We know how important it is to find a suitable residential property you can call home. That’s why many major decisions are involved in this process, one of the most common of which is deciding whether to rent or buy.
We’ve created this guide to help you find answers to almost all of your questions. We’ll show you the pros and cons of renting vs buying, as well as the differences between various mortgage types and much more!
What Exactly Is a Residential Property?
Residential properties are simply buildings or parts of structures explicitly designed for living or dwelling. The owners can occupy these units or have tenants living there under authorised rental agreements.
We can’t say whether renting or owning a house is better than the other because it depends on multiple factors. To help you see a clear picture of both options, we’ve created a comparison below outlining their advantages and disadvantages:
|Buying||Provides a sense of stability and helps build equity Gives you complete control over house decoration and remodelling Offers earning opportunities, such as renting it out or an increase in property value||Expensive upfront costs for down payment, maintenance, and other expenses Complete responsibility for upkeep and repairs Potential financial risk because the expenses and market value of properties are unpredictable|
|Renting||Lower initial costs, as it doesn’t require a sizable down payment|
Predictable expenses, since the monthly rent is fixed and repairs are usually the landlord’s responsibility Short-term financial commitment, giving you more flexibility to relocate whenever you need
|Potentially more expenses, as over time, accumulated rent may exceed mortgage payments Restricts your ability to change or personalise the space as you see fit Landlords could raise the rent or evict you|
We won’t lie, the process of buying a home can be a little complicated, but there are three main steps you should be aware of:
- Get Specialised Help: You’ll need the assistance of a few professionals during this process. These may include a lender who can lend you money to complete the purchase and a surveyor who can evaluate the property’s condition and provide an accurate valuation.
- Apply for Mortgage: You can qualify and apply for certain mortgage amounts based on several factors, most notably your credit score. If your credit score is low, make sure to boost it so you can increase your chances of acceptance and even get better mortgage deals.
- Find a Suitable Property: Determine the qualities and features you want in a house first, such as the number of bedrooms and location, so you don’t get overwhelmed with options. Then, start looking for houses that fit your budget online or through real estate companies.
Renting a house isn’t as tricky as buying one. The steps involved in the renting process are quite straightforward, with the following being the most important:
- Set Your Budget: Before doing anything else, make a list of your monthly expenses to get a ballpark of how much rent you can afford. Don’t forget to factor in future property expenses, such as utility bills.
- Tour Several Houses: Start looking for potential candidates after you’ve decided on the key features you want in a home. Visit multiple houses to increase your chances of finding the best deal for you; don’t just stop after viewing a couple!
- Check Tenancy Agreement: Once you’ve decided on a rental option, it’s critical you thoroughly review the tenancy agreement before signing it. That way, you’ll have a clear understanding of both your and the landlord’s rights and responsibilities.
As you look into options, you’ll find property prices vary significantly, and this is primarily due to the factors listed below:
- Location and neighbourhood
- Property size and features
- Property condition
- Accessibility to shopping and entertainment options
- Presence of reputable schools nearby
A house in the UK can cost you an average of £290,000; of course, this varies greatly by region. So, for illustration, if you’re looking to buy in the East of England, expect to pay an average of £358,114, while the average price in the North East is £163,371 and in London is £533,986.
Yes, you can look up the prices at which properties were sold to get a better idea of the offer you might receive. This information is available from a variety of sources, including the government’s website and legit real estate sites such as Zoopla.
To buy a residential property, you must have several requirements ready, which include:
- Sufficient down payment
- Pre-approval for a mortgage loan
- Valid ID
- Documentation, including bank or credit card statements and a driver’s licence
- Property survey
The first way to tell if you’re getting a good deal on a property is to ask yourself, “How well does it meet my requirements and future financial goals?”
After you’ve narrowed down options based on the answer to that question, make sure you do the following to ensure you get a fair deal:
- Check recent comparable sales to gauge the property’s value.
- Conduct a thorough home inspection to identify potential property-related issues.
- Be willing to negotiate, especially if the property has been on the market for a while.
- Consult with a real estate agent to get an expert’s advice.
