Buy versus rent: which one actually leaves you better off?

Ask ten people whether buying beats renting and you will get ten confident answers, most of them based on what happened to that person specifically rather than any actual arithmetic. The honest answer is that it depends on the numbers, and the numbers most people compare are the wrong ones.

The usual comparison is monthly rent against monthly mortgage payment, and buying nearly always looks better on that alone. But a mortgage payment includes building equity, a rent payment does not, and neither figure accounts for what your deposit could have been doing if you had not sunk it into a front door. Get the comparison right and the answer stops being obvious.

The cost that never makes it into the conversation

Say you have £40,000 saved for a deposit on a £200,000 flat. Buy the flat, and that £40,000 becomes bricks and mortar. Rent instead, and that same £40,000 could sit in a stocks and shares ISA quietly earning a return, say 5% a year on a long-term average. That is £2,000 a year, roughly £167 a month, that a renter keeps and a buyer gives up the moment they complete.

This is the opportunity cost of the deposit, and it is the single biggest thing that gets left out of pub-table comparisons. It does not make buying wrong. Property can appreciate too, and a mortgage is a forced savings plan of sorts. But pretending the deposit has no cost just because it is not a monthly bill is how people end up comparing the wrong two numbers.

A worked example over ten years

Take that £200,000 flat, bought with a £40,000 deposit (20%) and a £160,000 repayment mortgage over 25 years at 4.5%. Compare it against renting a similar flat for £950 a month, with rent rising 3% a year, and that £40,000 deposit invested at 5%.

Run those assumptions forward and, with property growing at a fairly ordinary 3% a year, the buyer typically pulls ahead by around year eight or nine, once the equity built up plus the property's growth overtakes what the renter's invested deposit and monthly savings have managed to earn. Push the property growth rate down to 1.5% a year, or the mortgage rate up to 6%, and renting can still be ahead at the ten-year mark. Small changes in the assumptions move the answer by years, which is exactly why this is not something you can eyeball.

What tips the answer one way or the other

A handful of inputs do almost all of the work in this comparison, and it is worth knowing which ones matter before you trust any single answer:

• How long you plan to stay put. Buying costs are front-loaded (stamp duty, legal fees, moving costs), so the longer you stay, the more they get spread thin. Move again within three or four years and those costs alone can wipe out most of the advantage of buying.
• The gap between mortgage rate and rent. When mortgage rates are high relative to rents, as they have been at various points recently, the monthly cost of buying can genuinely exceed renting even before maintenance and fees are added.
• What you actually do with the difference. The comparison only holds up if a renter genuinely invests the gap between rent and the cost of buying. Spend it instead and the whole calculation collapses in favour of buying, because the buyer is being forced to save via their mortgage and the renter is not saving at all.

That last point is the one I would flag hardest. The maths behind "renting and investing the difference" only works for people who actually invest the difference, month after month, without fail, for a decade or more. In practice that is a smaller group of people than the online arguments suggest.

The bit that is not really about money

Even once the numbers are done properly, buying and renting are not purely financial decisions and it is worth being honest about that. Owning gives you the freedom to knock through a wall or get a dog without asking permission, and it removes the risk of a landlord deciding to sell up and giving you two months to find somewhere else. Renting gives you the freedom to leave a job, a relationship, or a city without selling a property first, which has its own value that does not show up in any spreadsheet.

If the financial comparison comes out close, which it often does, those non-financial factors are usually what should decide it. If it is not close, at least you will know by how much, rather than guessing.

This guide is general information, not financial advice. Figures are illustrative and your own mortgage rate, growth assumptions, and costs will differ, so check your own numbers before making a decision.