Buying a house may be akin in many ways to renting from the bank, but at the end of 30 years it’s yours
And, based on some quick calculations, it certainly looks like it might be cheaper to buy rather than rent just now, given the relative strength of the rental market compared with property for sale.
Take a young couple paying about €1,600 a month for a two-bed city apartment (see example opposite), who could potentially save their hard-earned cash by becoming a homeowner.
At present, you can rent a two-bed in Dublin’s Spencer Dock for €1,650 a month – but mortgage repayments on such a property only come in at €1,126. Or how about a family in Limerick, paying €800 to rent a three-bed house. If they could switch to buying, they would see their monthly repayments drop to €654.93.
But what happens over the long-term? Given that interest rates are now a chunky 4-5 per cent or so – and more likely to rise from that level than fall over the course of a standard mortgage term – could you save money by renting over 30 years or so?
Well, it’s worth considering, given that Spencer Dock apartment is really going to cost you €405,632 when you’ve factored in how much the bank will take in interest from you – a staggering €189,632 over 30 years. And the purchase price of that house in Limerick is closer to €235,000, once you consider the cost of funds at today’s prices.
However, all things being equal, it still makes financial sense to buy, rather than rent, as you will pay more in rent on both these properties over 30 years. And of course you get to keep the property at the end of a mortgage.
Owning an asset
Buying a house with a mortgage may be akin in many ways to renting from the bank, but with one major difference: at the end of those 30 years or so it’s yours. With all the talk of overvalued or undervalued property, it’s hard to discredit this fact – whether prices are up or down, you will still own an asset once you have repaid everything you owe.
And a valuable asset at that, because it can be your home at a time when your income might have reduced dramatically. Given the pressure on State pensions and the poor performance of private ones, this is a major long-term benefit of purchasing.
It also gives you options, as it’s an asset that could possibly be sold in favour of a smaller alternative home with the balance used to fund your retirement.
Buy and rent a room
Another option to consider is the additional income flow that can come if you buy your own multi-bedroom property and decide to rent a room. Take the example of the two-bed apartment on Spencer Dock in Dublin 1. If a single person was to rent such a property, they could expect to potentially half their monthly rent to about €800 by sub-letting one of the bedrooms. If they had bought the apartment however, they could charge the same rent, and put this annual total of €9,600 tax-free (a limit of €10,000 applies) towards the cost of their mortgage. This would mean they would only have to find about €300 to service their mortgage each month, with the surplus helping with other payments such as property tax etc.
But don’t get carried away just yet . . . it’s not just about the mortgage.
Home insurance, property tax, life assurance, legal fees, management charges, stamp duty . . . The costs of buying and owning a house only starts with the purchase price.
Last year AA Ireland came out with a survey showing that the average costs of running a home, including servicing a 92 per cent mortgage on a purchase price of €170,000, was €16,000 a year.
Subtracting the mortgage costs from this, still leaves you with costs of about €7,000 to deal with, due to the costs of heating, phone and broadband, property tax, kitchen appliances, insurance, TV licence and bin charges. While you would still incur some of these costs while renting, you wouldn’t be on the hook for all of them.
In addition, stamp duty may have declined considerably in recent years, but it is still another expense facing buyers. It is levied at a rate of 1 per cent on all properties up to €1 million, and 2 per cent on amounts over this. So, a purchase price of €300,000 will mean a bill of €3,000 to be settled promptly with the Revenue.
And of course, the other possible obstacle is whether or not you have a deposit saved. These days you will need at least 10 per cent to get a mortgage – and the more you can put towards the purchase price, the better. If you haven’t a lump-sum to call on, it’s time to get saving. Putting away €200 a month will give you €12,768 after five years based on a return of 2.5 per cent.
And it’s not all about financial sense . . .
Your boiler’s broken and you’ve no heating. The washing machine has stopped working. You’ve a leak in the bathroom. All regularly occurring household occurrences, but all enough to cause you quite a headache. Unless of course you’re renting.
When it comes to getting things fixed, it’s hard to beat passing on responsibility to your landlord – provided of course that they act quickly and appropriately. When you own a property, all these eventualities are up to you to take care of – and to pay for. And, as many people discovered to their cost when the bubble burst in the last property boom, owning a property can offer you very little flexibility if your circumstances should change. You can move back home with your parents or move to Australia . . . but you’ll still have a mortgage to cover if you own a property.
Similarly, if you’re fed up with your noisy neighbours, you can always move if you’re renting – but it’s a little more difficult to do so if you own the property, particularly if prices plummet and you find yourself in negative equity with the housing market stalled, as so many people have done in recent times.
What the Government thinks
It may be bottom of your priorities, but the Government can make buying a home difficult – or a lot more attractive. Remember that first-time buyer’s grant anyone?
In these straitened times however, the Government is not so benevolent. In December 2012, the mortgage interest relief regime – which offered relief of between 15-30 per cent on interest charged on a mortgage – was discontinued, making home ownership more expensive.
Similarly, last year’s introduction of a property tax has also pushed up the cost of owning a home. Although all buyers who purchased during 2013 will enjoy an exemption from the tax until 2016, this no longer applies to home purchase this year, and it is only those who purchase a new home, or a property in a ghost estate, who benefit from this relief.
The tax is levied at a rate of 0.18 per cent (a figure that could rise next year, or, less likely fall, depending on local authority budgetary arithmetic), so a home valued at €355,000 will cost €337 a year.
And, with water charges on the way, we’re unlikely to see a change anytime soon.
for the Irish Times 25/02/2014