Rents and mortgages are both bills that you pay to keep a roof over your head, but that’s where the similarities end. When you’re renting, you are essentially throwing money away, paying a bill every month that goes towards supporting the landlord and letting them pay off their mortgage. It makes more sense, in the long term, to get a mortgage – if you know that you can keep up the repayments.
A mortgage is a loan that is secured on a property. These loans tend to be far lower interest than other kinds of loan. Usually, you are expected to put down a significant deposit, although if you have an excellent credit rating, you might be able to get a loan that is very close to the value of the property. The amount you borrow, compared to the value of the home, is called the “loan to value.” Usually you would be expected to have a loan to value of 80-90%, but in the past, it was not uncommon for 95-100% LTV mortgages to be taken out. If your mortgage amount is greater than the value of your home then you are said to be in ‘negative equity,’ and this is not a good thing. If you are in negative equity then you cannot sell your home to clear the mortgage, and if you cannot keep up repayments on the property then you would lose the house, and still end up owing money.
Renting is less risk for many people because landlords tend to be a little more flexible about issues like missed payments, and because you do not have to worry as much about the upkeep of the property – there are a lot of things that are the landlord’s responsibility. Lease terms are more flexible, and you don’t need to worry about selling the house if you need to move for work, or to downsize/get more space depending on your personal circumstances.
Rent is usually more expensive than a mortgage, but if you do not have a good credit rating yet or you are not confident that you are going to stay in the property for a long time, then that might not be an issue for you. It could be that you would prefer to rent an apartment while you establish yourself in a good job, then move later.
Mortgages are a big commitment, and usually not something that a person takes on until they are ready to start a family. However, at that point it can be a good idea to have the security of owning your home – after all, once you are mortgage free, you will enjoy much lower outgoings and the comfort of knowing that you don’t have to worry about more bills.
Taking on a mortgage should only be done after extensive research and financial planning. Most lenders will only give you a mortgage that works out to about 4x your earnings. If you are self-employed, then you might need to ‘self-certify’ your earnings, depending on how you register them for tax purposes. It is worth doing this, though, because paying rent, while less stress in the short term, means that you are essentially giving away money for short-term services, and when your lease ends you will have nothing to show for it. Is that the arrangement you want to have?
For short term accommodation, renting makes sense, but a mortgage gives you the financial security you need when you are looking to make plans for the future with your family.