Rent vs Buy: The Pros and Cons in 2023
The game has changed, you should read this article before calling your banker to take on a mortgage.
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We all know that buying a property is a big financial decision. And whether you're a first-time homebuyer, looking for a change of scenery, or just considering your options, the question of whether to buy or rent is a common one. In this article, we will explore the pros and cons of both buying and renting in 2023 and help you make an informed decision.
Rent vs Buy: Pros and Cons
Renting a Property
Pros:
Flexibility: Renting allows you to move from one place to another relatively quickly and without the burden of selling a property
No Maintenance Costs: When you rent, your landlord is responsible for maintenance and repairs
Lower Upfront Costs: Renting typically requires a security deposit and the first month's rent, which are way lower than the down payment required to purchase a home
No Property Taxes: As a renter, you won't have to pay property taxes
Cons:
Limited Control: Renters have limited control over their living space, as they can't make permanent changes without the landlord's approval
No Equity: Renting doesn't build equity like owning a property does
No Tax Benefits: Renters do not have access to the same tax benefits that homeowners do, such as deductions for mortgage interest
No Appreciation: Renting doesn't offer the potential for appreciation like owning a property does
Buying a Property
Pros:
Equity: When you make a mortgage payment, you're building equity in your home – This can provide a nest egg for the future or help you get a better return on your investment if you sell
Tax Benefits: Homeowners have access to tax benefits, such as deductions for mortgage interest, that can help lower their tax bill
Appreciation: Owning a property gives you the potential for appreciation, meaning its value can increase over time
More Control: As a homeowner, you have more control over your living space and can make permanent changes without seeking approval
Cons:
Higher Upfront Costs: Buying a home requires a larger upfront investment, including a down payment (often 10-15% of the property cost), closing costs and Stamp Duty costs
Maintenance Costs: As a homeowner, you're responsible for all maintenance and repairs
Risk of Decline in Value: The value of a property can decline, leaving you with a mortgage and property that's worth less than what you paid for it
Less Flexibility: Once you buy a property, it's harder to move, especially if you have a mortgage
Both buying and renting have their pros and cons and depending on where you are in your life you may choose one option or the other.
However, the current macro environment has led to higher interest rates and increased mortgage costs reducing the financial perk of owning a property vs renting it.
London's Cost of Living Crisis
Owning a Home Becomes More Expensive Than Renting
London is facing a rising cost-of-living crisis, with growing fears of a recession, and the cost of servicing a mortgage now surpassing the cost of paying rent. Exclusive data analysed by Homes & Property has revealed that it now costs £832 more per month to make mortgage repayments compared to renting a property in London, which is a complete reversal of the traditional dynamic.
The Bank of England raised the base rate, which determines mortgage rates, by 0.5% in December to 3.5%, the highest level since the global financial crisis. Economists believe that the rate will continue to increase in Q1 2023, reaching 4%, resulting in higher mortgage rates.
David Fell, an analyst at Hamptons, stated that since interest rates started to rise, it has been cheaper to rent instead of buying a home with a 10% deposit. This gap reached a record of £832 in October 2022, and it should continue to be cheaper to rent than buy in the near future.
First-time buyers are the most affected by the rising mortgage rates
Following the interest rate hikes, a first-time buyer in London now needs to earn more than ever since 2012 to service the same mortgage. The income required to purchase a home with a 10% deposit has risen from £72,000 in November 2021 to £97,310 a year later, a pay increase of £25,330 in just one year.
As a result, experts predict a dramatic drop in London's house prices as the demand decreases, with a fall of 12.5% in 2023, reversing the growth seen during the pandemic era and the 2020 stamp duty holiday.
In conclusion, London's cost-of-living crisis and rising interest rates are making homeownership increasingly unaffordable, especially for first-time buyers. The gap between renting and owning has never been wider, and experts predict a significant drop in house prices in 2023.
Both buying and renting have their pros and cons, and the decision is ultimately up to you and your individual circumstances. But if you live in London, based on the 2023 rising rates environment, you will be better off renting your property and investing your money in other interest-generative assets.
On my end, I will keep renting my apartment and use my savings to invest in other assets that I detailed in my article How To Invest Your Money in 2023 which will help you make smarter financial decisions and grow your savings.
I hope this article has been helpful in your decision-making process!
And you? Which option would you choose between buying or renting a property in 2023? And Why? Let me know in the comments.
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