Rent vs buy is the comparison between what it costs to rent a home and what it costs to own an equivalent one over the same stretch of time. The comparison almost everyone runs, rent against the monthly mortgage payment, is the wrong one: part of that payment repays the loan itself, and money that turns into equity has not been spent. What belongs on the buying side is only the money that leaves for good, which is the mortgage interest, the recurring taxes on the property, insurance, service and ownership charges, maintenance, the one-off costs of buying and later selling, and the return the deposit would have earned had it stayed invested. Set that total beside the rent and you are finally comparing like with like.
Worked example
These figures are illustrative and in no particular currency, because every line depends on your country and your deal. Renting costs 1,000 a month, so 12,000 over a year, none of it recoverable. On the buying side, for the same home, suppose the first year brings 9,000 of loan interest, 2,000 of property taxes and insurance, and 1,500 of maintenance. Buying and later selling will cost 20,000 in total, and you expect to stay 10 years, so that is 2,000 a year. The deposit of 60,000 is no longer invested, and you give up 3,000 it would have earned. The unrecoverable total is 9,000 + 2,000 + 1,500 + 2,000 + 3,000 = 17,500, against 12,000 for renting, so buying costs 5,500 more this year. The principal you repay, say 4,000, appears in neither total, because it is still yours. Change the transaction costs or the number of years you stay and the gap narrows or reverses.
Why it matters
Getting the framing right matters because rent against the mortgage payment quietly flatters buying: it hides the interest inside a payment that is also building equity, and it leaves out the return the deposit stops earning, often the largest number on the page and the only one nobody ever invoices you for. The second reason to go carefully is that no question in personal finance depends more on where you live. Purchase taxes and duties, notary, agency and registration fees, recurring taxes on the property, insurance requirements, mortgage rules, what a landlord may charge and how long a tenancy is protected, all of it differs from one country to the next and often between regions of the same country. A rule of thumb picked up from a site written elsewhere can be badly wrong where you are, so look up the figures that actually apply to you and run the comparison over the number of years you realistically expect to stay.
Frequently asked questions
Because part of that payment repays the loan. That part is not spent, it moves from your bank account into the equity in your home. The fair comparison sets rent against the money that genuinely leaves: interest, taxes, insurance, fees, maintenance, and the return your deposit stops earning.
Mortgage interest, recurring taxes on the property, building and contents insurance, service or owners’ association charges, maintenance and repairs, the one-off cost of buying and later selling spread over the years you stay, and the forgone return on your deposit. The rates and fees behind each of these are set locally, so look up the ones that apply where you are buying.
It can, but as an assumption rather than a fact, and a small change to it swings the result a long way. A safer habit is to run the comparison at zero growth first, see how far ahead or behind buying comes out, then work out how much yearly growth would be needed to close that gap and judge whether it looks plausible.