A few crucial aspects are frequently overlooked when looking at houses. We’ve listed them below so you can look for or inquire about them the next time you go house hunting:
- Roof’s state and age so you can budget for maintenance or replacement.
- Condition and quality of heating, air conditioning, and ventilation systems.
- Level of energy efficiency and its impact on future utility bills.
- The neighbourhood appeal, so drive by and inspect its cleanliness and safety.
The best two routes to finding the right property for you are to go to a reputable real estate firm or browse options online on real estate property portals. Here are some of the top real estate companies and websites in the UK:
It doesn’t end with deposits or periodic mortgage repayments; there are other expenses associated with purchasing a house, which include:
- Surveyor’s Fee: To assess a house’s condition, you’ll need to hire a professional to conduct a property survey. Surveys can cost between £250 and £600 or more.
- Legal Fees: You’ll need to hire a legal expert, such as a solicitor, to handle the legal work, which can cost anywhere between £850 and £1,500.
- Insurance: Insurance policies are necessary because they protect your home and its contents in the event of a fire, theft, flood, or other disaster. The average cost of obtaining one ranges from £146 to £152 per year.
Yes, if you’re buying a home for the second time, you’ll have to pay an additional 3% Stamp Duty on properties worth more than £40,000.
However, if you qualify for first-time buyer relief, you won’t have to pay Stamp Duty on properties up to £425,000, or you’ll pay a reduced rate on purchases up to £625,000.
Now it’s time to show you the different types of mortgages available, along with their benefits and drawbacks, so you can choose the best one for you:
One of the most common types you’ll come across is the repayment mortgage. It entails monthly payments to the lender of the capital amount borrowed plus interest. You’ll continue to make these payments for the duration of the term, which is typically 25 years.
- Lower total interest payments because the interest rate drops as the amount owed decreases
- Own your home free and clear at the end of the term
- Lenders may offer lower interest rates if you make on-time payments
- Monthly repayments are high compared to other mortgage types, like interest-only
- Repayments are fixed, so it’ll be tricky to adjust them if your financial situation change
As the name suggests, an interest-only mortgage allows you to make monthly payments only for the interest owed. With this mortgage type, you get to repay the capital at the end of the term.
- Monthly repayments are relatively low
- Possibilities to reinvest the freed-up capital elsewhere
- Great for property investment, as it can feed your repayments while also earning you money if it outperforms
- Interest rates are typically higher compared to other mortgage types
- The capital must be paid all at once
- This type is uncommon because lenders had difficulty collecting capital owed at the end of the term
With a fixed-rate mortgage, you’ll pay pre-set or constant interest rates for the duration of the loan; interest rates don’t change regardless of market fluctuations.
- Consistent monthly repayment allows for better budgeting
- Offers protection from unexpected interest rate increases
- Deals are usually more costly than other mortgage types with variable interest rates
- No way of benefiting from the decrease in interest rates on the market
A variable-rate mortgage, as opposed to a fixed-rate one, allows interest rates to go up and down throughout the loan term. This means you can make different repayments each month.
- Lower initial payments than fixed-rate types
- If the interest rate falls, you’ll pay lower amounts
- Less sense of stability and more difficulty in budgeting
- If the interest rate rises, your repayments will rise as well
One of the popular types of variable rate mortgages is the tracker mortgage. Lenders offering this type track another interest rate, usually the Bank of England base rate, and apply it to lenders.
However, sometimes you might find tracker mortgages set a percentage above the base rate. So, if the base rate is 3%, the tracker rate could be 4%.
- As the base interest rate falls, your mortgage rate will decrease
- Deals are offered at lower rates than fixed-rate mortgages
- If the base rate increases, your repayments will be higher
- Unless you choose a capped rate, there’s no limit to the increase in interest rates
Another common type of variable mortgage is a discount mortgage. This type involves lenders providing a discount on their standard variable rate (SVR) for a set period, usually two to three years. When this period expires, you’ll shift to paying the higher-priced SVR.
- Reduced interest rate for a specific period, which is ideal for anyone looking to sell or refinance their property before the deal expires
- Possible rate reduction if the lender lowers the SVR in line with the Bank of England base rate
- Increased monthly payments after the discounted period ends
- Unless you remortgage to a better deal, the overall cost could end up being more expensive than fixed-rate mortgages
To apply for an offset mortgage, you’ll need to have one or more savings accounts with the same financial institution. The money you deposit in your savings account will be used to reduce the total interest rate on your mortgage; it won’t be used for repayments.
