Renting an apartment or taking a mortgage: which is more profitable

2024 Author: Malcolm Clapton | [email protected]. Last modified: 2023-12-17 03:44

Detailed analysis with examples and calculations.

When comparing mortgages and renting real estate, the material aspect usually fades into the background. The participants in the discussion find out which is better: pay someone else's uncle or get into slavery to the bank, overpay, but for their own, or constantly move in search of more profitable options. But if you leave the sentiment and turn to numbers, then the situation becomes clearer.

Rent and mortgage in numbers

Changes in prices for real estate and rental apartments, as well as the size of inflation for a long period can be predicted only approximately, so that the calculations will be inaccurate. And yet, numbers are more eloquent than words.

The weighted average rate on mortgage loans in April this year, according to the Central Bank, amounted to 9, 64%. According to Domofond.ru analysts, renting an apartment in March 2018 was on average 0.7% cheaper than in December 2017. However, for the sake of accuracy, we will assume that the landlord will increase payments by 5% per year.

For calculations, let's take the regional center, the city with a population of one million Volgograd and the federal city of St. Petersburg.

Volgograd

Mortgage

The average price of a two-room apartment in Volgograd, according to Domofond.ru, is 2,365,695 rubles. Consider the situation if you have accumulated an initial payment of 15%, 25% and 50% of the apartment value and took out a mortgage at 9.64% per annum for a period of 10 years.

Down payment, rubles	Monthly payment, rubles	Overpayment, rubles	The total price of the apartment, rubles
354 854, 15%	26 176	1 130 060	3 495 755
591 250, 25%	23 088	996 818	3 361 818
1 182 500, 50%	15 392	664 546	3 029 546

The calculations do not take into account the additional costs of related services in the form of home insurance and the person who took the mortgage, and compensation such as a tax deduction.

Suppose that real estate prices will grow by 5% per year, then in 10 years the apartment will cost 3.67 million rubles.

Rentals

The average cost of renting a two-room apartment in Volgograd is 15,845 rubles per month. If the landlord raises the rent by about 5% per year, then in 10 years the tenant will have to pay 24,556 rubles a month. In total, over the years, he will pay 2,389,344 rubles for living. For the difference between the cost of a mortgage with a down payment of 15% and rent, a tenant can rent an apartment at a projected price of 2028 for another three years and nine months.

With an average salary in Volgograd of 28,483 rubles, both rent and mortgage payments seem feasible for a family with two working adults.

It is also worth considering that the tenant has unspent savings for the down payment (if any), which he can put in the bank at interest. According to the Central Bank, the weighted average rate on deposits with a maturity of one to three years in 2018 is 6.41%. Over 10 years, the indicator will change several times, but for the calculations we will use this particular figure. The calculations do not take into account capitalization.

Down payment (savings), rubles	Amount in 10 years, rubles
354 854, 15%	582 315
591 250, 25%	970 241
1 182 500, 50%	1 940 482

Accordingly, in 10 years the tenant will not only spend less, but also earn on the deposit.

Rent and savings

From the previous paragraph, it is clear how much a person will be able to accumulate on a deposit in 10 years if he continues to rent a house.

The greatest chances to save up for an apartment and buy it without a mortgage are from a person who has half the amount of the cost of the apartment, but only if the price of real estate does not change.

In 10 years, 425,213 rubles will not be enough for him to buy an apartment. In order to have the entire amount on hand at the right time, he will have to save a little more than 3.5 thousand rubles a month.

In five years, he will have 1,561,491 rubles on his deposit. To buy an apartment at this time, a person needs to set aside 13, 4 thousand a month for all five years. Together with the cost of renting housing, he will spend 29, 3 thousand in the first year and 32, 6 thousand - in the fifth. Accordingly, if he buys an apartment in five years, the total costs including rent will be 3,415,482 rubles, in ten - 4,755,039 rubles. Both options are more expensive than mortgages.

St. Petersburg

Mortgage

The average price for a two-room apartment in St. Petersburg is 6,797,671 rubles.

Down payment, rubles	Monthly payment, rubles	Overpayment, rubles	The total price of the apartment, rubles
1 019 651, 15%	75 210	3 247 152	10 044 823
1 699 418, 25%	66 362	2 865 134	9 662 805
3 398 836, 50%	44 241	1 910 089	8 707 760

In order not to overpay on the mortgage, you need to either accumulate an initial payment of at least half of the cost of the apartment, or increase the monthly payment and shorten the loan term. With an average salary of 58, 5 thousand rubles, obviously not everyone can do this.

In 10 years the apartment will cost 10, 99 million rubles.

Rentals

The average cost of renting a two-room apartment in St. Petersburg is 32,744 rubles per month. With an increase in the rental cost by 5% per year, in 10 years the monthly payment will be 50,787 rubles, and the tenant will pay 4,942,178 rubles in total. For the difference between the cost of a mortgage with a down payment of 15% and rent, a tenant can rent an apartment at a projected price of 2028 for another eight years and three months.

Do not discount your savings as well.

Down payment (savings), rubles	Amount in 10 years, rubles
1 019 651, 15%	1 673 247
1 699 418, 25%	2 788 744
3 398 836, 50%	5 577 490

Rent and savings

And again, a person who already has half of its price can count on buying an apartment without a mortgage. But it will be problematic for him to meet the five-year deadline. In five years, he will have 4,448,162 rubles on his account. To collect the required amount, every month he needs to save 39, 2 thousand. Together with the rental costs, he will have to allocate 72 thousand per month in the first year.

If he buys an apartment in five years, the total costs, including rent, are estimated at 8,968,837 rubles, in 10 years - at 11,739,849 rubles.

