Renting vs Mortgage

I live in a pretty seaside town in Cornwall which has a lot of Londoners coming down buying up holiday homes; great for them but the locals are now priced right out of the market.  Buying a house in my parents day was a natural step to adulthood; these days the prices are so inflated its not even considered, especially on Cornwall wages which average the lowest of the country.

Buying your own home is a UK obsession – Margret Thatcher’s move to let all council house be bought by their renters in the 80-90s via S125 has meant a lot more people of that generation now own former council property.  This I think has helped fuel the consumer splurge, with former tenants finding themselves jumping upwards from working class (The Brits are still obsessed with class; sorry) and taking out secured loans to cover in many cases frivolous spending – who needs a kitchen refurb every two years?

An interesting post by the New York Times property expert David Leonhardt offers a buy or rent calculator – it basically shows that sometimes its best to rent rather than tie up your money in a speculative bubble.  (Graph in $’s but same principle for £’s)

A basic rule of thumb touted in the article by David is to divide the price of your house on the market with your annual rental.  If the ratio is above 20 the monthly cost of ownership exceeds the cost of renting.

My figures…

Pay £700 a month rent on a £300,000 valued house; £8400 a year rental outgoings – I get a ratio of 35.71% (!)

This is typical for the county.  This is obviously way over what I want to tie up my money in – I’m thinking I’ll only now ever get a mortgage if I can get an LTV (Loan to Value) under 50%. 

Those sitting in their over priced houses smugly are in no real better position – if they sell their house they have to buy another over priced house, mortgages found on review sites usually the only way to find competative prices.

EDIT – 17 July

Found a good site explaining the tradeoffs in more details here – What Should you Pay for Your House?

Tags: mortgages, housing bubble, cornwall, uk