Why Renting Might be Better Than Buying

Have you been thinking whether renting might be better than buying given the current financial circumstances? It’s an interesting question that is worth exploring a little further.

With interest rates being so low, financial markets likely to be impacted by post COVID stress and capital growth in property uncertain, the question of renting versus buying becomes a lot more relevant.

So let’s take a look at some of the factors that impact your decision making. With this information you will then be able to decide for yourself whether renting might be better than buying in the current financial climate.

Renting is a Waste of Money

Many people will tell you that renting is a waste of money. That you are paying rent, and getting nothing for your money, as opposed to paying off a mortgage, which will one day mean that you own the house without debts.

Some people will tell you that you’d be better off living at home with your parents until you can afford to buy your first home

But, for many, this isn’t an option. The large deposits needed to buy can make owning a home seem impossible, and we aren’t all fortunate enough to have someone else to live with. The good news is, renting isn’t all bad, far from it. It may not be wasting money. For starters, you are getting a roof over your head, and a chance to make a home for yourself. There are benefits to renting, here’s a look at some of them.

renting might be better than buying

Renting versus Buying: Considerations

When you rent, a property management team and the landlord are responsible for any repairs and maintenance. You don’t have to pay for them, or even arrange them. All you have to do is report problems if they arise.

When you buy a property, unless you buy a brand-new home, you can face expensive repairs that aren’t completely evident at the time of buying. Speaking from first hand experience, this happened to me when I discovered some issues with a property that I purchased that resulted in some expensive repairs the first time it rained in the new property.

Few of us get to buy our dream house the first time around. Buying a home is a significant commitment, and we’re usually forced to make compromises until we’re taken a few steps on the property ladder.

Renting is less of a commitment and less of an expense. This might mean that you can afford to live somewhere much nicer, in a fantastic location with great amenities, first time round. 

Less Upfront Cost

When you rent a home, you typically have to pay a month’s rent up front, and a security deposit, which might be the equivalent of another month’s rent. When you buy, you might need to pay 10% of the home’s value in deposit, as well as mortgage arrangement fees, solicitors fees, tax and other costs. It takes time to save for the deposit and costs, which you might decide you prefer to use on living where you want now.

When you buy a house, you tie yourself to it for the foreseeable future. Yes, you could sell, but this is a time consuming and costly process. When you rent, you might be tied into a short lease, but once that’s up, you can move quickly and easily. These days flexibility is something that people value.

Often, people that tell themselves that they’ll never rent and that they will only move out of their parents’ house when they can afford to buy, get stuck. They don’t want to miss out on fun with their friends to save, so they don’t save.

They fall into bad habits, and they get used to living at home as an adult. The chance for freedom can pass them by. Renting allows you to get out into the world and enjoy some freedom, without having to wait or to miss out.

Renting will also enable you to experience different locations to determine where you would most like to end up buying for the long term. You don’t want to buy and then discover that you don’t really like the location. Sure you can check out the location before you buy, but nothing beats living in the location to experience everything about it.

Economic Factors: Why Renting Might be Better than Buying

As I mentioned earlier, there are some current economic factors, that are unprecedented, that will impact your decision making.

Interest Rates

The first is interest rates…

In case you haven’t noticed, they are at all time lows and in some cases at risk of going negative. Can you imagine the bank effectively paying you to have a mortgage. Nah me neither!

I don’t think we will get to that point, but it is possible that in some parts of the world, interest rates will go negative at an official level, but the margin banks add will keep mortgage rates positive.

However, with rates so low, most people will believe that is a great reason to be a buyer versus a renter. And to be honest, I tend to still be in that camp…

BUT… For those that don’t have the capacity right now to raise the deposit and costs, renting could be a better option for them to get into a home that is in a location that they prefer.

Capital Growth

In a normal market, the capital growth that you achieve by buying will be a significant factor in the buying decision versus renting.

Right now however, with confidence being curtailed by COVID, the likelihood of above average returns is going to be harder to achieve.

The outcome of whether renting might be better than buying, in the long term, comes down to whether you believe that this is a short term issue. If you believe the markets will resolve to normal and returns will be back in a few years then you may still be a buyer versus a renter.

This is probably the likely result, but in the short term, it could be that you choose to use this period of depressed returns to rent and enjoy the reduced responsibilities…

The key would be to ensure that you continue to put some cash aside for when you are ready to buy…if that is what you want in the long term.

Conclusion

I’m still going to suggest that you will do better by being a buyer, but I understand right now that there are unusual circumstances that swing the decision to the renters. Whether that is sufficient to change the long-term decision I’m not so sure.

As always, it comes down to your personal circumstances. The younger you are, the more likely that being a renter right now is a good option. You still have time to observe, let the markets settle down and see what happens.

If you are a little older, you may want to take advantage of the low interest rates and get into the market before things turn around.

Like most investing decisions, it’s a personal decision that is based on your long-term goals. However, these are unusual times and whether renting might be better than buying is always a good debate.

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