Renting vs buying, it’s not as much dead money as you think

publication date: Jan 14, 2014
 | 
author/source: Kate Faulkner, Property Expert and Author of Which? Property Books

Many renters I meet are really worried that renting a property is ‘dead  money’.

The good news is renting isn’t the ‘dead money’ it used to be. The reason being,house prices have risen at a much higher rate than rents on an annual basis and mortgages now, in the main, have to be repayment only.

Personally, I think many renters are realising this is the case and are doing the sums, knowing they can be better off renting than buying. Read our renting vs buying checklist for more information.

A good rule of thumb is the amount of dead money in renting versus buying is no different if the following numbers apply:-

  • Estimate the cost of your rental property if you buy it  eg £100,000 
  • Calculate your annual rent, if you pay £400 per month  eg £4,800 (12 x 400) 
  • Work out the percentage of rent you pay versus value  eg £4,800 / £100,000 = 4.8% 


Is your percentage less than 5%?

What we know is if the percentage of rent you pay is less than 5% (as is the case above), property prices aren’t growing much year on year, the mortgage is 95% loan to value, then you are spending as much dead money on rent as you are on paying the mortgage company in interest payments.

Don’t believe me? Here are the numbers and we used the BBC mortgage calculator so it must be right!

Case study examples

£100,000 property. £4,800 a year in rent, £400 rent per month
At 95% loan to value with a 5% mortgage rate (this is the long term average) the repayment costs at this level would be £561.70 of which £395.83 would be in interest to the lender.

£200,000 property. £9,600 a year in rent, £800 rent per month.
At a 95% loan to value with a 5% mortgage rate, the repayment costs would be £1123.41 and the interest to the lender would be £791.66

£300,000 property, £14,400 a year in rent, £1,200 rent per month  
With the examples above, this would be £1685.12 repayment with interest only at £1187.50

£500,000 property, £25,000 a year in rent, £2,084 rent per month
As above, this would be £2808.53 repayment with interest only at £1979.16

In addition to the above, you would have to pay a deposit, which would be from £5,000 to £25,000 on the values in the case study examples. For the property at £200,000 you would lose £2,000 in stamp duty, £9,000 for the £300,000 and the £500,000 would attract stamp duty of £15,000!

On top of this you’d have costs of buying legals, removals, renovation and fitting out the property – and you’d be responsible for all the maintenance and building insurance which currently as a renter, you don’t have to pay.

So while property prices – bar a few boroughs in London – aren’t rising at a huge rate, then it’s worth carefully calculating whether buying versus renting is actually as much dead money as you thought! Read our how to work out your property market checklist.


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All our information is brought to you by Kate Faulkner, author of
Which? Property books and one of the UK's top property experts.
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