Buying property or renting in the UK, in old age.

April 27, 2011 1:14 PM

UK Filter: Can people retire without buying property when younger?

TLDR: Is it possible to live out our old age in the UK without buying property, with only renting? How is this possible?

Here's the meat of the question:

I have been working in the UK for two years, and I'm seriously considering laying down roots here. Now one big question, is property. So far the ground work I've done include reading bits and pieces online, as well as asking colleagues about mortgages, why they don't buy etc.

I'm currently paying pretty high rent, rent that is about that of some mortgages (well, "estimates" on the web). Hence, if I'm going to stay here in the UK for a long term, would it make sense to purchase property? From my absolutely non-streetwise point of view, I'm paying rent, which provides me with a roof over my head. However, from another point of view of someone who may want to stay on, is that buying property means that I can have an asset at the end of the mortgage.

Right now, my salary is split into roughly
1/3 - Rent
1/3 - Savings
1/3 - Day to day spending.

If I were to get a mortgage, I would imagine it would be
1/3 - Mortgage
1/3 - Savings
1/3 - Day to day spendings.

Is it wrong to imagine this situation? Granted, I do need a few more years before I can plonk down a deposit (london is so expensive), but I keep thinking that renting does not make sense, unless I intend to move to another country.

But if I decided not to purchase property, and continue this saving/renting routine, what happens when I "retire"? Do I use these savings to rent in the future? This is the part I'd like the hive mind's thoughts on.

Hope this post is not too unclear.

Thanks!

posted by TrinsicWS to Home & Garden (22 answers total)

The thing about mortgages is that it's a form of forced savings (and a common way to leverage debt) that should appreciate above the rate of inflation over 25-30 years. However, many people in the US and the UK have discovered otherwise. The challenge at retirement is easily liquidating this asset.

One interesting activity would be to figure out what your expenses would be in terms of renting vs owning. Be sure to include things like taxes, insurance, minor repairs and maintenance, major repairs and maintenance, opportunity cost while you are performing maintenance.

You'll probably find that it costs twice as much on a monthly basis to own as it does to rent.

If you rent, investigate investing that extra income; you'll be able to build up a nest egg, and reinvest the disbursements - maybe you'll end up saving the same in the long run, with less hassle (but less freedom, as renting is not always as attractive as owning in terms of where you can live)
posted by KokuRyu at 1:23 PM on April 27, 2011 [1 favorite]

My impression from talking to estate agents recently is that you will struggle to get a mortgage at the moment without a fairly hefty deposit. I'm in Edinburgh, YMMV, but I don't imagine it'll be much easier in London.

But if I decided not to purchase property, and continue this saving/renting routine, what happens when I "retire"? Do I use these savings to rent in the future? This is the part I'd like the hive mind's thoughts on.

Well, yes, presumably - what other option is there, unless you have a really good pension to pay your rent with? (Not being snarky - I'm not a personal finance expert by any means, so I'm wondering if you have some other specific solution in mind).
posted by penguin pie at 1:24 PM on April 27, 2011

Is it possible to live out our old age in the UK without buying property, with only renting?

Not just possible: it happens very very often, though generally for people who rent council houses, and receive additional housing support in retirement.

That's a different situation from the one you find yourself in, and social housing stock is particularly limited in and around London, even before considering the coalition government's plans to reassess things like the lifetime tenancy and housing benefit rules.

My friends' experience of London living has been that they spent a few years living in relatively grotty shared accommodation in order to accumulate a deposit, then either gradually climbed the property ladder until they ended up in a leafy suburb, or moved to another part of the country altogether.
posted by holgate at 1:36 PM on April 27, 2011

It absolutely makes sense to pay a mortgage if it's not going to cost much more than renting. Even if the property loses some of its value over the next twenty-five years, you're still going to recoup something. With rent you get nothing back; in fact, it's likely that you're payingoff the landlord's mortgage with your rent.

1/3 savings is very high for the UK. Which is not to say that it's unwise. But I don't know of many British people who save more than 10%. Most save much less. Perhaps it's the safety nets of the NHS and the benefits system making people complacent. But you don't need to keep cash in reserve to cover medical expenses in the UK.

