We are often asked whether it is better to rent or buy a home in London. Weighing up the benefits of renting versus buying a property isn't always straightforward and will depend on your circumstances.
If you're struggling to decide, we hope that this article will help inform your decision.
Should you buy a home?
Getting on the property ladder is a very British obsession. Given that house prices always seem to be rising, it is easy to see why.
If you are considering buying your first property, the upsides and drawbacks you should consider are:
The benefits of buying
- You are investing. Your monthly mortgage payments are going towards owning your property rather than into your landlord's pocket. You will fully own your home at the end of the mortgage term, so you will be able to live in it with nothing to pay.
- You could make money when you sell. In the long term, property prices generally go up. If you decide to sell, you can keep any money left over once the mortgage is paid off.
- You can make home improvements. Homeowners have much more freedom to put their stamp on a place and renovate to suit their lifestyle. Money spent on home improvements is likely to be an investment, increasing the value of the property when you come to sell.
- It is your choice when to move. As long as you keep up with your mortgage repayments, you can live in the property as long as you want.
The drawbacks of buying
- High initial costs. You will need to put down a deposit of at least 5% - or more if you want to access the best mortgage rates. There is also solicitor's fees, surveyor's fees, and stamp duty if the property you are buying costs more than £125,000.
- Interest rates are going up. Currently, interest rates are rising. This means that your monthly mortgage repayments will go up. Although you can get a fixed-rate mortgage, you could still face increased rates when you reach the end of the fixed period (which is usually between 2 and 5 years).
- Property prices can go down. Property is considered a solid investment, and in the long term, its value has consistently increased. However, there can be short-term fluctuations in the market which means your property depreciates. If you have a large mortgage, this could put you into negative equity, where your mortgage is more than the value of your home.
- You are responsible for maintenance and repair costs. If something goes wrong, you will have to pay for repairs, like a broken-down boiler or leaky roof. Property experts recommend spending around 1% of the property's worth on maintenance each year to retain its value.
- It isn't easy to move quickly if you need to. It can take a long time to move house as you will probably need to sell your current home first. It might not always be easy to sell your home, depending on what is happening in the market.
- Limitation of leasehold properties. If you are buying a leasehold apartment, there are added restrictions and costs. You will need to pay a service charge and abide by the terms of the lease. For more information, read our blog: How to extend a lease.
Should you rent a home?
In the UK, renting is often viewed negatively as the fallback option for people who can't afford to buy. Renting should not be seen in such a pessimistic light as there are many benefits to balance against the drawbacks.
The benefits of renting
- Lower up-front costs. When you buy a house, you will need a large deposit (at least 5% of the property's value) and money to cover solicitor's fees, survey fees and stamp duty. Although you will need to pay a deposit when renting, this is capped at five weeks rent and is far less than the money you will need to save to buy a house.
- Rent can be cheaper than mortgage repayments. If you are renting in London, you may find that your monthly rent is lower than the mortgage repayments on a similar property. This could mean you can afford a better home in a more expensive location.
- You're not responsible for maintenance costs. Your landlord covers buildings insurance and repair and maintenance costs. So if the boiler breaks down or the roof leaks, it is your landlord's job to fix the issue.
- You have more freedom. Tenancy agreements can be as short as six months, giving you the freedom to move quickly if you need to.
The drawbacks of renting
- You are not investing. You will have nothing to show for all the money you have spent on rent. You will always have to rent a property, even in your retirement.
- You must abide by the restrictions in your tenancy agreement. Generally, landlords will not allow you to redecorate a rental home, and many landlords will not allow pets.
- Your landlord could decide to sell. At the end of your tenancy agreement, your landlord may choose not to renew as they want to sell the property. You will find yourself having to find somewhere else to live.
Is it cheaper to buy or rent your home in London?
In the short term, it is often cheaper to rent in London. This is because the rent you pay is likely to be lower than your mortgage repayments, and the deposit on a rental property is significantly less than the initial costs of buying a home. If you are purchasing a flat, you may also have to pay service charges which you would not need to pay if you were renting.
However, mortgage repayments can sometimes be less than paying rent, depending on the property you choose and the size of the deposit you can put down. Bigger deposits give you access to the best mortgage rates and reduce the size of the loan.
If you are thinking of buying you should contact mortgage lenders who will help you work out how much you can borrow and what the monthly repayments will be.
How to decide whether to buy or rent your home
If you are still struggling to decide whether renting or buying in London is the best option for you, ask yourself these questions:
Do you have enough for a deposit?
To get a mortgage, you will need to have a deposit. If you are a first time buyer, you should aim to save 10% of the cost of the property, although some lenders will offer mortgages with just a 5% deposit. For the best mortgage rates, you will need at least a 25% deposit.
If you do not have a sufficient deposit, then renting may be the best option for you.
Do you have enough for the other costs of buying a house?
As well as saving for a deposit, you will also need to put aside money for other costs you will incur when buying a home. These include:
- Survey costs
- Solicitors fees
- Mortgage arrangement fees
- Stamp duty
- Removal costs
- Buildings insurance
- Initial furnishing and decorating costs
Do you earn enough to afford a mortgage?
You should only buy a house if your income is sufficient to cover your mortgage repayments and your other outgoings, including credit card debt, other loans, household bills and general living costs.
Your mortgage lender will look at your salary and other income as well as your outgoings to ensure that you can afford the mortgage repayments.
If you are struggling to get a mortgage, you could consider a guarantor mortgage. This means that a parent or close family member promises to cover any missed mortgage repayments if you are unable to.
How long will you stay in your next home?
If you plan to only live in an area for a short time or expect your circumstances to change, renting is usually cheaper and more flexible when you need to move house. However, if you intend to live in an area or property for a long time, buying a home can work out cheaper.
Government help to buy a home
The government has created Help to Buy schemes to give home buyers a helping hand onto the property ladder.
The two primary schemes are:
With an Equity Loan, the government lends you up to 20% (40% if you're in London) of the cost of your newly built home. You pay a deposit of at least 5% and arrange a mortgage to make up the rest. You won't be charged interest on the Equity Loan for the first five years of owning your home.
The Shared Ownership Scheme offers you the chance to buy a share of your home (between 25% and 75% of the home's value) and pay rent on the remaining share. You can buy bigger shares when you can afford to.
As a central London estate agent operating from Knightsbridge and Marble Arch, Plaza Estates specialises in both sales and lettings. If you have any questions, contact us today.