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Buy or Rent a Home? Vers 3.1 7 May 2012
What's best? To buy a home with a mortgage or to rent one?
The answer depends on how long you stay in the property - ie the term shown in the graph. See below for more explanations.
Simply enter your own assumptions below (blue figures) and see the chart change to identify when buying becomes a better bet (ie positive figures).
Enter Assumptions: Change blue figures. Move mouse over a cell to read the comments.
Initial House value (buy or rent): £200,000
Buy or Rent? Cost difference depends on time held.
Mortgage loan amount if buyer: £160,000 80.00%
Positive figures mean buying is best.
Mortgage term (enter 0 for interest-only) 25 years
Rent - % of house value if a tenant: 4 % pa
Rent reviewed after every: 1 years £35,000
Overall cost - difference
Stamp Duty (as from April 2012) 1 % £30,000
£25,000
Total buying costs % of house (Inc Duty): 2.5 %
£20,000
Selling costs % of house value: 3 % £15,000
Maintenance as % of house value £10,000
When owned (owner pays all): 1.25 % pa £5,000
When rented (landlord pays some): 0.5 % pa £0
-£5,000 1 2 3 4 5 6 7
Average mortgage interest: 4 % pa
-£10,000
Maintenance Inflation rate: 2.5 % pa
Property held - term in years
House inflation rate: 2.75 % pa Scroll down for longer term graph
Initial tenant's free capital £45,000
Net return on tenant's capital: 2 % pa
Note that stamp duty wef April 2012 would be 1% of £200,000 (£2,000)
Summary conclusion based on assumptions entered above, comparing cash flows:-
If you intend to remain in the house for up to about 2 year(s), it is probably better financially to rent.
If you intend to stay in the house for about 3 or more years buying is probably a better financial option.
How to use this spreadsheet
Enter any assumptions in the table above and immediately see when either buying or renting becomes better.
House purchase is normally more favourable than renting in the longer term, assuming a positive growth rate.
The graph above shows the difference in the total outlay for renting and buying, depending on how long you stay in the property. This graph
displays terms of up to 7 years only (the most likely maximum term), but another graph below displays up to 20 years. The figures
include any profit made on the sale of the house after both initial buying costs and final selling costs, as well as all the anticipated monthly payments
for maintenance and either rent or mortgage. For tenants, an amount of cash is assumed to be invested equal to the amount of deposit otherwise needed
to buy (including the initial buying costs) and produces an additional profit at the end of the term, depending on the entered interest rate.
Tenants may expect to pay less for maintenance than an owner, since the landlord is usually responsible for some of the costs.
The mortgage loan can be interest-only (enter 0 as the term) or a capital repayment (enter the actual term in years).
Please note that Stamp Duty (calculated automatically) must be included in the buying costs and it depends on the purchase price.
Cash
Positive figures on the graph mean buying is better, negative figures favour renting. The figures are obtained from the table below. They flows
are obtained from a separate tab (IRR Calculations) and assume owners and tenants sell or move out at the end of the year illustrated in the columns.
You will observe that the most sensitive assumptions are the house growth rate and the rent as a percentage of house value. Buying expenses will
also significantly affect the conclusion. The mortgage debt remains fixed throughout for interest-only loans but steadily reduces for capital repayment loans..
Mortgage interest is initially assumed to be fixed although in practise it will fluctuate up and down. But you can enter different interest changes in the table below.
The rent however usually increases in line with house inflation, although often delayed and reviewed periodically. You can enter a review period in the table above.
The table below not only compares total cash flows, but also calculates the IRR (Internal Rate of Return) for each term from 1 to 25. Please study the book
on www.mortgagesExposed.com for a full explanation of the IRR. In summary the IRR is a more accurate comparison tool than cash flow quantums
but is more difficult to calculate: for practical purposes, given the sensitivity of the assumptions, comparing cash flows is just as relevant.
Note that the IRR for renting is almost always negative unless an exceptional return on the free capital is achieved. A positive IRR for buying is possible.
