mattee2264 Posted May 21, 2018 Share Posted May 21, 2018 I am struggling a bit to get my head around the way of thinking about this. I understand the general logic of buying a place. House prices generally increase in line with inflatiion (because the incomes used to pay rent also rise in line with inflation). And with leverage even a modest inflationary increase of say 2-3% a year can result in double digit returns (although these returns obviously fade as more of the mortgage is repaid). And returns will also be diluted if the "imputed rent" isn't enough to cover interest + property expenses. I also understand the case against renting. The money basically goes down the drain. Whereas when you buy you would hope to recoup any principal repayments when you sell the house and probably a good portion of the interest paid as well. But I am struggling to translate this into a sensible framework for making an informed decision about whether to buy or rent. Obviously you can compare what you'd pay to rent each month versus what you'd pay to buy (i.e. principal repayments + mortgage interest ). But this seems oversimplistic given as mentioned above you'd hope to recoup mortgage repayments and even interest when you sell whereas the money you pay in rent is lost forever. And also you'd want to factor in that any excess of monthly principal repayments + interest payments over rent could be invested by a renter in the stock market and earn returns of say 7-10%. Also this analysis does not factor in leverage which amplifies returns in most instances. What is the correct way of thinking about this and working it out based on the numbers? For example currently I am renting paying around £1,000 a month for a studio flat in a nice area with a fairly stable demographic of young professionals attracted by the fast transport links into the City of London and the West End which has a market price of around £280K and you can get a fixed rate mortgage for 5 years for about 3% per annum (in the UK we do not really do longer fixes). UK base rates are 0.5% which obviously isn't likely to persist over a typical 20-25 year mortgage term. The Bank of England is currently stress testing by adding 300 basis points to a typical introductory rate. And for buy to let investors the stress test is the higher of 5.5% and 200 basis points above a buy-to-let mortgage rate. Given the above what would be a way to translate this into a buy vs rent decision? Obviously not expecting a definite answer but would like to gain a better handle on the correct thought process. Link to comment Share on other sites More sharing options...
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