Money
Managing your money
The credit crunch: how could it affect you and your family?
The money sections of the papers have been full of news of the horrors of the nation's personal finances for the past few weeks. We've heard about the rising difficulties of taking out new loans, be they from the bank or on a credit card, writes Merryn Somerset Webb
We've heard that 41% of people paid for some part of Christmas on their credit cards; that more people than ever before will go bankrupt this year; that repossessions are likely to keep rising all year; that the mortgage rate going to keep going up even as base rates fall; and that the average person only has enough cash to last 12 short days should they leave their jobs.
Hot on the heels of this has come a slew of articles telling us what to do about it. Anyone who doesn't know how to consolidate their loans, find an interest-free credit card, cut their utility payments, create a budget spreadsheet and get a cheaper mortgage by now clearly hasn't been listening to the personal finance experts properly.
But reading – and writing - all these money makeover articles recently, I've been beginning to wonder if for many people the best way to survive the credit crunch and free up a lot of cash in a hurry might be to stop bothering with financial micro-managing, dump their mortgages altogether and rent somewhere to live instead.
Why it makes sense to rent, not buy
Selling to rent (STR as it is now known) has made some financial sense for some years now in cashflow terms – ie: rents have been generally cheaper than mortgage payments on most properties.
But now that the chances of making a capital gain on owning a house (the only reason to have bought over the last three years) look pretty low, it seems to make more sense than ever.
Have a look at www.primelocation.com. Here you can see the rental and sale prices of hundreds of thousands of houses. It makes for very interesting reading. One example sent in by a reader from Wales makes the point very clearly. He points to a nice-looking 'executive' four-bedroom house with views over fields to the rear and close proximity to several excellent schools. It is both for sale and for rent. The sale price is £315,000 (at least 12 times the local average wage).
A repayment mortgage on this amount would come to around £2,000 a month and even an interest-only mortgage to around £1,500. Yet you can rent this very same house for £750 a month (offering its current owner a pathetic gross yield of under 3%), a saving of £750 a month – and that's before you even consider the fact that you don't have to be responsible for its upkeep.
The situation is much the same in other parts of the country. There has, for example, been much talk about how fast rents are rising in central London, but they're going to have to rise an awful lot faster for it to make sense to buy instead of renting.
A three-bedroom mews house in Bayswater currently costs around £1m. The cost of owning it, on even an interest-only mortgage, would therefore come in at something like £55,000 a year - and that's only if you don't include the purchasing costs, (another £45,000 or so) or the maintenance (at least another £5,000 a year). The cost of renting a similar house? About £39,000 a year. That's £16,000 less.
Homeownership isn't everything
I am not suggesting that people with no serious financial problems, with mortgages they can afford and with houses they and their families like living in suddenly sell up and rent instead. Moving house is an awful lot of bother if you don't have to do it.
But if you are heavily in debt and scared of losing your home (as the newspapers seem to think everyone is), why not just sell up, move into a cheaper rented house and then pay off your debts with the money you save on not having a mortgage every month?
My guess is that over the next five years being debt-free is going to feel a lot better than being up to your eyeballs in interest payments, even if the latter means you get to keep claiming ownership of your own (depreciating) home.
Where to find the highest interest rates on the market
And if your children or grandchildren are among the many first-time buyers desperate to get a foot on the ladder and endlessly whining about it in Mail on Sunday case studies, why not stop worrying, keep renting and save the difference? If interest rates and house prices keep coming down at their current rates, odds are they will be able to afford one soon enough.
Merryn Somerset Webb is the editor of Moneyweek and writes a monthly investment column for Saga Magazine. Her opinions are her own and for general information only. Always seek independent financial advice.