You may vary any parameter each year by amending any blue figure the table below directly. It is better to save the original spreadsheet beforehand
in order to preserve the original standard formulae.
Table showing the next 25 years
Buy Rent Buy Rent Conclusion
Year House House % Inflation Mortgage Mortgage Capital Maint. Total Rent £ Maint. Total Total Total Difference IRR IRR Difference Based on Based on
end Value growth pa % pa % pa £ p.month Owing (Owned) in year p.month (Rent) in year Cash flow Cash flow Cash flow IRR Cash Flow IRR
1 £205,500 2.75 2.5 4 £845 £156,196 £208 £1,053 £667 £83 £750 -£14,496 -£8,100 -£6,396 -32.21% -18.00% -14.21% 1 Renting better # Renting better
2 £211,151 2.75 2.5 4 £845 £152,238 £214 £1,058 £685 £85 £770 -£17,752 -£16,427 -£1,325 -18.86% -18.08% -0.78% 2 Renting better # Renting better
3 £216,958 2.75 2.5 4 £845 £148,118 £219 £1,063 £704 £88 £791 -£20,761 -£24,987 £4,226 -13.49% -18.16% 4.67% 0 Buying better # Buying better
4 £222,924 2.75 2.5 4 £845 £143,830 £224 £1,069 £723 £90 £813 -£23,513 -£33,787 £10,275 -10.47% -18.25% 7.78% 0 Buying better # Buying better
5 £229,055 2.75 2.5 4 £845 £139,367 £230 £1,074 £743 £92 £835 -£25,998 -£42,834 £16,837 -8.48% -18.35% 9.87% 0 Buying better # Buying better
6 £235,354 2.75 2.5 4 £845 £134,723 £236 £1,080 £764 £94 £858 -£28,206 -£52,134 £23,928 -7.04% -18.45% 11.41% 0 Buying better # Buying better
7 £241,826 2.75 2.5 4 £845 £129,890 £242 £1,086 £785 £97 £881 -£30,128 -£61,694 £31,566 -5.95% -18.55% 12.61% 0 Buying better # Buying better
8 £248,476 2.75 2.5 4 £845 £124,859 £248 £1,092 £806 £99 £905 -£31,753 -£71,522 £39,769 -5.08% -18.67% 13.59% 0 Buying better # Buying better
9 £255,309 2.75 2.5 4 £845 £119,624 £254 £1,098 £828 £102 £930 -£33,070 -£81,625 £48,555 -4.37% -18.78% 14.42% 0 Buying better # Buying better
10 £262,330 2.75 2.5 4 £845 £114,175 £260 £1,105 £851 £104 £955 -£34,068 -£92,011 £57,943 -3.77% -18.90% 15.13% 0 Buying better # Buying better
11 £269,544 2.75 2.5 4 £845 £108,504 £267 £1,111 £874 £107 £981 -£34,734 -£102,687 £67,953 -3.27% -19.03% 15.76% 0 Buying better # Buying better
12 £276,957 2.75 2.5 4 £845 £102,603 £273 £1,118 £898 £109 £1,008 -£35,057 -£113,662 £78,605 -2.83% -19.16% 16.33% 0 Buying better # Buying better
13 £284,573 2.75 2.5 4 £845 £96,460 £280 £1,125 £923 £112 £1,035 -£35,024 -£124,944 £89,920 -2.46% -19.30% 16.84% 0 Buying better # Buying better
14 £292,399 2.75 2.5 4 £845 £90,068 £287 £1,132 £949 £115 £1,063 -£34,621 -£136,541 £101,920 -2.12% -19.43% 17.31% 0 Buying better # Buying better
15 £300,440 2.75 2.5 4 £845 £83,415 £294 £1,139 £975 £118 £1,092 -£33,835 -£148,462 £114,627 -1.83% -19.58% 17.75% 0 Buying better # Buying better
16 £308,702 2.75 2.5 4 £845 £76,491 £302 £1,146 £1,001 £121 £1,122 -£32,653 -£160,717 £128,064 -1.56% -19.72% 18.16% 0 Buying better # Buying better
17 £317,191 2.75 2.5 4 £845 £69,285 £309 £1,154 £1,029 £124 £1,153 -£31,058 -£173,314 £142,256 -1.33% -19.87% 18.54% 0 Buying better # Buying better
