Renting v Buying in Northern Ireland

Saturday, February 22nd, 2014

Renting v buying: Which is the best long-term bet?

Young couple having just moved inYoung people in Northen Ireland face great pressure to get on the property ladder as soon as possible. But is this always the best option?

If you don’t own a property, should you do everything in your power to buy, or just relax and continue renting? As far as Northern Ireland is concerned, for the past few decades the answer has pretty much always been BUY, BUY, BUY.

For young people, it is hard to escape the pressure to save up a deposit and buy a house or flat as soon as they possibly can. But is that always the best option?

After all, mortgage finance is harder to come by at the moment than it has been for years. There are signs of some improvements here as the local banks and building societies seem to be returning to the mortgage market with very affordable deals

It is frequently pointed out that in countries such as France and Germany, the private-rented sector is much larger and many people there are happy to spend their whole lives as tenants.

In Northern Ireland, however, there appears to be a great deal of resistance to this idea, with cash spent on rent often described as “money down the drain”.

Here we take a look at the pros and cons of either option to help you make an informed decision.

Rent versus mortgage costs

First time buyers often see rent as a waste of money that they could instead be spending on mortgage repayments. But is this a reasonable view?

One thing you need to bear in mind is that a large chunk of your mortgage repayments will be devoted to covering the interest charges on your loan, which are likely to add up to many tens of thousands of pounds over the typical 25-year term.

The only way to avoid these interest costs is by buying your property outright at the start – but not many of us have ready access to £80,000 or £100,000, say.

Comparing rental rates with the interest component of a mortgage is a simple way to work out which is more affordable.

Property website Zoopla regularly makes this comparison for towns and cities around the UK to see where renting is relatively cheaper than buying and vice-versa.

Its research looks at the cost of renting a two-bedroom flat and the cost of servicing an interest-only loan on a similar property in the same area.

Deposit and equity

If you want to buy, you’ll need to save up a substantial deposit: on a £100,000 property, most banks will only offer you a decent mortgage rate if you can put down at least £10,000, although you may be able to get away with just a £5,000 down payment if you can afford higher monthly repayments.

Think of the alternative uses for these kinds of savings: they could go towards holidays, clearing credit-card debts or even into your pension.

In theory, home ownership gives you the opportunity to benefit from growth in house prices: so your £100,000 house could be worth £150,000 in five to ten years, giving you £50,000 or more of equity. In the very long term, this equity could be used to help pay for your children’s college fees or your own retirement.

But there are no guarantees that property prices will always grow – they certainly haven’t in the past few years. And falls in values could leave you in negative equity, where what you owe exceeds your outstanding mortgage: that could create a serious problem if you needed to move. We have just experienced a 50% drop in Northern Ireland’s average property price over the past six years.

Renting doesn’t mean you won’t have any financial security for the future. Provided your rent cost less than monthly capital plus interest repayments on a home loan, you could use the spare cash (added perhaps to what you would have spent on a deposit) to save or invest.

Security and your responsibilities

One inevitable downside of being a tenant is a potential lack of security: most tenancy agreements will give either side the chance to cancel with just a couple of months’ notice. If your landlord decides to sell, for example, you could face having to find alternative accommodation at fairly short notice.

Some lettings agents are however reporting an increase in the typical length of tenancy agreements, with two- and three-year deals becoming more common – possibly indicating a move towards a more long-term, Continental view of renting.

On the other hand, if you need to relocate for work, say, the fact that you are in rented accommodation could make it much easier than if you had to sell your home in a depressed market.

As a homeowner, you’ll have to foot the bill for anything that goes wrong with your property: a broken-down boiler could set you back hundreds of pounds in repair bills, whereas tenants would be able to rely on their landlords to pay for maintenance costs such as this.

But many owners would argue that having their own place gives them greater freedom to decorate and make alterations as they see fit, without having to get permission from a landlord.

So what to do?

It’s a big decision with lots to decide but with the general consensus being that the Northern Ireland property market has bottomed out the decision is becoming all the more important as the first time buyer fears missing the boat! Do your research and check your finances.

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