Trent at the simple dollar posted on comparing renting to buying a house. He suggested that when looking at similar standard properties,
- if rent exceeds the mortgage payment then a mortgage is (financially) better
- if rent exceeds the interest portion of a mortgage then its a grey area
- if rent is less than the interest portion of a mortgage then renting is better
In any case he suggests that if renting is a cheaper option, you should save or invest the difference towards a deposit. Trent does assume that your rent will only be less than the interest portion of the mortgage payment if you haven't enough saved for a deposit which, I think, depends on how you define enough.
Anyway, I've compared my planned mortgage payment and rent to see how it stacks up.
Rent = £375
Mortgage = £493
Interest on Mortgage Initially = £400
It looks like I shouldn't be buying at all, but continuing to rent. However, Trent actually states that you should consider the interest payment after 5 years as a fairer representation of the grey area. For my mortgage I have
Interest on Mortgage after 5 years = £370
Wow, thats a pretty close thing. I'm in the grey area by the skin of my teeth. Trent suggests that I consider the utilities, tax and maintenance issues to determine whether I should rent or buy. In my case, I can pretty much assume that the utilities and tax will be the same but maintenance and insurance costs will be higher.
I think this means that strictly financially speaking I'd be slightly better off renting and saving more money towards a deposit. Which goes to show that buying a house isn't just a rational, financial decision for me. I already knew that it was a marginal decision but I want a place of my own and I'm prepared to pay for it.