So which is more profitable

According to average estimates, rent is more profitable. In all cases, the monthly rent is less than the mortgage payment. At the same time, the initial payment is not only not spent, but also brings money.

However, in 10 years the person who has chosen a mortgage will own an apartment, while the tenant will not.

As for the rental of housing and the simultaneous increase in savings for an apartment - here, too, everything is not so simple. Predictable factors work: the more money you have on hand, the higher the income and the lower the cost of real estate and rent in your city, the more chances you have to save up for an apartment without a mortgage and remain in the black. However, when calculating, they usually do not take into account that real estate prices can rise significantly over 10-15 years.

Therefore, it is worth taking into account another key indicator - time. Long-term predictions are difficult, even for specialists. And stability in the country is closer to a religious indicator: you either believe in it or you don't. Therefore, if it takes more than five years to save up for an apartment, it is worth involving not only logic, but also intuition in the calculations.

Please note that inflation depreciates money, and real estate grows in value.

However, according to Rosstat, in the past three years, prices in the secondary market have been declining for all types of apartments, with the exception of elite ones.

As an additional factor, it is worth considering the proximity of the retirement age. It will be difficult to rent an apartment for pension payments, but in large cities it will be impossible. So by this time it is good to have your own home, even if you got it with an overpayment.

The argument that you could rent an apartment for the rest of your life with the money that went to the bank is sound if you give up buying a house in a large city and rent an apartment at a very favorable price. So, if you save 3 million on overpayment, this will give you 25 thousand a year monthly for 10 years (but you should take into account inflation).

Money can also be deposited. An amount of 3 million, taking into account the current average interest on deposits, will bring 15 thousand rubles a month in interest, 4 million - 20 thousand.

How to calculate what's best for you

Average calculations give average results, so in order to understand what is more profitable for you, you will have to do the calculations yourself. To do this, you need the following data:

1. The amount of the rent for the apartment.
2. The amount of your savings that you plan to use as a down payment.
3. The cost of the apartment you want to buy.
4. Mortgage interest rate (you can use the national average or the one offered by the bank where you would like to take out a mortgage).
5. The percentage of a bank deposit to which you are willing to entrust your money for a long period.

If you choose between a mortgage and renting a home while saving money to buy an apartment

1. Mortgage

With the help or on the website of your bank, calculate how many years your mortgage will take with the optimal monthly payment, what the overpayment will be.

With an apartment price of 5.2 million rubles, an initial payment of 3.2 million, an interest rate of 11% and a mortgage term of seven years, the monthly payment will be 34,245 rubles, and the overpayment - 876,569 rubles.

2. Renting an apartment

Calculate how much over the years you will pay for renting an apartment, taking into account possible increases in rent.

For example, you give 22 thousand rubles a month and have been renting an apartment for three years. During this time, the price has never risen, but it is obvious that in seven years the rent will not cost the same. Therefore, in the next year you will presumably give away for rent 22 × 12 = 264 thousand, in the next three years - 24 × 36 = 864 thousand, in the remaining three - 26 × 36 = 936 thousand, in total - 2.06 million rubles.

3. Deposit and savings

Calculate how much money you will have accumulated on the deposit for the term of the mortgage, and estimate the amount. Then calculate how much money you will have after the first year, the second, and so on until the end of the mortgage term. Also, decide on the amount that you can set aside on a monthly basis to buy an apartment, calculate how much money it will give you in a year or two, and so on until the end of the mortgage term. Now, by a simple addition of the amount on the deposit and savings, find out in how many years you will be able to collect money for real estate.

On a deposit without capitalization with an interest rate of 6, 1%, the amount of 3, 2 million rubles in seven years will turn into 4,566,400 rubles.

Even if real estate prices do not rise, then in seven years it is impossible to buy an apartment without a mortgage.

There is an option not to wait for the required amount to accumulate on the deposit, and to save 20 thousand rubles a month or 240 thousand a year. Then, after five years, the savings will be 5,376,000 rubles. Taking into account the rent, the total cost of real estate will be 6,640,000 rubles, and 176,000 will remain. For seven years, the mortgage on the apartment will go to 6, 8 million. That is, in terms of costs, it comes out about the same, but two years have been saved, that is, renting a house and saving at this time is more profitable.

These calculations work only if the cost of the apartment has not changed for five years, and the rent has not risen in price faster than predicted.

When you cannot save up for an apartment even for the term of the mortgage, it is obvious that borrowing from a bank is more profitable than saving.

If you are choosing between a mortgage and a rental with no plans to buy an apartment in the future

1. Remember how much you give the landlord

Let's take the numbers from the previous example - 22 thousand rubles.

2. Calculate your monthly mortgage payment

Again the number from the previous example is 34.3 thousand rubles.

3. Compare two numbers

Obviously, it is more profitable to rent, even if you do not take into account the down payment in the calculations. If everything is not so simple, divide the amount of the down payment by the number of months of the mortgage and add the amount received to the monthly payment:

3 200 000 ÷ 84 = 38;

34.3 + 38 = 72.3 thousand rubles.

Comparison with 22 thousand is even clearer. And even if in seven years rent will double in price, renting an apartment will still be more profitable.

However, already in the eighth year, a person with a mortgage will fully repay it and will only pay for utilities. And the tenant will continue to pay the same amount for rent. On the other hand, if the rent did not rise, the amount that would have gone to the mortgage would be enough for a 26-year lease.

4. Calculate how much you will earn on the money that could have gone to the down payment

In seven years, the deposit will be 4.57 million rubles. And if you postpone the difference between payments in the amount of 12.3 thousand per month on a monthly basis, then in seven years it will bring another 1.03 million. The total amount of 5.6 million, set at 6.1% per annum, will bring 28.5 thousand rubles per month in interest.