We’ll give you an example because we know it may sound a little confusing. Assume you have £40,000 in your savings and a £250,000 mortgage. You’ll pay interest only on the offset amount of £210,000 (the result of subtracting £40,000 from £250,000), not on the total mortgage amount.
- Allows you to save lots of money due to lower interest rates
- Permits deposits and withdrawals from your savings account as usual
- The interest you save is not taxable
- The savings account will no longer earn interest
- It’s usually only worthwhile if you have a large deposit in your savings
If you want to buy a property solely to rent it out rather than live in it, Buy-to-let (BTL) is for you. This mortgage’s requirements are quite different from those of other types of residential mortgages.
For example, BTL mortgages have much higher interest rates and are interest-only most of the time.
- Allows you to earn a sizable rental income that could grow over time
- An excellent way to diversify investment portfolios
- Capital growth will be generated as the property value rises
- All property services and maintenance become your responsibility
- Higher initial and ongoing mortgage payments
The British government established the Help to Buy mortgage scheme to make it easier for first-time buyers to purchase a home. With this programme, you’ll be able to buy a house with as little as a 5% down payment.
The size of the equity loan will be determined by your location. In general, you can borrow up to 20% of the home’s value unless you live in London, where you can borrow up to 40%.
- Requires a small deposit to purchase a house
- Provides five years with no interest rates applied; even after that, the rates are low
- Gives you access to affordable mortgage rates
- This mortgage type isn’t available from all lenders
- Repayments are based on the current value of your home; if the value increases, you’ll repay the government more than the initial loan
If you don’t have enough money to put down on a house, a shared ownership mortgage may be the answer!
Housing associations provide this mortgage. It allows you to purchase a portion of a house and pay the remaining amount in rent. The initial share can range from 10% to 75% of the property value.
- Enables you to buy a house sooner than if you waited until you saved up enough money.
- Flexibility in increasing your stake in the house
- If you’re a member of the military, your request will be prioritised
- It applies to specific properties, which might limit where you can buy a house
- Mortgage rates are typically higher when compared to other conventional mortgage types
The regulations managing residential properties in the UK are numerous. But it’s crucial you understand these three:
- Law of Property Act 1925: This act outlines various rules mainly related to property ownership, conveyancing, and land registration.
- Energy Performance Certificate (EPC) Regulation: You can’t sell or rent out a property unless you request an EPC for potential buyers and tenants; otherwise, you’ll be fined.
- Housing Act of 2004: This legislation addresses housing conditions and standards, and it empowers authorities to take action if the housing environment is unsafe or unhealthy.
You have complete control over a property if you inherit it as the sole owner. So, for example, you could sell it to pay off your current mortgage, rent it out for a profit, or even live in it.
Although you won’t have to pay Income Tax or Capital Gains Tax right after inheriting the property, you might have to pay an Inheritance Tax.
It depends on whether you own or rent the property. If you own the house, you’ll be responsible for all repairs and maintenance requirements. On the other hand, if you’re a tenant, your landlord is responsible for handling most, if not all, of that.
Yes, purchasing a residential property is a worthwhile investment! To better understand the benefits and drawbacks that it carries, take a look at the comparison below:
|Potential value appreciation, which can result in a sizable profit||High initial costs, as well as ongoing responsibilities and maintenance expenses|
|Renting out the property can provide a consistent stream of passive income||Property value isn’t guaranteed as it’s significantly impacted by the market and economic conditions|
|Real estate is one of the top hedges against inflation||Risk of depreciation, particularly if you haven’t been preserving the property’s condition|
The decision between buying and renting will eventually depend on which option best supports your long- and short-term financial objectives.
No doubt, there are now excellent mortgage types that make purchasing a home easier. But, renting is still quite appealing in terms of having a limited commitment and liability toward a property. So, take your time investigating both routes!
Don’t forget to check out our services at Watertight Homes; we’d be happy to help you take care of your home.