Ask for a mortgage to buy a house or live for rent, what is more profitable?

What is more profitable, buy or rent a home? It has always been one of the million questions in the real estate market. However, now that the inflation is out of control, at maximum levels for almost 40 years, the doubt is even greater. As usual, the right answer is not simple. It depends on many variables, such as the place of residence, the type of house, the profile of the tenant or owner and the current economic situation. But there are also keys that help to know what may be of more interest now or in the future.

Calculator In hand, it is cheaper to take out a loan to acquire a home than to choose to rent it. According to the latest data from the General Council of Notaries, the average price per square meter stood at 1,575 euros in April. Meanwhile, according to the Fotocasa Real Estate Index, the average rent was 10.89 euros per square meter per month. Assuming that you want to rent a house of 80 square meters, the monthly payment to be paid would be about 871 euros. In the case of wanting to buy it, the price would be 126,000 euros. In general, banks grant financing for 80% of the purchase value, so that the mortgage would have an amount of 100,800 euros. With an average term of 25 years and an average fixed interest rate of 2.68%, the monthly bill would be 461 euros. They are 410 euros less per month than the rental income.

Of course, you have to take into account that to access a mortgage It is essential to have saved 30% for entry. This is usually the main handicap, especially for young people. In addition, mortgages usually carry associated products such as insurance or cards that increase the final cost. Likewise, the owner of a home must pay maintenance expenses such as the IBI, the garbage rate or the community. The amount of the IBI differs a lot between territories and, according to a recent study by the Organization of Consumers and Users (OCU), the lowest is around 150 euros per year or 12.5 euros each month. The average price of the garbage tax is 90 euros per year (7.5 euros per month) and the community of neighbors represents an average of 100 euros per month. In total, about 120 euros that would be added to the mortgage payment of 461 euros, which yields 581 euros. So, the average savings with respect to rent is reduced to 290 euros per month.

In the case of rentalsit is also necessary to make an economic effort in the form of bail and advance installments, but “it is much lower,” says Antonio Gallardo, an expert at iAhorro. According to a study by the comparator based on average data from the INE, the effort involved for Spaniards to pay a mortgage is 26.37%, compared to the 38.71% involved in paying rent. According to these data, in general, renting is less profitable than buying.

interest rates

It’s not all black and white. In the choice between buying or renting, factors such as interest rates. Experts invite you to compare the money spent on rent with that paid in interest on a mortgage. The cost of financing has been at historic lows for years, thus making the purchase more interesting given that the rental price exceeds interest. But now rates are starting to rise and so are mortgage prices, which bodes well for more interest burdens on households.

Continuing with the previous example, for a rent of 871 euros per month compared to a 25-year mortgage of 100,800, financing the loan at an annual rate of 1% would entail paying 336 euros in principal and 44 euros in interest per month during the first year. In those 12 months, a total of 4,560 euros would be allocated, of which 528 euros correspond to interest. The figure is less than the 10,452 euros per year that would be paid for rent. If the rate rose to 3%, interest would reach 142 euros per month and in one year 5,736 euros would be paid between principal and interest. With higher rates, 5%, the loan would cost 7,068 euros per year including 253 euros of interest each month. Even in this last case, buying is more profitable than renting a house during an exercise.

With the perspective of rising rates, banks are tightening fixed rates and in some cases they are already above 3% APR when a few weeks ago they mostly did not reach 2% APR. In addition, the euribor is in full upward trend, which makes variable mortgages referenced to the index more expensive. The 12-month indicator is already above 0.4% compared to -0.48% a year ago, and forecasts suggest that it could exceed 1% before 2023.

“The possibilities of accessing the purchase market, especially in young people, does not depend so much on monthly income but on previous savings,” says Ferrán Font, spokesperson and director of studies for “In any case, the decision between buying and renting must be considered, taking into account the economic situation in the short, medium and long term. Renting allows greater mobility and buying and selling offers much more security and stability”, he adds.

house prices

On the other hand, when choosing between buying or renting, the future evolution of house prices and expectations. Although rents and purchase prices usually rise in parallel, the sale operation is carried out at a price that will no longer vary, while if you rent, you assume the risk of a possible rise in rent.

