The Difference a Decent Down Payment Makes: Buying Over Renting to Save

Real estate headlines constantly point to the outrageous prices that homes go for in London today, often to the exclusion of every other part of the country. In London, home prices tend to be so expensive, renting works out to be cheaper.

According to research recently published by The Metro newspaper, it can cost £1,000 more a month to buy than to rent in the big city. Bristol, Cambridge, Reading, York, Southhampton and Aberdeen are similarly expensive. Many hopeful home buyers looking at these headlines naturally assume that it’s the way the equation works over the rest of the country. Nothing could be farther from the truth.

You do yourself a great disservice believing that it’s always a better deal to rent rather than to buy. Depending on where you are in the country, you stand to save anywhere from £30 a month (in Sheffield) to £100 a month (in Birmingham) or £150 a month (in Glasgow), compared to renting.

How do those savings come about?

Affordable mortgage interest levels have made buying cheaper than renting over much of the country. The nationwide rise in rent levels has contributed to making buying the competitive choice. The study reported in The Metro looked at typical rents and sale prices for small, two-bedroom homes in several cities across the country. When a family buying a home is able to put together a 10% deposit (or down payment), and buys with a 25-year mortgage at a 4.5% interest rate (the current competitive rate charged), it usually turns out to be far cheaper than renting. On average, outside of the very expensive half-dozen cities, the typical family stands to save about £60 a month.

Then, there’s the equity

Buying a home can make financial sense in multiple ways. To begin, the interest component of the mortgage payment that you make each month is a tax-deductible expense. Given that nearly your entire installment each month goes to paying off the interest on the mortgage rather than the principal, it’s almost as if your mortgage payments are free over the first few years.

There’s also the fact that home prices rise at a 2% rate each year in Britain, on average. Your equity in your home rises dramatically, even as your mortgage payment remains steady. Certainly, home prices could fall, as many home owners found out during the housing collapse of 2007 and 2008. Barring such economic tumult that may occur once in a generation, though, you’re likely to end up with a generous profit if you even keep your home for no more than a decade before selling.

Your job is to focus on the deposit

For the average £250,000 home, a 10% deposit would work out to £25,000. Many make do with a 5% deposit. It’s a sizable sum that you need to put by either way, and it can take a few years to get ready. It can take considerable financial discipline to make it happen.

The larger the deposit, the more easily you qualify for the mortgage, and the lower your monthly payments and interest rate. You will have a greater level of equity in your home should you need to tap it for an emergency one day, as well (look online at

Things may change if mortgages become more freely available

Buying is cheaper now because there are so few people who are able to afford the deposit that it takes, and qualify for a mortgage. Should lenders become willing to lower their lending standards, though, there will likely be far more homebuyers qualifying. Mortgage lenders will then see no need to lower their interest rates to attract custom. They will have no problem raising their mortgage rates, right away turning homebuying more expensive than renting. The way things stand for the foreseeable future, ownership is measurably cheaper than renting. While property prices may be on the high side today, it’s still a great time to buy.

Homeownership comes with multiple benefits. Other than the fact that it helps you invest your resources rather than turn it into dead money (as unproductive rent is often called), ownership offers a sense of freedom, stability and financial discipline. To young families attempting to establish themselves, these are immense advantages.

Mable Wolfe has vast experience in residential real estate. Now semi-retired she enjoys spending a couple of hours each morning tapping out a real estate based article which can go up online to help others whether a graduate new to the business, or an individual looking to sell their home fast.

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