The true cost of home ownership

We have just had our first remortgage completed and finally came to terms with the new MUCH higher mortgage interest rate. Ouch! 🥲 Anyone who has recently gone through the same or have just bought their first home will know this year has been nothing but painful when it comes to mortgages and home buying.

This brings me to the hot topic of the real cost of home ownership, which often gets underestimated. When it comes to comparing renting vs buying a property, many people believe that if you rent, you are technically throwing money away or simply put - paying your landlords mortgage.

In this case buying a property and building equity is much more preferable to renting. But is this always true?

There is also an investment piece - majority of people think that buying a home is a great investment and while this has been somewhat the case for the last couple of decades, things are changing.

Is buying a home still a good investment or can you build more wealth when renting? 🤷‍♀️

What no one tells you

I must confess - I didn’t factor in all the different costs of owning a home when we were looking at buying our house. I knew there were things like stamp duty and legal fees, but beyond this I didn’t run a calculation of what it really costs to buy opposed to renting. No one talks about these things.

When buying a property, asides from the legal costs, there are so many other costs involved and if you factor everything in, sometimes renting actually makes much more sense. ⚖️

Additional costs and phantom costs 🏡

There are quite a few hidden costs of owning a home. Here are the main categories of additional fees and expenses, which are often forgotten.

Home buying costs

• Mortgage - cost of the property, interest on the loan, mortgage arrangement fees and broker fees

• Legal fees and conveyancing

• Stamp duty

• Deed of trust (if you’re not married or buying with a friend/relative)

• Buildings insurance (you need this to get the mortgage approved)

Phantom costs

• Remortgaging fees

• Contents insurance (optional)

• Maintenance (replacing and servicing boiler, fixing anything that gets broken, etc)

• Furnishing and decorating

• Upgrading (extensions)

• Maintaining the garden (lawn mower, soil, plants)

Once you add all of this up, the true cost is going to be higher than just the mortgage payment. Many people tend to look only at this number for deciding whether they can afford to buy, which is quite dangerous as you can end up paying far more than expected.

Purely based on simple maths, £1,000 in rent is worse than £800 in monthly mortgage payments. But once you calculate the extra costs, they can easily add 50% on top of your mortgage payment. You could end up paying £1,200 (£800 mortgage + £400 in phantom costs) in total.

Opportunity cost 💸

Rarely anyone talks or thinks about this one.

What if instead of buying a property you decided to rent? If you had saved up a 15% deposit for £300k house (£45k), you could invest this money in the stock market. In 25 years your total could be worth £257k*!

What if you also invested the difference between rent and owning a home? An extra £200 invested monthly with an initial 45k starting balance could be worth £419k* in 25 years.

Now this is a great investment! 📈

*assuming an average 7% return with 3% inflation factored in, however, this is not guaranteed.

Rent is the most you will pay, mortgage is the least you will pay

Ever heard this saying? Rents can increase as well, but you would have an option of moving and finding something within your budget. You won’t need to fork out on a new boiler or pay someone to fix your leaking roof. The landlord takes care of it all.

Whereas the mortgage can go up based on the interest rates and if you’re not on a fixed deal, this can fluctuate quite a lot. In the US, 30 year mortgage deals are common, but in the UK we have to remortgage every 2-5 years and this is when the costs of a mortgage can increase dramatically.

All things considered, buying a home as an investment becomes pretty questionable. People buy homes for many other reasons such as stability, home for kids, wanting to decorate own home or simply because they want to.

It’s just not the best investment nowadays!

My weekly recommendation

Scott Galloway is one of my favourite speakers and authors, who also talks about wealth and financial success. He breaks it down what it takes to succeed financially in this day and age.

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Until next time ✌️

Lina at Money Blues