Comparing the payment with rent is incomplete. Here is how to work out the real cost of owning.
Key findings
- Part of the mortgage payment repays debt and is not a cost.
- For a 250,000 home with a 200,000 mortgage you need about 75,000 on completion.
- In the example, owning costs about 785 a month against a rent of 1,000.
The mistake of comparing payment with rent
“My mortgage payment would be the same as my rent, so I should buy.” It is the most common comparison and it is incomplete: part of the payment is not a cost, because it repays debt and stays with you as equity; and owning comes with costs that tenants do not pay.
First: do you have the cash?
For a 250,000 home with a 200,000 mortgage, you need a 50,000 deposit plus purchase taxes and costs. If you estimate those at 25,000, you need 75,000 on completion day. With 80,000 saved you would have 5,000 left: not much of a cushion for moving, furniture or surprises.
The real cost of owning
That 200,000 mortgage at 3% over 25 years has a payment of 948.42 a month. Of the first year's payments, 5,925 is interest (a cost) and 5,456 repays debt (saving). For the real cost, add:
- Other ownership costs: property tax, insurance, service charges and maintenance. Say 2,000 a year.
- What your deposit stops earning: the 75,000 you put in could sit in a savings account. At 2%, that is 1,500 a year.
All in, owning costs about 785 a month, even though the payment is 948.42. Against a rent of 1,000 for a similar home, buying is 215 a month cheaper in this example.
What this calculation leaves out
- How long you will stay. Buying and selling are expensive: if you move within a few years, those costs can wipe out the advantage.
- How house prices and rents move, which nobody knows in advance.
- Flexibility. Renting lets you change city or home easily.
Run your own numbers with how much of your mortgage payment is a cost and check whether you have enough cash with cash needed to buy a home.