As the housing market continues to flat line there are ever more headlines appearing in the mainstream media that suggest buying can be more affordable than renting. Most articles seem to be based upon overly simplistic views of the costs and ignore integral components of any move; house deposits, stamp duty, conveyancing costs. Some recent releases compare average monthly rents with the cost of servicing an interest only mortgage for 100% of the value of an equivalent property.
The 100% interest only mortgage has been extinct for several years now, which is why it is so surprising it is still used as basis for comparison. Even with a 90% loan to value mortgage, the average flat in Scotland still requires a deposit of over £11,600 and mortgages with high LTVs usually have higher arrangement fees. Add on the 1% stamp duty due on property over £125,000 and conveyancing costs in the order of £750 and the true costs of buying are far higher than many of the recent headlines would lead you to believe.
Monthly Rent v Mortgage Payments for Flats
|Q4 2012||Avg. Buy Price||Monthly Rent||Mortgage Payments*|
|Edinburgh, City of||£191,154||£730||£1,017|
|* assumes 90% LTV repayment mortgage at 5% interest over 25 years|
If we are to do a simple comparison of buy versus rent costs in Scotland we can take the average price of all flats sold in Scotland, which in Q4 2012 were £116,194 according to Registers of Scotland. Based on a 90% LTV repayment mortgage at 5% over 25 years, the monthly mortgage payments would be £620 and coincidentally average monthly rents in same period were also £620. However, this is still a very crude methodology as we have not included all the additional costs of buying or renting. It becomes obvious that at the city level, there are considerable differences between renting costs and mortgage costs as the table shows. These differences do of course give a basic indication of the variable yields on offer in the cities though it is only by looking at the local level that meaningful yield information can be determined -something we will be doing in forthcoming reports.