Lloyds Banking Group put out a press release (pdf) last weekend claiming that "Buying is £100 a month cheaper than renting", which the Home-Owner-Ist media regurgitated with glee.
They use the following assumptions:
Average house price £166,102;
Average deposit 27%;
Average interest rate 3.59%;
Plus a made up figure for those running costs which an owner-occupier pays.
They say that this all adds up to a cost of £608 a month for buying as against £708 a month for renting (which I shall take as given).
*Ho hum*
They are honest enough to include the interest you could have earned on a £44,262 deposit, which they reckon is about 1% per annum or £39 a month (this could easily double or treble, of course), which gets the total figure for mortgage repayments + other costs down to £569.
Excel tells me that the monthly repayment on a 25-year repayment mortgage of [£166,102 x 73%] @ 3.59% interest rate would be £611. If you visit their website and use their mortgage calculator for FTB mortgages with that house price/deposit combination and "tracker", it tells you £643.
Unles I've missed something, both of those figures are greater than the £569 total cost which they claim.
*/ho hum*
What have we wrought in the UK?
5 hours ago
15 comments:
Well they did do such a good job of due diligence on HBOS - I'd believe their figures!
Of course everyone has a spare £44k knocking around for their deposit.
:-s
I believe they still usually require life policies to the full value of the loan, so you can add £100-ish a month for that.
BB, the merger was for political reasons, they did no due diligence whatsoever.
DS, indeed. That assumption is completely la la land, but all I can do is check the maths.
TFB, I'd have thought more like £30 a month for 25-year term, decreasing amount?
Oh FFS. Just did a reply and it got lost in the aether.
Mark, the difference may be to do with annual rest vs monthly rest vs daily rest. My crude annual rest calculator says £619 + pence; home grown Excel balance estimator (monthly rest) says £614, Lloyds own calc for 2 yr tracker says £574 (£995 fee assumes paid up front) or £593 (no fee). Lloyds use daily rest.
TFB: Not any more. They can't "require" it because then the premiums would form part of the cost of credit and the APR would be through the roof.
Also most mortgage applicants are (trust me on this) possessed of special information: somehow many of them know they'll never, ever die; never be off work sick, never suffer an accident, and never be made redundant. So if Lloyds insisted, they'd go borrow elsewhere.
FT, I used "tracker for full term" as there wasn't an option for "SVR". But even your £593 figure is comfortably more than the £569 balancing figure.
What you are forgetting, MW, is in home-owner-ist-land house prices always go up. So clearly it makes sense to get on the housing ladder, since you will make money from these rising prices which you can't if you are renting.
L, if I may paraphrase:
"What they are forgetting in home-owner-ist-land is that house prices are drifting downwards. So clearly it makes sense to stay off the housing ladder, since you would make losses from these falling prices which you can avoid if you are renting."
That's better!
Does anyone really expect to pay 3.59% for the duration of their mortgage? That might be the average rate *now* but we're in a period of unprecedently low interest rates.
DNAse: "Does anyone really expect to pay 3.59% for the duration of their mortgage?"
I would like to think 'no', but bitter experience tells us that people care mainly about the initial rate, and not what it might revert to a couple of years down the line.
FT - quite.
In theory you could add the cost of mortgage protection insurance to the comparison. It's not necessary for renters as they can just walk away/claim state benefits (more than can be claimed by buyers)
That 44K increases every month as you pay off the principal. So the associated opportunity cost increases too. And if Lloyds thinks that a 1% opportunity cost is reasonable, I'm looking elsewhere for my financial advice.
Err, you may not have deducted the 27% deposit before calculating the repayments.
Their document says
Mortgage payments are the weighted average of repayment (capital and interest) and interest-only mortgage payments.
Whereas I think you just used repayment?
Either is wrong of course - to be strictly comparable with renting, you ought to use purely interest only - £363 per month. You'd expect buying to be cheaper, of course, because it eliminates the landlord's profit.
Ed P, oh yes I very much did. Paste this into Excel:
=PMT(0.0359,25,119671)/12
AC, I did indeed use repayment. But the most accurate comparison with renting would be a 100% LTV mortgage, on which the interest rate would be more like 7% (assuming you could get it, which you can't).
Or else you can deduct the £39 income on the cash savings from the renting side as well, either way, their figures are f-ed.
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