Should I buy a home or continue to Rent?

[BroglieBoy]

Hi All,

Some background:
We currently rent a property in South East England and pay a monthly rent of £1600 for a 4-bed detached house.

We are thinking of buying a home in the same area where we are currently renting as they are near to top schools and academies.
A 4-bed detached house in my local area costs around £550,000 to £800,000 even after the recent downturn. We can see many houses now reduced their asking price by £25K to £50K

I and my wife both work full time and have a combined salary of £160K annually.

We have a deposit of £80,000 + additional money for expenses such as stamp duty, and conveyancing.

We are not a first-time buyer.

My Question: Should I Buy or Continue to Rent?
A simple answer I believe based on a very basic calculation suggests it is better to continue to rent( see the image below for a monthly mortgage payment of £2887).
If we bought a house at £550,000 with a deposit of £80,000 at 5.5% interest rate for 25 years - the monthly payment would be circa £2887, Which would be £1200 more than what we are paying for rent today. We can definitely afford this extra payment but the question is should we do it?

The reason we are thinking if we should buy now or within the next 6 months is because we both are in our 40's and taking a mortgage at this age for 25 years will get us near to our retirement. Delaying it by a couple of years will only take us into our retirement. I don't believe the interest rates are going to come down anytime in the near future. So the question is how long could we wait for things to get any favourable for us.

Risk of Negative Equity
I understand the risk of immediate negative equity of buying now when the Interest rates are high and house prices are still falling. However, if we could negotiate 10% to 15% off the current asking price, will it reduce this risk? Plus this will also be our home for the foreseeable future and we don't plan to move for the next 10 years.

Based on the above details I would be interested to find out other's thoughts or if you have any suggestions/inputs or guidance.

Thanks in advance.

That's incredibly low rent - how secure is it to continue ar that level? Rents are rising exponentially here

We are confused about what to do with the BTL.

Selling the BTL is an option we can consider.

However, we are also wondering if we can keep that as a retirement investment as the rental income takes care of the property plus it gives us some additional income monthly.

High rents will be one of the first things to go if there is a proper recession (which U.K government have said could be necessary to tame inflation)

£1600 rental for a four bed detached house is good for the South East - the part I am in (South Bucks) you'd be paying over £2k for that pcm.

I think selling the BTL and investing in a property down here is probably the most sensible option. I would also ask whether you need a detached four bed house - I actually downsized from one of those to a three bed semi (admittedly due to marriage breaking down) but the kids prefer it as now we're in town and closer to their schools/friends and I am a lot happier about the size of the mortgage! I know I can pay this off myself and live here comfortably, which gives me peace of mind. A mortgage of £2.5K pcm would worry me, even though yes it's easily manageable on a £160K combined salary. Maybe that's just me!

Looks like more people are continuing to rent now that it is cheaper than a mortgage, or maybe still living with parents, as FTB loans have dropped 30% on last year it seems?

Sorry if I've not picked this up from what you've written but is a 4 bed non-negotiable?

Could you sell your BTL and buy a slightly sub-optimal home (to avoid excessive interest payments), furiously overpay to build equity then move in a few years?

I'm writing the next part because it's interesting comparing other peoples financial decisions, particularly when income is similar to your own and I appreciate this may not be helpful to you. We're very financially risk averse due to some bad investments made by our respective families...

We're living in a West Berks market town and have combined income of £140,000 (recently gone up from £110,000 after I increased my working hours). Have 2 children age 5 and 3.

Mortgage costs £1030/month. We're due to pay off our original balance of £260,000 mortgage (taken out in 2016) on a £450000 house within 2 years (have a mortgage with unlimited overpayments). Mortgage is moving from 1.89% to 3.99% 5 year fix next month. I buy second hand clothes, drive a battered 15 year old car and we're currently camping in my husband's parents' back garden so that we can save funds this year to overpay until we get to a point where interest is negligible.

All going well, we'll stay put for 4 years after paying off our mortgage to build up a further £240,000 in funds towards new house (this will help us avoid paying an extra £13000 in annual interest when we move) and move into a £700000-£900000 house around age 42 with a maximum of £200000 borrowed (which we will again pay off as soon as possible).

The interest costs from buying our ideal house now (assuming we'd never overpaid) Vs overpaying/saving from this point are:
Not overpaying: £589000 interest costs over 25 year mortgage
Vs £28826 interest from this point taking into account overpayments (doesn't include interest costs we are already saving from overpayments until this point ~£6000 annually and approximately £19000 in interest earned over the 4 years we are saving *which obviously we would have to pay tax on). Plus we would have our mortgage paid off by age 42-44.

Karl's mortgage calculator pro is amazing for working this kind of stuff out if you're interested.

If you don’t mind me asking, which lender offered a 3.99% fix as that seems very low at the present time?

