the various searches and conveyancing fees. Renting carries fewer upfront costs.

Equity is great when you build it

On the other hand, renting has a major drawback: you don’t build equity.

What is equity?

When the home’s value rises while the mortgage debt falls as you repay it, you’re “building equity.”

Home’s value – Mortgage debt = Equity

“History shows that homeowership is a pretty good investment,” says Malcolm Hollensteiner, Mid-Atlantic director of mortgage at United Bank.

However, if home values fall or you run into trouble repaying your mortgage, you stand to lose money. Your finances and credit could take serious hits if you fail to repay your loan.

Compare home appreciation with rent

It’s a good idea to balance home-value appreciation with the upfront costs of buying. Richard Green, a professor at the University of Southern California, Los Angeles, offers this rule of thumb:

“If house values have to go up about 3 percent a year over rent for you to break even, then, depending on your living in a place for five years, buying is a better bet than renting. If you have to get 5 to 6 percent appreciation every single year, then you are better off renting from a purely financial standpoint.”

Think of school

If you have young children, owning a home lets you lock in your housing costs so you can give the children the stability of staying in the same school catchment area for an extended period.

Don’t make it your primary investment

If you are focused on the investment potential of owning your home rather than the softer aspects of security and stability, then you might be better off renting.

“The idea that homeownership doesn’t carry a lot of risk with it is wrong,” says Green, the USC professor. “If you are in a mutual fund, with a long-term perspective, it is probably going to grow faster than real estate values. Housing can be more volatile than you think (depending on location).”

Now read about whether you should renovate your current home, or move