Rent vs Buy: How the Comparison Works

Summary

The rent-vs-buy calculator compares the financial outcome of buying a home versus renting and investing the difference. It runs a month-by-month simulation over a specified time horizon, accounting for property growth, mortgage costs, maintenance, stamp duty, rent increases, and investment returns. At the end, it compares total net wealth under each scenario to show which option leaves you better off.

How it works

The capital equalization model

The key insight is that buying and renting have different monthly costs. Whichever scenario is cheaper in a given month, that person invests the surplus at the assumed investment return rate. This ensures a fair comparison — you’re not penalising one scenario for having spare cash that sits idle.

What each side pays

Buyer (upfront):

• Deposit
• Stamp duty (SDLT)
• Buying costs (solicitor, survey, mortgage fees — typically 1–3% of price)

Buyer (monthly):

• Mortgage payment (amortised over the full term)
• Maintenance (typically ~1% of property value per year)

Renter (upfront):

• Nothing — the renter invests the buyer’s upfront costs instead

Renter (monthly):

• Rent (increasing annually at the specified rate)

The simulation

Each month:

1. Calculate the buyer’s monthly cost (mortgage + maintenance)
2. Calculate the renter’s monthly cost (rent, growing with inflation)
3. The person with the lower cost invests the difference
4. Both investment pots grow at the monthly investment return rate
5. Record wealth snapshots at year-end for charting

At the end of the time horizon:

• Buy wealth = property value (grown) − remaining mortgage − selling costs + buyer’s investment pot
• Rent wealth = renter’s total investment pot (from deposit, stamp duty, buying costs, and monthly surpluses)

Property growth and rent inflation

Historical UK data provides context for the growth assumptions:

Typical UK costs

The formula

For the renter:

Rent wealth = initial investment × (1 + i)ᵐ + Σ monthly surpluses compounded

where the initial investment = deposit + stamp duty + buying costs (everything the buyer spent upfront).

Worked example

Inputs explained

• Property price — the purchase price of the property
• Deposit — the amount paid upfront toward the property
• Mortgage rate — annual interest rate on the mortgage
• Mortgage term — years over which the mortgage is repaid (typically 25)
• Monthly rent — starting monthly rent for the equivalent rental property
• Annual rent increase — how fast rent grows each year (UK long-term average: ~3.7%)
• Property price growth — how fast the property appreciates (UK long-term average: ~3–5%)
• Investment return rate — annual return on investments (UK equities long-term: ~6–8%)
• Buyer type — first-time buyer, moving home, or additional property (affects stamp duty)
• Buying costs — solicitor, surveys, and mortgage fees as a % of price
• Selling costs — estate agent and conveyancing fees as a % of sale price
• Annual maintenance — ongoing repair and upkeep costs as a % of property value
• Length of stay — how many years you plan to live in the property (the comparison horizon)

Outputs explained

• Winner — whether buying or renting leaves you with more wealth
• Benefit amount — the difference in net wealth between the two scenarios
• Buy wealth — property equity + buyer’s savings pot after selling
• Rent wealth — renter’s total investment portfolio
• Wealth over time chart — year-by-year comparison of cumulative wealth for both scenarios
• Breakdown cards — detailed view of where the money goes in each scenario
• Verdict — plain-English explanation of the result

Assumptions & limitations

• Fixed assumptions over time. In reality, mortgage rates change at remortgage, property growth varies year to year, and investment returns are volatile. The calculator uses constant annual rates for simplicity.
• No tax on investments. Investment returns are modelled gross. In practice, returns outside an ISA may be subject to capital gains tax or income tax on dividends. Using a Stocks & Shares ISA eliminates this for most investors.
• Maintenance at 1% is a rule of thumb. Actual maintenance costs vary enormously — a new-build may need almost nothing for years, while an older property may need a new roof.
• Rent and property growth are independent. In practice, they tend to be correlated (both driven by supply and demand in the same market).
• No transaction costs on investments. Platform fees, fund charges, and trading costs are not modelled.
• Length of stay matters enormously. Buying has high upfront costs (stamp duty, fees) that are amortised over time. For short stays (under 3–5 years), renting almost always wins because those costs haven’t been recovered through property growth.

Verification