18 £325,914 2.75 2.5 4 £845 £61,786 £317 £1,162 £1,057 £127 £1,184 -£29,036 -£186,263 £157,227 -1.11% -20.02% 18.91% 0 Buying better # Buying better
19 £334,877 2.75 2.5 4 £845 £53,981 £325 £1,169 £1,086 £130 £1,216 -£26,570 -£199,574 £173,003 -0.91% -20.18% 19.26% 0 Buying better # Buying better
20 £344,086 2.75 2.5 4 £845 £45,858 £333 £1,178 £1,116 £133 £1,249 -£23,646 -£213,256 £189,611 -0.74% -20.33% 19.60% 0 Buying better # Buying better
21 £353,548 2.75 2.5 4 £845 £37,404 £341 £1,186 £1,147 £137 £1,284 -£20,244 -£227,321 £207,077 -0.57% -20.49% 19.92% 0 Buying better # Buying better
22 £363,271 2.75 2.5 4 £845 £28,605 £350 £1,194 £1,178 £140 £1,318 -£16,348 -£241,778 £225,430 -0.42% -20.65% 20.23% 0 Buying better # Buying better
23 £373,261 2.75 2.5 4 £845 £19,448 £359 £1,203 £1,211 £143 £1,354 -£11,939 -£256,639 £244,700 -0.28% -20.81% 20.53% 0 Buying better # Buying better
24 £383,525 2.75 2.5 4 £845 £9,918 £368 £1,212 £1,244 £147 £1,391 -£6,999 -£271,915 £264,917 -0.15% -20.98% 20.83% 0 Buying better # Buying better
25 £394,072 2.75 2.5 4 £845 -£0 £377 £1,221 £1,278 £151 £1,429 -£1,506 -£287,617 £286,111 -0.03% -21.14% 21.12% 0 Buying better # Buying better
2 switch over year #
Buy or Rent? (20 yrs max)
Positive figures mean buying is best. Negative means renting best.
£200,000
£150,000
Overall cost - difference
£100,000
£50,000
£0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
-£50,000
Property held - term in years
Created by Michael Kelly e-mail mkelly@foxwood.me.uk. See also www.mortgagesexposed.com
Table to calculate cash flows (row 33) and the IRR (row 5) for the term
Initial cash flow in year 0 is the purchase cost less the mortgage loan and purchase costs (or free capital
Move after year: 1 2 3
Buy Rent Buy Rent Buy
IRR: -32.21% -18.00% -18.86% -18.08% -13.49%
Based on IRR -best to Rent Rent Buy
0 -£45,000 -£45,000 -£45,000 -£45,000 -£45,000
1 £30,504 £36,900 -£12,634 -£9,000 -£12,634
2 £39,882 £37,573 -£12,697
3 £49,570.46
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
Total cash flows: -£14,496 -£8,100 -£17,752 -£16,427 -£20,761
Based on cash best to Rent Rent Buy
33) and the IRR (row 5) for the term a house is held
e mortgage loan and purchase costs (or free capital for tenants). For following years it is the sum of the monthly costs pa. The final year includes the s
3 4 5 6
Rent Buy Rent Buy Rent Buy Rent
-18.16% -10.47% -18.25% -8.48% -18.35% -7.04% -18.45%
Buy Buy Buy
-£45,000 -£45,000 -£45,000 -£45,000 -£45,000 -£45,000 -£45,000
-£9,000 -£12,634 -£9,000 -£12,634 -£9,000 -£12,634 -£9,000
-£9,245 -£12,697 -£9,245 -£12,697 -£9,245 -£12,697 -£9,245
£38,258 -£12,761 -£9,497 -£12,761 -£9,497 -£12,761 -£9,497
£59,579.95 £38,954 -£12,827 -£9,755 -£12,827 -£9,755
£69,921.64 £39,663 -£12,894 -£10,021
£80,606.99 £40,384
-£24,987 -£23,513 -£33,787 -£25,998 -£42,834 -£28,206 -£52,134
Buy Buy Buy
e monthly costs pa. The final year includes the sale of the house/investment.