@Twiglets1 first direct but we fixed in 6 months ago when rates dipped a little. We've always been with them as they allow unlimited overpayments without penalty.

Ok thank you. We're with FD too actually and I really like them.

Unlimited overpayments, that is interesting.

In my view, renting a house appears to be a preferable option compared to purchasing one. While each choice has its advantages and disadvantages, it's important to acknowledge that each has pros and cons. If you want to know more about this, you can check online or you can also read it here:
https://medium.com/@Edinburghestateagents/rent-vs-buy-the-pros-and-cons-of-renting-or-buying-a-property-in-the-uk-8c1e32d7c89e

Yes, extremely low.

This isn't the mythical 3.99% fix again is it? Ah no, I see it is FD rather than some obscure BS who definitely isn't offering 3.99%.

Completely agree with @KievLoverTwo . Good questions BTW. Wait at least a year. Pop your 80K deposit into a 1Y higher rate savings bond in an ISA. Or NS&I if you are not a tax payer (at 6.2%). Save like billy-ho to add to the deposit. Your LVT will be shrinking fast over the next year and that will open up the best mortgage rates when you buy.

LL who own w/o a mortgage are like gold dust. They realise that it's better to have a secure good tennant paying constantly. They don't need to chase rents up to pay the BTL mortgage.

Why 4 bed? Buy small and cheap so long as comfortable. Continue saving for the next step up once we hit bottom.

Unfortunately, I am in my late 40's and may find it a bit difficult opportunity to buy small for the short term and then try the next step.
Moreover, since I also have a BTL I will be paying 3% extra stamp duty every time.

I agree with your and others' comments it's better to wait another year.

In the meantime, I am keeping an eye on the market and viewing properties. I will see if I can buy with a good discount or get a good bargain such that it takes care of the 1-year drop that is likely to come.

Ok. Good luck whatever you plan.

Just a couple of things. If you know when you want to retire then just take out an appropriate mortgage term at the time. For example, if delaying a couple of years until purchase then think about a 23 year mortgage when you do buy, if it aligns with your target retirement date. It won't make a great deal of difference to the monthly payments (at least nothing that should disturb you based on your stated income).

Do make sure that you are fully maximising pension contributions. In my 40's I was paying in 20-25% per annum and getting a proportion matched. I managed to retire at 50 given that I was so used to a small net income. It also helped to downsize from the SE to a small ex-LA house in cheaper (but very nice) area. Cheap council tax, utilities, maintenance, insurance, house prices.

Your view of work in 10 years time may be very different to now!

I would see that as another reason to sell the BTL, to avoid having to pay the 3% extra stamp duty on your next property purchase.

But I appreciate you also have reasons to keep it so it's not an easy decision. Anyway, good luck and hopefully something you love and good value will come up in the next year or so.

I have never rented so have always been responsible for the boiler repairs etc. The big question is do you really want to be paying that much rent when you’re retired? When in fact if you buy now it will be paid off by this time.

Having your own property gives you so much freedom to do what you want to it. I would hold fire though as the market is teetering and probably due to dip a bit more, see what it’s like in the new year.

I think I'd give it another year.

I don't see you have much to lose. Interest rates are near the peak and there hasn't been a huge drop in house prices.

I would save the difference between the two plus a little extra for a maintenance budget and see how it feels.

You are lucky to have the rental.

How tied to the area you live in are you? E.g once the kids are in secondary school could you move a little out of catchment? And how far away is this?
Would you stay where you are regardless of schools?

" Interest rates are near the peak and there hasn't been a huge drop in house prices."

There has been a huge drop in sales and mortgage applications though, and there is no way they can reach 2% inflation by cutting rates again, rates at these levels mean the huge drop is still in the post IMO.

@CrashyTime yes that's what I meant.

To buy now you have the downside of high interest but little yet in the way of saving.

Different if you are paying as much to rent as you would be in mortgage in that there is never a good time to buy but with a decent stable rental I'd be in no rush.

I think interest rates above 4% are here to stay but I think the areas which saw massive post COVID booms (especially where going way over asking was necessary) will see house prices reduce.

That said, watch and wait is good and being ready to go if the right opportunity arises is wise.

Is the BTL on a repayment mortgage? Building equity?

If it makes a net income I would keep it. There will be CGT to pay on any increase in value since you moved out of that house.

I dont see interest rate cuts on the horizon, a pause yes, they are signalling that today, but ultimately the UK follows the FED and their economy is still running "hot", and of course the UK is open to its own unique inflation pressures as well (financial media also fretting about "stagflation" being on the cards now for the EU countries)

https://www.msn.com/en-gb/money/other/barratt-sees-new-home-reservations-slump-by-30-as-mortgage-crunch-hammers-sales/ar-AA1gjLGR

Looks like a lot of people are continuing to rent (or live with parents)