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Comment by pmg101 | Hacker News Reader

Let's simplify by assuming you can choose between two scenarios:

1. The bank lends you £1m to buy a house, you pay them 5% interest for this service = £50,000 pa.

2. You rent a £1m house from a landlord and pay £50,000 pa for this service.

Financially these are identical. And in either case if you stop paying you will lose your home - because it's not really yours, it belongs to the bank/landlord.

However surely 1. is always preferable?

* You can make any change you like to your living environment up to and including moving walls around

* Assuming you do continue to pay you have the absolute right to live there and will not be forced to leave

* Rents can rise out of your control, even to the point you can no longer afford it. Mortgage rates can change over time too but you get to choose your level of risk appetite explicitly by fixing for the period you prefer.

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Those are not comparable scenarios. You are omitting a lot of detail, which most people do, but the detail is important.

You need to give the bank $200k to get the $800k mortgage. Now you have $200k equity in the house, but you could have had that $200k equity in the stock market (compounding over the years).

Most of the replies here are for the US context. They use 6% interest rates over 30 year term. So their monthly repayments would be $4,797. And they're saying that renting the equivalent house would be about $2,500. I have no idea if this is realistic or not, but I'm just showing you what you're omitting from your calculations. We must also keep in mind, rent will increase over time, while your mortgage won't.

So now in the renting scenario, you have an initial $200k in the stock market growing at the nominal compound rate of say 8% each year. Then you're also investing the different between mortgage and rent (4,797 - 2,500 = 2,297) into the market each month, and that is also going to compound. Then you add in all the extra costs of home ownership over 30 years, then you calculate the value of your house that you now own outright at 30 years and compare it to the pot of money you put into the stock market while renting over those 30 years.

If your pot of money at the end of renting is enough to buy the house outright at that point, with some left over, then renting wins. Otherwise buying wins. (speaking purely financially)

I haven't done the calculations, but now you can see why your simple scenario is not sufficient.

These are not financially identical at all, at least where I live. If heating breaks down, it is landlord's financial burden. Sooner or later you'll have to replace the roof. You don't have this type of financial burdens if you rent.

Yes it'd be interesting to see all those kinds of decadal costs factored in.

My head is still very much turned however by the fact that rents rise with or above inflation every year, meanwhile I'm still paying off my mortgage in 2012 pounds. But I'm quite willing to believe I'm behaving irrationally.

Those costs are factored into the rent.

Exactly their point. That $50k of rent includes the cost of repairs & upgrades. The $50k you pay the bank does not.

except that those are not the numbers we have today (in the US, I don't know in the UK).

Rather, for a $1M house:

1. The bank lends me $800k to buy a house with a 6.5% interest. you need to put 200k$ as a downpayment.

2. The rent equivalent is 28000$ a year.

The math is way more complex than this, but what really matter at this point is the gap between renting and buying a place.

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