Buy or rent? The five question test

After last week euphoric article, where I almost incited you to buy a property based on the uninterrupted increases in property prices I think that this week I will try my best to be more poised and equanimous... informatively speaking of course.

 

Spaniards has always been prone to buying housing. There is a firm believe that rent means little less than "throwing money" away. In general, it is thought that owning a home provides security and stability to a family, but with the advent of this (past)? crisis this statement may no longer be true. This may explain why many families today contemplate renting a home as an alternative to applying for a mortgage.

 

What is the best choice for you? This article will give you five tips to help you choose between buying or renting a home.


1.      Do you have enough savings to get a mortgage?

With the economic crisis, the price of housing has fallen and becoming an owner could now be possible. However, many do not know that to get a mortgage you need to have saved 35% of the purchase value of the apartment: 35,000 Euros from a 100,000 Euros house.


20% will be to pay the "down payment", the part that the bank does not finance. The vast majority of institutions grant 80% of the value of the house, so a 20% of the price is required to make the purchase and 15% more to meet the other costs for contracting a mortgage and for taxes.


If you do not have this amount of savings, another option is to purchase an apartment directly from a "toxic" bank, because these types of mortgages do tend to finance up to 100%. Although the 15% mentioned above would be required in any case to pay for the additional expenses arising from the actual mortgage.


2.      Does your family have a minimum income of 2,000 Euros a month?

A few years ago getting a mortgage was much easier than now. Currently, only banks granted mortgage loans to customers with high net worth profiles with high revenues of more than 2,000 Euros per month. They do not want to repeat the mistakes made before the outbreak of the housing bubble, when entities gave mortgages to families who could not afford them afterwards. So now they learned the lesson and they ensure that their clients can deal with future loan payments. 

 

3.      Have you found a bank willing to finance you?

At this point, many would think that with enough savings and high income, I have everything to get the mortgage. But the last hurdle is to find a bank willing to lend the money. As I have mentioned before, only the most creditworthy profiles are more likely to obtain a mortgage. Which means:

  • Having job security, meaning having a Spanish type of "permanent contract".
  • No other unpaid personal loans or credit cards, or any record of defaults.
  • Not being heavily indebted, because in that case the bank would think it would not be able to afford the payments on a mortgage.


4.      Is the mortgage payment lower than the rent?

To make the decision to buy or rent a home, you should make an analysis of the regular monthly expenses and calculate how much would need to be paid for rent and how much for monthly mortgage payments. To find out how much amount the mortgage payment is determined on:

  • How much is the purchase price.
  • The interest rate of the mortgage.
  • The repayment term, ie, the number of years in which the loan is returned to the bank.

To analyze the possibility of renting as to buying both of those calculations need to be performed, and I forgot....the general housing expenses (community, pool maintenance, elevators) will have to be taken into account. You have to know how much amount in the case of rent, whether those expenses are paid by the tenants or included in the rent.


5.      Do you plan to live in this house a long time?

Another determining factor required to make the best decision is to know how long one plans to stay in one place. If you do not intend to live for many years in the same house, a mortgage is a big investment: when you leave home, the debt needs to be paid whether you live in it or not.


In case of the rent, stop paying it is always much easier than to put a property on sale.


So if you have not yet made tour mind yet get your hands on that old calculator and start tapping away.


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