People can and do live their lives without owning property in the UK; my parents do. But like most of the rental sector, they're not by any means well off. They've retired on state pensions and rent a tiny council-owned bungalow. They live frugally, but that's all they've ever really known. Living a somewhat more lavish lifestyle in rented property, funded by savings, isn't a particularly common lifestyle in the UK.
posted by le morte de bea arthur at 1:39 PM on April 27, 2011 [1 favorite]

Of course, you're asking about the UK but talking about London. There would be cheaper places to rent, unless you're convinced London is where you'd want to retire. There also are alternate arrangements, however common or uncommon; for example, you might be handy enough to be the handyman at Fawlty Towers, where you'd get a room/suite as part of your compensation.
posted by troywestfield at 1:44 PM on April 27, 2011

This is a nice tool from the NYT on the subject; it's US-centric, but I'm sure there are UK versions out there as well. The short answer is that a lot of different issues factor into whether it's a good idea to rent or buy, including the expected rates of housing value and rent increases, transaction costs involved in buying a home, the rate of return you could get if you invested your savings, etc. Note that the model assumes that, if renting is cheaper month-to-month than buying, you're investing the overage.

If you live in the same place for 30 years and your monthly mortgage is nearly the same as what your rent would be, it makes sense to buy because at the end of 30 years you'll have an asset that you can sell. If you had rented instead, at the end of the 30 years you've put nearly the same amount of money on the table, but you don't own something that you can sell.
posted by craven_morhead at 1:49 PM on April 27, 2011

Best answer: I'm guessing your numbers are wrong (but I know nothing of London). Do you mean:

Rent:
1/3 rent
1/3 day to day spending
1/3 savings

Buy
1/2 mortgage and home expenses
1/3 day to day spending
1/6 savings

Because mortgages are generally higher than rent and there are plenty of things you have to cover (property taxes, new furnaces, etc.) when you buy that the landlord covers when you rent.

If that is the case, the question is whether the increased savings you have when you rent will cover the rents you will have to pay when you retire (or more accuaretly, the rents you will have to pay after the mortgage period if you bought (less continuing home-owner expenses like property tax and furnaces, etc.)). And that is a tough question that requires a lot of data and a lot of assumptions, such as the number of years until you retire, the number of years you will live after you retire, an estimate of rents after you retire, an estimate of non-mortgage home-owner expenses after you retire and the amount your savings will earn.
posted by rtimmel at 2:17 PM on April 27, 2011

Best answer: Part of the answer is about your own temperament and way of living. The UK does not offer much security to tenants compared with other countries: it is reasonably easy for a landlord to have you out of their property with just a few month's notice. Alternatively they might fail to do essential maintenance or try to charge a stratospheric rent. You can plead, argue and go to court but you may have to just move out and find somewhere else.

On the other hand renting lets you move easily at short notice: if want to follow employment, children or friends about the place - or if you are just bored - you can up-sticks and go.

Being a happy life-long renter will depend on whether you can make yourself more a light-travelling nomad rather than a creature of habit and extensive baggage.
posted by rongorongo at 2:21 PM on April 27, 2011

Renting is generally more expensive than owning in the UK. At the moment that's about £100 a month more, which isn't insignificant. So if you're just interested in the best option financially and don't think you might need/want to move at short notice, then yes, that's probably going to be buying.

I rent but would absolutely buy if I could afford the required hefty deposit, for the cost plus all the reasons rongorongo pointed out above.
posted by Catseye at 2:49 PM on April 27, 2011

But if I decided not to purchase property, and continue this saving/renting routine, what happens when I "retire"? Do I use these savings to rent in the future?

Well yes, your savings and pension income will have to fund all your living expenses at that point and that would include housing. You are aware that the UK state pension is not going go very far at all, right? In any case even if you have bought property and paid off your mortgage you still pay repairs and utilities etc.

As others have said the main thing to consider is how long you are realistically going to stay in a location. If you think you will be moving around for work for example or because your needs change (growing family) there are significant transaction costs to buying and selling property. Which is fine if house prices are rising because you sell at a profit but adds to the pain if prices are stagnant or falling.

Says one who is in negative equity and can't afford to sell the flat in the UK even after moving to another country for work and is stuck with a flat that generates less rental income that is below the mortgage payments...thank god for relocation packages cover that kind of shortfall...

Another thing to consider is that rental accommodation in the UK is not always of a very high standard. People will invest money into making their homes nice but not properties they are letting. So you won't necessarily get new fixtures and fittings for example. You are unlikely to get central heating in purpose built flats etc. The reason why that is acceptable to tenants in the private sector, as opposed to council tenants, would not normally expect to be in rented accommodation for a long time. They would either expect to move again in the short/medium term for work, personal life changes or whatever, or because they are saving up for a deposit and plan to buy. There is an assumption that people who can afford to do so will buy their own home eventually.
posted by koahiatamadl at 3:11 PM on April 27, 2011

that should have been ..generates less rental income than the mortgage payments...thank god for relocation packages that cover that kind of shortfall...
posted by koahiatamadl at 3:15 PM on April 27, 2011

The important thing when doing rent vs. buy is to not count principal paydown as an expense but as savings.

