Are you paying more dead money in rent than through a mortgage?

 

If you’re part of ‘generation rent’ and feeling stuck in your situation, you’re probably fed up of people urging you to get on the property ladder and reminding you of all the ‘dead money’ you’re wasting on your monthly payments.

But take heart, this may not actually be the case: after all, interest on mortgages - which runs into thousands and thousands of pounds over the years - can also be considered to be ‘dead money’, too, the reason being is that in today’s property owning culture, you have to buy a property with a repayment mortgage, not just via interest only. And any mortgage payments you make, the interest element goes into the pockets of the mortgage lender – rather than paying off your mortgage!

Renting being ‘dead money’ is the same as ‘interest payments’ being dead money to lenders
Many of the indices which claim ‘buying is cheaper’ than renting do so because they assume that you have a massive 15-20% deposit.

Well if you did have that money, you probably wouldn’t be renting in the first place.

The reality is, if you are looking at buying a property versus renting, your comparison will need to be based on taking out a 95% loan to value (for example a deposit of £5,000 for a property costing £100,000 means you borrow £95,000)

So to check how much dead money you are paying in rent, you need to compare this to how much dead money you would be, or are, paying to the mortgage lender.

Based on a 95% loan to value mortgage, it is inevitable that the amount of interest you are paying will be a lot higher than most comparisons suggest.

How do you compare the ‘dead money’ you spend on renting versus mortgage interest? 
An easy way to work this out is this:

If your rent is 5% or less than the value of the property you rent, then the amount you are paying to your landlord is likely to be the same as the amount you’d be paying to the mortgage provider in interest.

So if it’s the same amount of ‘dead money’ on rent versus mortgage interest payments, there is no need for you to feel guilty or upset you don’t own a property!

Let’s take as an example, a property costing £150,000, purchased with a 5% deposit:

  • Property price: £150,000
  • Deposit: £7,500
  • Mortgage: £142,500
  • Interest rate: 4%
  • Mortgage repayment cost: £760.14 of which £475 goes to the lender in mortgage interest

With monthly interest payments of £760.14 and ‘dead money’ spent on mortgage interest of £475, that certainly puts your rental payments – which are likely to be around £500 on a property of this value – into perspective. And at least with renting, you don’t have to worry about the cost of maintaining a property, which can run to £1,000 a year even if nothing major goes wrong.

In addition you can trade up or down or move back home or in with friends/new partner in a matter of months as opposed to having to wait to buy or sell a property.

Other savings when renting versus buying
There are other savings made by renting, too.

You won’t have to pay buildings insurance (although you should still insure your contents)

Your deposit and fees will be much lower than when buying
You won’t have to fork out for legal costs as if you rent through an ARLA/RICS/NALs agent this is what your tenant fees goes towards

For more details of the initial and ongoing costs of buying and renting, check out Is it cheaper to buy or rent?

Rents tend to be static, mortgage payments can go up or down within just a month

Bear in mind too that interest rates can rise, bumping up mortgage payments into scary territory very quickly. If the rate went up to 7%, your monthly interest payments on the above property would take a massive leap to £831.25.

As a tenant, however, you are less likely to be a victim of rate rises. Landlords are normally cautious about passing their increased mortgage costs onto their tenants as this could drive them to look for alternative accommodation – and the last thing a landlord wants is empty property, as the bills still need paying. Even if they did feel the need to put up your rent to help offset their costs, it’s unlikely to rise by such a large amount.

Renting can be a really sensible and cost effective way of keeping a roof over your head!

So, next time those well-meaning folk glibly remind you of all the dead money you’re paying in rent, you might want to suggest they do some maths!

 

 

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