This article is taken from Merryn Somerset Webb’s free weekly personal finance email, Money Sense.
We’ve heard that 41% of people paid for some part of Christmas on their credit cards; that more people than ever before will go bankrupt this year; that repossessions are likely to keep rising all year; that mortgage rates are going to keep going up even as base rates fall; and that the average person only has enough cash to last 12 short days should they leave their jobs.
Hot on the heels of this has come a plethora of articles telling us what to do about it. Anyone who doesn’t know how to consolidate their loans, find an interest free credit card, cut their utility payments, create a budget spreadsheet and get a cheaper mortgage by now clearly hasn’t been listening to the personal finance experts properly or spending enough time on the Moneyweek website.
But reading – and writing – all these money makeover articles this month (see also: How to give yourself a money makeover), I’ve been beginning to wonder if for many people the best way to survive the credit crunch and free up a lot of cash in a hurry might be to stop bothering with financial micro managing, dump their mortgages altogether and rent somewhere to live instead.
Credit crunch: why it makes sense to rent, not buy
Selling to rent (STR as it is now known) has made some financial sense for some years now in cash flow terms – i.e. rents have been generally cheaper than mortgage payments on most properties. But now that the chances of making a capital gain on owning a house (the only reason to have bought over the last 3 years) look pretty low, it seems to make more sense than ever.
Have a look at Primelocation.com. Here you can see the rental and sale prices of hundreds of thousands of houses. It makes for very interesting reading. One example sent in by a reader from Wales makes the point very clearly. He points to a nice looking ‘executive’ four-bedroom house with views over fields to the rear and close proximity to several excellent schools. It is both for sale and for rent. The sale price is £315,000 (at least 12 times the local average wage).
A repayment mortgage on this amount would come to around £2,000 a month and even an interest-only mortgage to around £1,500. Yet you can rent this very same house for £750 a month (offering its current owner a pathetic gross yield of under 3%), a saving of £750 a month – and that’s before you even factor in the fact that you don’t have to be responsible for its upkeep.
The situation is much the same in other parts of the country. There has, for example, been much talk about how fast rents are rising in central London, but they’re going to have to rise an awful lot faster for it to make sense to buy instead of renting.
A 3 bedroom mews house in Bayswater currently costs around £1m. The cost of owning it, on even an interest only mortgage, would therefore come in at something like £55,000 a year – and that’s only if you don’t include the purchasing costs, (another £45,000 or so) or the maintenance (at least another £5,000 a year). The cost of renting a similar house? About £39,000 a year. That’s £16,000 less.
Credit crunch: homeownership isn’t everything
I am not suggesting that people with no serious financial problems, with mortgages they can afford and with houses they and their families like living in suddenly sell up and rent instead. Moving house is an awful lot of bother if you don’t have to do it.
But if you are heavily in debt and scared of losing your home (as the newspapers seem to think everyone is), why not just sell up, move into a cheaper rented house and then pay off your debts with the money you save on not having a mortgage every month? My guess is that over the next five years being debt free is going to feel a lot better than being up to your eyeballs in interest payments, even if the latter means you get to keep claiming ownership of your own (depreciating) home.
Credit crunch: where to find the highest interest rates on the market
And if you are one of the many first time buyers desperate to get a foot on the ladder and endlessly whining about it in Mail on Sunday case studies, why no stop worrying, keep renting and save the difference? If interest rates and house prices keep coming down at their current rates odds are you’ll be able to afford one soon enough.
And if you are wondering where best to keep the money you save as it accumulates, click here to see the accounts offering the highest interest rates on the market: UK savings accounts – best buys