To Rent or To Buy

publication date: Jul 13, 2011
author/source: Kate Faulkner, Designs on Property and Author of Which? Property Books

To Rent or To Buy

First Time Buyers: Finance tough, but worth it if you can afford to buy

With the economy being somewhat insecure and reports of property prices falling again, is now a good time for first time buyers to get on the ladder - or should you continue to rent?

Kate Faulkner from independent property advice website Designs on Property says "Now may well be an excellent time for first time buyers to purchase their first home". According to Kate "Deciding whether to buy at the moment or not depends really on your finances, how long you intend to hold onto the property for and your local property market".

Kate explains that although there are 5-10% deposits around, unfortunately they tend to attract higher interest rates of around 4-6% or more. Although this might make the property more expensive to pay for on a monthly basis, it's worth bearing in mind though that you might be able to purchase the property for less now if prices rise over the next few years, so it's worth looking at the trade off. For example, see the table below:-

Buy Now or Later?

Current Price of a homePrice of a home in three years *Waiting for three years
£60,000£66,000Might pay an additional £6,000
Deposit at 10%Deposit at 10%
£6,000£6,600Require a £600 extra deposit
Monthly Mortgage @ 6%Monthly Mortgage @ 4% **
£350 (approx)£320 (approx)Save £30 per month in mortgage

*   This assumes a 10% increase in house prices over three years which is equivalent to a 5% increase each year.

** This assumes lenders will start competing for First Time Buyer business and drop the mortgage rates to current rates for deposit levels in excess of 10%.

Of course this doesn't include any additional costs in renting a home you may incur over the next three years, and it assumes the property's price goes up - when it may not increase at all.

The difficult decision for first time buyers though is, is it worth moving out of rented accomodation at all? It might be that your rented property costs a lot less to rent than it would be to buy. Any maintenance costs are paid for by the landlord, so there are no worries there and of course you don't have to scrimp and save for a deposit.

To make this decision you need to:-

  1. Decide whether you really want to commit to the costs and responsibility of being a home owner
  2. Work out if you have at least a 5% deposit
  3. Add up everything you have to spend money on (for example utility bills, getting to work, council tax, food)
  4. Work out how much you have spare for mortgage and insurance by taking away your ‘must spends' from your net salary
  5. Think through any problems which might occur such as redundancy, sickness or if buying as a couple if you split up and how this would affect your decision to buy - could one of you buy the other out for example?

In addition to the above, if as a first time buyer you intend to stay in the property for a good five or more years, then this should be long enough for property prices to grow by 5-10%. To date though it's worth knowing that many areas are no way near the price they were in 2007. Some properties and areas are still worth 20% less while others have recovered and a few are showing signs of slight increases versus 2007 heights.

So, even if you have the finances and security over the next five years to buy, it is worth spending some time finding out what is happening to property prices in your local area. To find out how to assess your local market read How to check out the local property market.


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