How to compare the cost of renting and buying
Take the comparison in the answer above: a home costing $400,000, bought with a deposit of $80,000, against $2,200 a month in rent rising 3.00% a year, over 10 years, with money valued at 5.00% a year.
- Buying starts with the deposit and the buying costs, paid on day one, and a mortgage for the rest, repaid at $2,022.62 a month. $80,000 + $12,000 = $92,000 on day one $400,000 − $80,000 = $320,000 borrowed
- Every later payment, on both sides, is brought back to today's money at 5.00% a year, one month at a time: each month back divides by (1 + 5.00% ÷ 12) and rounds to the cent. That is what makes a payment years away count for less than one made now.
- Brought back to today, the costs of buying add up as follows. The home is sold at the end, worth $537,566.56 with $271,283.24 still owed on the mortgage; what the sale brings back once the selling costs and the loan are paid is taken off: $92,000 deposit and buying costs + $190,695.36 mortgage payments + $39,152.31 property tax + $14,142.15 insurance + $35,592.68 maintenance − $142,093.51 back from the sale = $229,488.99
- Renting is $2,200 a month, rising 3.00% a year, for 10 years. Brought back to today the same way, that comes to $234,912.28.
- Over 10 years, buying costs less than renting by the difference: $234,912.28 − $229,488.99 = $5,423.29
- Sold at the end of year 9 instead, buying would cost $212,696.97 against $213,511.98 for renting, and that is the first year buying costs no more: $213,511.98 − $212,696.97 = $815.01
That is where the $229,488.99 cost of buying, the $234,912.28 cost of renting and the $5,423.29 between them in the answer come from.
The question is how long you stay
Renting and buying are usually compared on the monthly payment, which is the one comparison guaranteed to mislead. Buying front-loads a large cost, gives some of it back at the end, and charges for a set of things a tenant never pays. Whether it wins depends almost entirely on how long the money stays in the property, because the costs of buying and selling are paid once and have to be spread over the years you are there.
That is what the break-even year on this page is. Every row of the table is its own complete comparison, with the home bought at the start and sold at the end of that year, and the cost of selling taken off. It is not a running total: selling happens once, and a comparison that leaves it out flatters buying in every single year.
Everything is in today's money
Both sides are discounted at the return you would earn on the money if you did not buy. That single rate does two jobs. It makes a payment ten years away comparable with one next month, and it charges the buyer for the deposit being tied up in a house rather than invested. A comparison that builds a separate investment account for the renter is doing the same thing with two numbers that have to be kept in step; this does it with one.
Turn the rate up and renting improves, because the money the renter is not spending on a deposit works harder. Turn it down and buying improves. It is the most sensitive input on the page after house price growth, and it is worth moving both before treating any answer as settled.
The costs people forget
Maintenance is the big one, and it is charged here as a share of what the home is worth at the time rather than of what it cost, because that is how it behaves. Property tax, insurance and any service charge are the rest of the running costs a tenant does not pay. On the way in there are buying costs, and on the way out the cost of selling, which is usually the larger of the two and the one most often left out of the comparison entirely.
What is not here is as important. There is no tax relief on mortgage interest and no tax on the gain when the home is sold, because both depend on where you live, on the rest of your return, and on rules that change. House prices cannot fall on this form, so a growth rate of nothing is the pessimistic case available. The full list sits beside the method note, and it is worth reading before treating the verdict as a decision.
Common questions
What should I put for house price growth?
Something you would defend. It is the input the answer is most sensitive to over a long comparison, and it is the one nobody knows. A sensible approach is to try a rate near long-run inflation, then a rate well below it, and see whether the break-even year moves into or out of the period you actually plan to stay.
Why does buying look worse than I expected in the early years?
Because the costs of buying and selling are both charged in full, and in the early years there are few years to spread them over. Early mortgage payments are also mostly interest, so little of the money is turning into equity yet. Both effects are real, and both are why moving frequently and buying rarely mix well.
Can I compare a cash purchase?
Yes. Set the mortgage length to nothing and the whole price is treated as paid up front, with no mortgage payments and nothing owed at the sale. The deposit field then carries the purchase, and the discount rate charges you properly for the money being tied up.
Why is the mortgage worked out separately?
Because the payment on a repayment mortgage is defined by a schedule that clears the balance to exactly zero, which is the loan calculator's job on this site. This page asks that calculation for the schedule and then values it along with everything else, so the payment here and the payment on the mortgage pages are the same number rather than two numbers that ought to match.
Is anything I type stored?
No. The calculation happens on the server as part of rendering the page, nothing is written down, and the access log for this site drops the query string precisely so that the numbers you enter are never recorded.
Sources
No figure on this page is read from a table, so there is nothing to source. What these documents define is the convention behind the arithmetic, and the regulated measures this calculator deliberately does not compute:
How this is worked out
Both sides are a stream of monthly payments discounted to today at the return you gave. Buying is the deposit and buying costs at the start, the mortgage payment, property tax, insurance, maintenance and any service charge every month, and the sale at the end, less the cost of selling and whatever is left on the mortgage. Renting is the rent, raised once a year. The deposit's opportunity cost is in the discount rate rather than in a separate investment account, which is one number to set instead of two that have to agree.
It compares the costs you type at the growth rates you type, and no part of it is a forecast of house prices or rents.
What this page does not model, in full:
- Mortgage interest relief and property tax deductions, which depend on where you live and on the rest of your return
- Tax on the gain when the home is sold, and any exemption from it
- A fall in house prices: the growth rate cannot be negative on this form
- Months between tenancies, and the cost of being between homes
- Moving costs on either side, and the fees of moving again
- A rental deposit, and the interest it does or does not earn
- Inflation, so every figure is in today's money at face value