Tenants better off than homeowners

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by Kay Murchie

High Street bank, Abbey, has issued its latest annual Rent vs Buy index and shows that the financial benefit of buying a home rather than renting over a 25-year period has fallen by 75% over the last 12 months, with tenants better off than homeowners in half of the UK’s regions.

Increasing interest rates and rising property prices have left Abbey’s theoretical homebuyer worse off in 6 of the 12 British regions studied.

Areas surveyed were Ayr, Bangor, Belfast, Bradford, Cardiff, Carlisle, Colchester, Crawley, Dundee, Edinburgh, Exeter, Glasgow, Harrow, Hull, Ipswich, Lancaster, Maidstone, Newcastle, Swansea, Watford, Wolverhampton, Worcester, Yeovil and York.

Abbey’s research calculates the cost of home ownership based on a person taking out a 90% loan-to-value, 25-year repayment mortgage at 6.5%, and assumes essential home maintenance costs. In the 2006 survey the average mortgage rate was 5.5%.
Rental costs are inflated over the time period in line with the rental cost element of the retail price index.

The study shows the average cost of buying a home over 25 years would be £437,925 against £443,736 for those renting.

The study has not allowed for potential property price inflation which would leave homeowners better off, neither does take into account any potential property price falls for those buying now, with several analysts declaring the market has peaked.

At the end of this period, the homeowner would own their property and would be nearly £6,000 better off than if they had rented according to the study.

The diminishing financial cost difference between renting and owning for the average UK resident continues a pattern that has seen the advantage of buying fall from £135,000 in 2001.

A spokesperson for Abbey said a number of aspects have come together to cause rent over 25 years and a mortgage for the same period to converge across the UK. In some areas it is cheaper to rent than buy on a month-to-month basis but at the end of the 25 year period, a homeowner actually owns a property whereas a renter has nothing. Furthermore, homeowners benefit from any further house prices increases as the value of their equity increases over time.