7 8 9 10
Buy Rent Buy Rent Buy Rent Buy
-5.95% -18.55% -5.08% -18.67% -4.37% -18.78% -3.77%
Buy Buy Buy Buy
-£45,000 -£45,000 -£45,000 -£45,000 -£45,000 -£45,000 -£45,000
-£12,634 -£9,000 -£12,634 -£9,000 -£12,634 -£9,000 -£12,634
-£12,697 -£9,245 -£12,697 -£9,245 -£12,697 -£9,245 -£12,697
-£12,761 -£9,497 -£12,761 -£9,497 -£12,761 -£9,497 -£12,761
-£12,827 -£9,755 -£12,827 -£9,755 -£12,827 -£9,755 -£12,827
-£12,894 -£10,021 -£12,894 -£10,021 -£12,894 -£10,021 -£12,894
-£12,963 -£10,294 -£12,963 -£10,294 -£12,963 -£10,294 -£12,963
£91,648 £41,117 -£13,034 -£10,574 -£13,034 -£10,574 -£13,034
£103,057 £41,863 -£13,106 -£10,862 -£13,106
£114,846 £42,622 -£13,180
£127,029
-£30,128 -£61,694 -£31,753 -£71,522 -£33,070 -£81,625 -£34,068
Buy Buy Buy Buy
10 11 12 13
Rent Buy Rent Buy Rent Buy Rent
-18.90% -3.27% -19.03% -2.83% -19.16% -2.46% -19.30%
Buy Buy Buy
-£45,000 -£45,000 -£45,000 -£45,000 -£45,000 -£45,000 -£45,000
-£9,000 -£12,634 -£9,000 -£12,634 -£9,000 -£12,634 -£9,000
-£9,245 -£12,697 -£9,245 -£12,697 -£9,245 -£12,697 -£9,245
-£9,497 -£12,761 -£9,497 -£12,761 -£9,497 -£12,761 -£9,497
-£9,755 -£12,827 -£9,755 -£12,827 -£9,755 -£12,827 -£9,755
-£10,021 -£12,894 -£10,021 -£12,894 -£10,021 -£12,894 -£10,021
-£10,294 -£12,963 -£10,294 -£12,963 -£10,294 -£12,963 -£10,294
-£10,574 -£13,034 -£10,574 -£13,034 -£10,574 -£13,034 -£10,574
-£10,862 -£13,106 -£10,862 -£13,106 -£10,862 -£13,106 -£10,862
-£11,157 -£13,180 -£11,157 -£13,180 -£11,157 -£13,180 -£11,157
£43,394 -£13,257 -£11,461 -£13,257 -£11,461 -£13,257 -£11,461
£139,619 £44,179 -£13,335 -£11,773 -£13,335 -£11,773
£152,631 £44,977 -£13,415 -£12,094
£166,079 £45,789
-£92,011 -£34,734 -£102,687 -£35,057 -£113,662 -£35,024 -£124,944
Buy Buy Buy
14 15 16 17
Buy Rent Buy Rent Buy Rent Buy
-2.12% -19.43% -1.83% -19.58% -1.56% -19.72% -1.33%
Buy Buy Buy Buy
-£45,000 -£45,000 -£45,000 -£45,000 -£45,000 -£45,000 -£45,000
-£12,634 -£9,000 -£12,634 -£9,000 -£12,634 -£9,000 -£12,634
-£12,697 -£9,245 -£12,697 -£9,245 -£12,697 -£9,245 -£12,697
-£12,761 -£9,497 -£12,761 -£9,497 -£12,761 -£9,497 -£12,761
-£12,827 -£9,755 -£12,827 -£9,755 -£12,827 -£9,755 -£12,827
-£12,894 -£10,021 -£12,894 -£10,021 -£12,894 -£10,021 -£12,894
-£12,963 -£10,294 -£12,963 -£10,294 -£12,963 -£10,294 -£12,963