The question is difficult to answer. People who rented in the 1980s and put their principal money in the stock market did very well for themselves in the 1990s, and can now retire on their stock gains.

Renting is dangerous though, since if wage inflation takes hold again housing costs will skyrocket and you'll be truly SOL.

But if wage DEFLATION takes hold -- eg. if UK income taxes get raised a lot on the middle-class -- then rents & home prices will go down from here and not buying will be the winner.

You really need to spreadsheet this out and see where you want to be in 2041. Me, I'd lean towards buying now, if you can.
posted by mokuba at 3:51 PM on April 27, 2011

The situation for first-time buyers in the UK is dire at the moment because a huge deposit is needed before you can even think about a mortgage, no matter how good your credit is. For example, a neighbour is renting a property identical to mine except that hers needs modernising. Her rent is 50% more than my monthly mortgage payment, and she would love to be able to buy but has nothing like the 25% she'd need to put down on a place. She has a really good job, she's head of the English department at one of the UK's top public (that is, posh private) schools but without that deposit she can't buy.

Consequently people unable to get a mortgage are paying more in rent than they'd probably be paying if they were buying.

This situation has arisen primarily because of the lack of social housing in the UK. 40 years ago when a couple got engaged, they'd go on the council list, and it wouldn't be too long before they were allocated a council flat. As their family grew, they'd move up the list to qualify for a council house, and that would be at a subsidised rent.

But Thatcher changed that by extending the Right to Buy, where council tenants could buy their council homes at vastly discounted rates. The money received by the councils could not be spent on building new homes, no matter how much they were needed.

As a result, over the last 30 years millions of council homes have been sold, and so there is very, very little available social housing. Consequently people who in the past would have qualified easily for a council property now have to rely on the private rented market, where rents are, typically, at least 50% higher than social housing.

Something to consider is Shared Ownership through a Housing Association. The way this works is that you buy only part of the property, say, 40%, and pay rent on the other 60%. You only need to get a mortgage for the 40%, and the rent is usually lower than private rent. Over the years of ownership as your finances increase exponentially, you can buy additional tranches, until you own the property 100%. But to qualify for these schemes you generally have to be a 'key worker' in a certain profession - police, nursing, etc. There's more information on this here.
posted by essexjan at 4:42 PM on April 27, 2011

If I were to get a mortgage, I would imagine it would be
1/3 - Mortgage
1/3 - Savings
1/3 - Day to day spendings.

As has been noted, this may not be an accurate assumption. Buying means taking on the costs of appliances, repairs, redecorating, and other fun parts of ownership. How much those are will vary, as will the question of how much owning your own place improves (or hurts) your quality or life.
posted by Forktine at 4:43 PM on April 27, 2011

The thing about mortgages is that it's a form of forced savings (and a common way to leverage debt) that should appreciate above the rate of inflation over 25-30 years. However, many people in the US and the UK have discovered otherwise. The challenge at retirement is easily liquidating this asset.

1- The people who bought 30 years ago and are trying to liquidate now are doing just fine. They are likely getting a return in the 3x to 7x range. (Maybe not in the UK, just don't know about that.) Would they have gotten more if they sold 4 years ago? Surely. But they didn't want to sell 4 years ago, or they got greedy. Nonetheless, 30 years ago was 1981. Think about what house prices were back then.

2- Your home is only an investment in not having to pay rent in 30 years. You always have to have a place to live. So you buy a place and when you pay it off, now you have a more-or-less free place to live. That is HUGE.

3- But all of this assumes you are going to want to stick around in the same place for the rest of your life.
posted by gjc at 4:44 PM on April 27, 2011

As has been noted, this may not be an accurate assumption. Buying means taking on the costs of appliances, repairs, redecorating, and other fun parts of ownership. How much those are will vary, as will the question of how much owning your own place improves (or hurts) your quality or life.

Amortized over the life of the loan, those costs are almost zero unless you get ripped off or are very unlucky.
posted by gjc at 4:46 PM on April 27, 2011

I know folk who bought a house on a shared mortgage (through a cooperative bank account). Well, they also do shared rota-d (organic vegetarian) cooking, groceries & supplies cheaply bought en gros which saves even more money (Personally it would drive me nuts, damn hippies). When somebody moved out they would sell their share to the next person or even back to the house. Newcomers could only buy a little piece of the share at first or just rent for a while, it was quite flexible. They ended up owning the house but decided to start another mortgage on top of their house. Neat.

