We live in a really nice, light and airy, two-bedroomed apartment. 

It is one of three in the building which is situated in a lovely, quiet area.  We have a sea view from the lounge.  It is only a very short commute into the centre of town.  Our neighbours in the other apartments are quiet and considerate and we have perfect landlords.  We feel very grateful.

Well, the other day we found out that the apartment above ours is for sale.  It is also two-bedroomed.  Some friends of ours, who have recently bought their own two-bedroomed cottage, wanted to know whether we would buy it.

The short answer was no. 

We like renting and having the flexibility that gives us.  We like to travel.  And in the recent past, every two or three years, we have stopped ‘normal work’ and taken 6 months time off.  We’ve spent one of those six month periods living in England and two, separate, 6 month periods travelling in India, which is our favourite place.

Additionally, should we find that, for any reason, we no longer like living in a particular place we just have to give notice and move.  You never know what’s round the corner. 

Another thing we have to consider is the values of the properties…and here on the island they are high.  The apartment above ours is on the market for £155,000.  (As it happens, that is just a little less than the average value of loans approved for house purchases, in July 07, according to the British Bankers Association – £159,600.)

So, how would the figures work out, Renting versus Buying?

I’ll do it fairly simplistically and only consider the basic financing costs but excluding any mortgage arrangement fees, associated legal fees and also the annual buildings insurance, which can be quite substantial in themselves when you buy a property.

The Rent payable is £625 per month, inclusive of service charge and rates.

Assume a Repayment Morgage of £155,000 @ 6% over 25 years (the standard variable mortgage rate from the Halifax - Britain’s biggest mortgage lender- is currently 7.75%)

Mortgage would be £998.67 per month, consisting of £775 in interest, £223.67 in principal

(As an aside, you may notice that 77.6% of your monthly payment to the bank is interest.  What happened to the ‘good’ interest rate of 6% you got from the bank?)

Service charge and rates £101.83 per month.

Total buying cost = £1,101.50 per month.

Okay, I hear you saying, “What about the tax relief?”

Well, I’ll come to that in a minute. 

But first, why is it that you get tax relief on mortgage interest payments you make to the bank and yet you have to pay tax on any interest you receive on savings from the bank?  It seems there is tacit encouragement for you to acquire debt…and we know who really benefits from that, don’t we?

Anyway, let’s see.  Total amount paid in a year to mortgage company £11,984; Total interest paid £9,225; Tax relief on the interest paid (@10%) £922.50.  Therefore, net amount paid for the mortgage £11,061.50.

Or £921.79 per month, plus £101.83 service charges and rates, makes £1,023.62. That’s a saving after the ‘Tax Relief’ of £77.88 per month.

But wait.

Because the mortgage is for 100% of the cost of the property you have to pay for PMI (Private Mortgage Insurance) – which kindly covers the mortgage company should you default on the loan.  In fact, you generally have to pay this unless you have at least 20% equity in the property. 

So, we also have to add the cost of this insurance.  A typical cost for this, to cover a mortgage of £155,000, would be £697.50 per annum, or £58.12 per month.

And now we have £1,023.62 + £58.12 = £1,081.74.

This makes buying the apartment £456.74 more expensive than renting.

As it stands, at the moment, let’s avoid having so much debt, keep renting and put the £456.74 in a savings account.

Of course, if the property market here took a turn for the worse and prices should fall substantially then maybe we’d change our minds…who knows?