House prices are rising to near-bubble-era levels in some areas. In the first quarter of 2022 alone, the average price increased by 6.8% year-on-year, according to Tinsa. From the financial comparator, they estimate that the upward trend in house prices will moderate in the coming months. They also believe that with the Euribor skyrocketing and the loss of purchasing power, demand will slow down. In general, experts expect increases of between 2% and 6%.

Likewise, rents are getting more and more expensive. According to the specialized consulting firm MVGM, the rental price has grown by 3% at the national level and there is “evidence of sustained increases in rents in the main capitals, in part due to the effect of the CPI.” For its part, the appraiser UVE Valoraciones estimates that rental prices will rise by more than 6% throughout 2022.

High inflation is one of the main fears in the rental market. Since 2015, owners can include in their contracts the possibility that rents be updated annually according to inflation. It consists of applying the interannual CPI published on the update date to the monthly income. If the CPI is positive, income goes up; and if the CPI is negative, income falls.

Currently, inflation in Spain stands at 8.7% and reached 9.8% in March. The general rise in prices has led many landlords to raise rents. However, to avoid excessive increases, the Government limited the annual update of rents to 2% in accordance with the CPI from April 1 to June 30, a measure that will last until September 30.

This means that an average rent of 800 euros could increase by a maximum of 16 euros per month or 192 euros per year. In any case, at the end of the summer, tenants could see how the rental bill for living rises above that percentage. Taking the CPI data for May (8.7%), the average increase would be almost 70 euros per month, about 840 euros per year. And a rent signed in April 2022 could be referenced one year later to the CPI for March 2022. If 9.8% is applied, the average rent would skyrocket by more than 78 euros per month or 940 euros per year.

The truth is that some landlords have chosen not to touch the price stipulated in the contract. Others have reached agreements with their tenants to set softer increases.

In this context, from Fotocasa they point out that, currently, the temporary disassociation of the renewals of the rents from the IPC supposes a clear respite for the tenants. In cities like Madrid or Barcelona, ​​where the monthly rental price is around 1,200 euros or 1,300 euros, the link to the CPI would mean an increase of about 85 euros per month, almost one month more at the end of the year. “A suffocating aspect for those whose salaries have not increased at the same rate,” they point out.

However, the real estate portals remember that the 2% cap only affects contracts in force and not those newly signed. In fact, they assure that the average of the Government is not serving to contain the prices of the market. Thus, although the rental option is more flexible, especially if you do not have a high fixed income, prices have skyrocketed in some Spanish cities. For Antonio Jesús Gómez, executive director of The Simple Rent, “with an inflation of 8.7%, almost structural, the consumer sees the purchase of real estate as a reserve of value”. And he adds that “the conscience of the Spanish is still buying.”

PER and profitability

On the other hand, when it comes to knowing if it is better to buy or rent a property, according to Bankinter analysts, one of the golden rules is to know the PER (Price Earnings Ratio). This data is different in each city of Spain, even in each district and each neighbourhood. The PER reflects the number of times that the annual rental income is contained in the sale price, that is, the number of times it would take to pay for a home through rent. It is calculated by dividing the price of the house by the annual rental price. For example, if a house costs 300,000 euros and 12,000 euros per year are paid for rent, the PER is 25 years. If the cost is 500,000 euros, the PER is 41.6 years. “The higher the PER, the greater the proportion of the purchase with respect to the rent and you are interested in renting. The lower the PER, the lower the proportion of rental with respect to purchase and you are interested in buying”, they point out in the entity.

Another ratio that can be used is to calculate the gross rental return, which is the percentage of dividing the annual money that would be obtained by renting a home as an owner between its theoretical sale price and multiplying it by 100. Following the previous example, 12,000 euros of rent divided by 300,000 times 100 equals 4. With 500,000 , the result is 2.4. It is interesting to buy the higher the profitability per rental and it is interesting to rent the lower it is.

According to the Bank of Spain, the gross profitability of renting a home in Spain is 3.7%. Calculating the data inversely (100/3.7%) a PER of 27 years is obtained. “The first thing is to obtain the rent return or the PER of a home that interests us or of a district or municipality. Once the calculations have been made, we compare them with the data from the Bank of Spain. In this way, broadly speaking, the theory tells us that if the PER is above 27 years (average PER in Spain), it is better to rent, while if it is below it may be better for you to buy”, they explain from Bankinter .

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