Also, a friend rents out a flat he bought on a mortgage a few years ago. His tenants' rent doesn't cover the mortgage costs totally but (in a way which maybe isn't totally ethical) he will eventually end up with a flat which other people paid for, largely, having only had to invest a the down payment and having had to play landlord.

Maybe those two data points help you think outside the box on this one...

For me it's been 7 years of happy renting in the UK. My 5th flat has almost the ideal combination: - old style flat, high ceilings, wooden floors, retro, - central heating, - Walk to work and almost anywhere (OK it ain't London) - half students, half professionals - Get away with practising instruments but have quiet most nights - a kitchen with morning sun - a room with afternoon / evening sun and a sofa - bohemian "owning feel" as the landlord never shows and you do to the place what you like - nobody disturbs your plants or your research collection in the fridge. That room costs 1/5 of my income - after taxes, NHS and private pension - all in. (I'm gonna go re-read that thread on how to save more now.)
posted by yoHighness at 5:36 PM on April 27, 2011

One thing to remember is that living in London is very expensive and, as I read in the paper yesterday, for every minute you spend on the train going out of London, the average house price goes down by about £1300.

All too often we have stories in the paper about people unable to buy a flat when what they actually mean is that they are unable to afford a flat *in a specific area of London*.

I'd love to live in Richmond or Chelsea but accepted that my budget didn't stretch that far - so I looked elsewhere.
posted by mr_silver at 1:08 AM on April 28, 2011

Yes, mortgage costs are usually less than rent in the UK.

However, my partner and I have no mortgage at all and we are still spending exactly the same each month as we did when renting, in order to cover the ongoing maintenance costs on a property that hasn't seen much maintenance in 30 years. I expect the costs to go down in a couple of years - and in the meantime we're increasing the value of the house - but if we were paying a mortgage, our costs would be very substantially more than when renting.

On the plus side, the maintenance expenses are more "moveable". That is, if I had to, could stop maintaining the house for a couple of years and live on almost nothing, whereas if I couldn't afford rent I would be stuck.
posted by emilyw at 2:04 AM on April 28, 2011

Response by poster: Hi everyone! Thanks for the answers. It seems like this is way over my head. I need some time to digest the information, but here's a bit more data - I'm living about 10 minutes (walking) from oxford street, and take me roughly 10 minutes to get to work (again via walking) - which is why my rent is higher, I don't pay transport for transport, and I save on travel time.
posted by TrinsicWS at 2:35 AM on April 28, 2011

Best answer: It may be worth asking around for recommendations of a fee-based financial advisor who could work through this question using your particular figures.

As others have pointed out there are several factors which are difficult to know - but which you should at least form your own opinion about:

1. PROPERTY SCARCITY: The UK has tight planning regulations which make new-builds hard. It also has a population who aspire to live in larger houses than their parents. In economic hubs like London this has made property desirable. This effect may offset others that would otherwise depress the value of property. The same scarcity also affects rental prices: if everybody is dashing away from ownership then demand for rental property will lead to rapid rental price rises. The carrot of property scarcity has been one of the main factors used by the property industry to inflate the price bubble - but this does not mean it should be discounted as a driving force.

2. INTEREST RATES: They can only really go up. For a while in 1990 they were 15% - so they could foreseeably go a long way up. Feed in a 15% interest rate into your mortgage calculator. If that is not appealing to you then you can bet it would not be popular with other property owners. Most UK mortgages are variable so people would be poorly protected from such rises.

3. UN-BURST PRICE BUBBLE: I would recommend you look at this Economist graph of property prices plotted as an index for several countries and over the past 20 years or so. Compare the UK with the USA, Ireland, Spain or wherever else. Prices still look high to me.
posted by rongorongo at 3:13 AM on April 28, 2011

Best answer: Some data points for you as my partner and I bought our a house in London less than 12 months ago.

The rent on a 2 bed flat in zone 2 east London (10 mins from Liverpool street on tube) was approx £1200; the mortgage on a 3 bed house in zone 3 east London (15 mins from Liverpool street on tube) is a shade over a grand currently, fixed for a few years. This involved a 20% deposit. The difference just about covers the running repairs I'm now supposed to make, maybe a touch under. Based on that, your figures seem about right to me. You should also consider whether to class your mortgage payments as at least partly contributing to your savings, thus freeing up some cash from that section.

A useful starting point might be to look at where you can afford to live based on your preliminary calculations and see if thats a compromise you're willing to make. Two useful sites are http://www.houseprices.co.uk/ and http://www.nethouseprices.com/.
posted by fatfrank at 6:00 AM on April 28, 2011