-£13,034 -£10,574 -£13,034 -£10,574 -£13,034 -£10,574 -£13,034
-£13,106 -£10,862 -£13,106 -£10,862 -£13,106 -£10,862 -£13,106
-£13,180 -£11,157 -£13,180 -£11,157 -£13,180 -£11,157 -£13,180
-£13,257 -£11,461 -£13,257 -£11,461 -£13,257 -£11,461 -£13,257
-£13,335 -£11,773 -£13,335 -£11,773 -£13,335 -£11,773 -£13,335
-£13,415 -£12,094 -£13,415 -£12,094 -£13,415 -£12,094 -£13,415
-£13,497 -£12,423 -£13,497 -£12,423 -£13,497 -£12,423 -£13,497
£179,978 £46,615 -£13,581 -£12,761 -£13,581 -£12,761 -£13,581
£194,344 £47,455 -£13,667 -£13,109 -£13,667
£209,194 £48,309 -£13,755
£224,544
-£34,621 -£136,541 -£33,835 -£148,462 -£32,653 -£160,717 -£31,058
Buy Buy Buy Buy
17 18 19 20
Rent Buy Rent Buy Rent Buy Rent
-19.87% -1.11% -20.02% -0.91% -20.18% -0.74% -20.33%
Buy Buy Buy
-£45,000 -£45,000 -£45,000 -£45,000 -£45,000 -£45,000 -£45,000
-£9,000 -£12,634 -£9,000 -£12,634 -£9,000 -£12,634 -£9,000
-£9,245 -£12,697 -£9,245 -£12,697 -£9,245 -£12,697 -£9,245
-£9,497 -£12,761 -£9,497 -£12,761 -£9,497 -£12,761 -£9,497
-£9,755 -£12,827 -£9,755 -£12,827 -£9,755 -£12,827 -£9,755
-£10,021 -£12,894 -£10,021 -£12,894 -£10,021 -£12,894 -£10,021
-£10,294 -£12,963 -£10,294 -£12,963 -£10,294 -£12,963 -£10,294
-£10,574 -£13,034 -£10,574 -£13,034 -£10,574 -£13,034 -£10,574
-£10,862 -£13,106 -£10,862 -£13,106 -£10,862 -£13,106 -£10,862
-£11,157 -£13,180 -£11,157 -£13,180 -£11,157 -£13,180 -£11,157
-£11,461 -£13,257 -£11,461 -£13,257 -£11,461 -£13,257 -£11,461
-£11,773 -£13,335 -£11,773 -£13,335 -£11,773 -£13,335 -£11,773
-£12,094 -£13,415 -£12,094 -£13,415 -£12,094 -£13,415 -£12,094
-£12,423 -£13,497 -£12,423 -£13,497 -£12,423 -£13,497 -£12,423
-£12,761 -£13,581 -£12,761 -£13,581 -£12,761 -£13,581 -£12,761
-£13,109 -£13,667 -£13,109 -£13,667 -£13,109 -£13,667 -£13,109
-£13,466 -£13,755 -£13,466 -£13,755 -£13,466 -£13,755 -£13,466
£49,178 -£13,846 -£13,833 -£13,846 -£13,833 -£13,846 -£13,833
£240,412 £50,062 -£13,939 -£14,209 -£13,939 -£14,209
£256,816 £50,960 -£14,034 -£14,596
£273,774 £51,874
-£173,314 -£29,036 -£186,263 -£26,570 -£199,574 -£23,646 -£213,256
Buy Buy Buy
21 22 23 24
Buy Rent Buy Rent Buy Rent Buy
-0.57% -20.49% -0.42% -20.65% -0.28% -20.81% -0.15%
Buy Buy Buy Buy
-£45,000 -£45,000 -£45,000 -£45,000 -£45,000 -£45,000 -£45,000
