How to decide whether to rent or buy a home

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For most of us, buying our first home is something of a rite of passage. Getting that all-important first step on the property ladder is seen by many as one of life’s key goals.

Of course, there are good reasons why so many of us want to jump on the property ladder. The key benefit of buying a home is, it’s yours. As long as you keep up the repayments on any mortgage you have, no one can take the roof away from over your head.

However, buying and owning a property can't be entered into lightly. It's probably the biggest financial decision any of us will ever make. It's not just an expensive purchase but it is also an on-going financial commitment, so it pays to make sure you know exactly what you are getting yourself into.

Let's start by taking a look at the pros and cons for owning a home

Pros

  • You have outright ownership of the property and can choose who lives there.

  • Once you’ve fully repaid the mortgage you will live ‘rent-free’.

  • As long as property prices rise your property should increase in value.

  • When you sell the property any profits are yours.

  • Subject to planning permission where necessary, you can improve and change your home to suit you.

  • Mortgage repayments can be cheaper than paying rent.

Cons

  • You have to keep up with repayments on any mortgage you have.

  • Mortgage repayments can increase with interest rates, meaning you have to pay more.

  • The value of your home can go down if property prices fall.

  • Buying and selling is expensive – there are estate agents fees to pay when selling, stamp duty to pay when buying and solicitors/conveyancers fees to pay.

  • Owning is less flexible than renting. It can take time to sell a property.

  • You have to be able to pay for maintenance on your property as well as decoration and furnishings, which you may not have to do in a rented property.

The biggest consideration for buying a home is the cost

It's so much more than just a deposit or your mortgage repayments. There's conveyancing or solicitors fees, arrangement fees and holding deposits just to name a few. Not forgetting the biggie – stamp duty. This can be a hefty sum, so make sure you allow enough to cover the cost of it.

Stamp duty is payable on every property that costs more than £125,000. There are several bands of stamp duty that attract a different rate, increasing as the cost of the property rises.

For instance, on a property that costs £175,000, you’ll have to pay stamp duty of £1,000, as you pay 2% of the property value that falls within the relevant band above £125,001 and up to £250,000. You pay 5% on properties that cost between £250,001 and £925,000, 10% on properties between £925,001 and £1.5 million and 12% over £1.5 million. This can add a significant sum to the overall cost, so be prepared.

If you're a first-time buyers then the rules are a little different. You won't have to pay Stamp Duty on properties worth up to £300,000. For properties up to £500,000, you won't pay Stamp Duty on the first £300,000. You will pay Stamp Duty on the remaining amount, up to £200,000.

If you're not sure how much stamp duty you'll be asked to pay, you can use this calculator.

Factor in rate rises

Unless you’re on a fixed-rate mortgage, the amount you pay will vary every time the interest rates changes. While falling rates are to be welcomed by those paying off their mortgage, a rate hike can be cause for concern.

For example, a 1% hike in interest rates would see borrowers with a standard variable rate mortgage having to find an additional £55 a month for every £100,000 owed on their mortgage.

So be prepared and make sure you factor in the costs of potential rate rises when you consider whether the property is affordable. No-one can predict the future, but it's important to try and be prepared for these scenarios.

Consider fixing costs

A fixed-rate mortgage can help you keep your expenses under control, as you know exactly what you’ll pay each month for as long as the fixed-rate period ends.

It does mean though that should interest rates go any lower you won’t benefit from the rate cut. However, you need to trade that off against the fact that a rate rise won’t affect you either. Fixed-rates often come with a tie-in period that means if you switch mortgage within the fixed-rate term you are charged a penalty.

Also, make sure that you don’t over-borrow at a low rate, because the fixed-rate will one day come to an end and there could be a considerable hike in the amount you pay if your lender’s standard variable rate has risen significantly in the interim.

Get help to buy

Overall, the decision of whether to buy or rent is down to you and your personal financial circumstances. But there are schemes that can help make your home-ownership dreams come true if you want to buy. Help-to-Buy equity loans secure additional money towards a deposit. You can no longer open a new Help to Buy ISA, but if already have one, you can find more information about how it works in our Guide to Help to Buy.

Using a Lifetime ISA

Designed for 18 to 39-year-olds, it's designed to help you save for a deposit for your first home. You can save up to £4,000 a year into the ISA and you will receive a £1,000 a year tax-free bonus for every year that you do.

If you use the money in your LISA to buy a property then the money, including any bonus you’re entitled to, will be sent directly to your solicitor or conveyancer.

Should the purchase fall through for whatever reason, the money will simply be transferred back into your LISA. And that won’t have any impact on the contributions you make into the LISA in that tax year. That’s because you can (and the government hopes you will) keep paying into the LISA for your retirement as well, once you’ve bought your first home.


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