Buy or stay in rented?

[24again]

We moved to a new area 15 months ago and have been happily renting a lovely house. It's a tad small but in a beautiful location and is cheap (£595 a month) We have sold our former home and have £200,000 cash from this sale. We have two - three years and then income will go up quite a lot and enable us to buy the sort of house that we will stay in for a very long time.

In the meantime.... do we stay in the rented house or buy somewhere for around £360,000 - £380,000 considering that we may only be in it for three years and the stamp duty and other sales fees are nearly the same as two years rent anyway?

Also hardly any detached nice houses available in this price range but we can't afford to spend any more on a house for the next two - three years so wouldn't be able to raise budget.

What would you do?

I'd stay in rented if you're happy where you are and don't need to move.

How about using some of the £200,000 to invest in a buy to let? Maybe use £30 - 40,000 as a deposit and keep the rest as a deposit? £200,000 is a lot to keep in a bank account for up to three years gaining hardly any interest.

200,000 should not be in a bank account for 3 years anyway! You'd get it earning better money elsewhere.

OP, from all you've described it sounds like renting is the best option. Of course the years it's quite a long time so that's dependent on renting being on from a stability perspective.

If you bought for three years it would cost you your purchasing costs (maybe £2k for survey and mortgage product) + stamp duty of ~£11k + losing the income from your savings (assuming that would go down as deposit) of ~£6k per year (conservative 3%net) so £18k over the years + your interest payments over 3 years of ~£350 a month (mortgage of 170k at 2.5%) for a total over three years of £12.5k + your selling fees of ~£1k.

Grand total of £44.5k divided by 36 months is £1236 per month to live in the bought house for the 3 years vs £600 per month in your rented.

Only makes sense if you believe house prices are going to shoot up over that period, and arguably flat or down is more likely.

Oooh! Thank you for the detailed breakdown! That's what I had thought but I had forgotton about the interest from the £200,000 in the bank.

You're welcome. The difference is actually even bigger. Two things I didn't allow for are (a) cost of maintenance in an owned house vs the responsibility of landlord, and (b) the compounding effect of your savings interest (I.e. I calculated interest at 3%per year on 200k each year, whereas year two interest is paid on 204k or whatever of course.

When people so buy vs rent comparisons they pretty much always miss allowing for the lost opportunity cost of their deposit earning money elsewhere.

If interest rates rise over 3 years then house prices may drop. You could easily foresee a scenario where it has 'cost' you £1k a month extra over three years in real terms to live in a purchased house.

RCheshire I wish I'd had your posts to show our parents every time they went on about us "throwing money down the drain" by renting! That's such a helpful analysis.

OP, I'd stick with renting - you know where you are each month with outgoings which is important on a low income. We're only just moving from a rented 1 bed (using the living room as our bedroom at night!) to buying and it was definitely the right thing for us while DS was v young to rent.

Contrary to other posters I would probably buy in your situation.

It may not turn out to be the best financial decision in a few years time but I would think it is the safer option as property prices may suddenly rise and you could end up not being able to afford the type of property you are aiming for. With the recent mortgage changes and talk of possible interest rate hikes the market does appear to be cooling at the moment but I would be very careful to take this as a given and market sentiment changes very quickly. Also, are you really sure that you want the uncertainty of renting? It can be very difficult to truly feel at home in a rented property as you are not allowed to make any changes and can be booted out at very short notice.

Mmm, we are as secure as you can be in a rented property and obviously if the landlord suddenly wanted us out, we'd buy somewhere rather than go into rented again. We normally pay three months in advance but may up this to six months for greater security. Trying to see if we can buy the sort of place we are likely to stay in, then it would be worth moving.