-£12,634 -£9,000 -£12,634 -£9,000 -£12,634 -£9,000 -£12,634
-£12,697 -£9,245 -£12,697 -£9,245 -£12,697 -£9,245 -£12,697
-£12,761 -£9,497 -£12,761 -£9,497 -£12,761 -£9,497 -£12,761
-£12,827 -£9,755 -£12,827 -£9,755 -£12,827 -£9,755 -£12,827
-£12,894 -£10,021 -£12,894 -£10,021 -£12,894 -£10,021 -£12,894
-£12,963 -£10,294 -£12,963 -£10,294 -£12,963 -£10,294 -£12,963
-£13,034 -£10,574 -£13,034 -£10,574 -£13,034 -£10,574 -£13,034
-£13,106 -£10,862 -£13,106 -£10,862 -£13,106 -£10,862 -£13,106
-£13,180 -£11,157 -£13,180 -£11,157 -£13,180 -£11,157 -£13,180
-£13,257 -£11,461 -£13,257 -£11,461 -£13,257 -£11,461 -£13,257
-£13,335 -£11,773 -£13,335 -£11,773 -£13,335 -£11,773 -£13,335
-£13,415 -£12,094 -£13,415 -£12,094 -£13,415 -£12,094 -£13,415
-£13,497 -£12,423 -£13,497 -£12,423 -£13,497 -£12,423 -£13,497
-£13,581 -£12,761 -£13,581 -£12,761 -£13,581 -£12,761 -£13,581
-£13,667 -£13,109 -£13,667 -£13,109 -£13,667 -£13,109 -£13,667
-£13,755 -£13,466 -£13,755 -£13,466 -£13,755 -£13,466 -£13,755
-£13,846 -£13,833 -£13,846 -£13,833 -£13,846 -£13,833 -£13,846
-£13,939 -£14,209 -£13,939 -£14,209 -£13,939 -£14,209 -£13,939
-£14,034 -£14,596 -£14,034 -£14,596 -£14,034 -£14,596 -£14,034
-£14,131 -£14,994 -£14,131 -£14,994 -£14,131 -£14,994 -£14,131
£291,307 £52,803 -£14,231 -£15,402 -£14,231 -£15,402 -£14,231
£309,434 £53,747.58 -£14,333 -£15,822 -£14,333
£328,176 £54,708 -£14,438
£347,555
-£20,244 -£227,321 -£16,348 -£241,778 -£11,939 -£256,639 -£6,999
Buy Buy Buy Buy
24 25
Rent Buy Rent
-20.98% -0.03% -21.14%
Buy
-£45,000 -£45,000 -£45,000
-£9,000 -£12,634 -£9,000
-£9,245 -£12,697 -£9,245
-£9,497 -£12,761 -£9,497
-£9,755 -£12,827 -£9,755
-£10,021 -£12,894 -£10,021
-£10,294 -£12,963 -£10,294
-£10,574 -£13,034 -£10,574
-£10,862 -£13,106 -£10,862
-£11,157 -£13,180 -£11,157
-£11,461 -£13,257 -£11,461
-£11,773 -£13,335 -£11,773
-£12,094 -£13,415 -£12,094
-£12,423 -£13,497 -£12,423
-£12,761 -£13,581 -£12,761
-£13,109 -£13,667 -£13,109
-£13,466 -£13,755 -£13,466
-£13,833 -£13,846 -£13,833
-£14,209 -£13,939 -£14,209
-£14,596 -£14,034 -£14,596
-£14,994 -£14,131 -£14,994
-£15,402 -£14,231 -£15,402
-£15,822 -£14,333 -£15,822
-£16,252 -£14,438 -£16,252
£55,685 -£14,546 -£16,695
£367,594 £56,678
-£271,915 -£1,506 -£287,617
Buy
