In short
- Rent is pure cost. A mortgage payment is partly cost (interest) and partly savings (principal).
- Compare rent with interest, real estate tax, insurance, a repair reserve and what your down payment could have earned.
- Buying pays off when you plan to stay put for several years, because the one-off transaction costs are spread over those years.
- The price-to-rent ratio (price / annual rent) quickly shows whether buying is expensive or cheap in a given area.
Rent or buy a flat: what exactly to compare
The most common mistake is to compare rent with the full mortgage payment. That payment has two parts. Interest is the bank's income, and you will never see it again. Principal reduces your debt, so in practice it is savings held in the flat.
A fair comparison puts rent against the owner's costs that are gone for good. These are mortgage interest, real estate tax (NĪN), insurance, a repair reserve and the return your down payment could have earned in a deposit or an investment.
Building management, heating and utilities are paid by tenants and owners alike, so you can leave them out. If they are included in the rent, subtract them from the rent first.
| Tenant | Owner with a mortgage | |
|---|---|---|
| Money you never get back | The whole rent | Interest, NĪN, insurance, repairs |
| Savings | None (unless you save the difference yourself) | Principal repaid |
| One-off costs | Security deposit, sometimes an agent's fee | Down payment, state fee, notary, bank fees |
| Risk | Rent increases, lease ending | Rate increases, falling flat value |
A worked example with round numbers
Say the flat costs 120,000 euros. The down payment is 18,000 euros and the loan is 102,000 euros over 30 years at 4% a year. The monthly payment is about 487 euros, and in the first month 340 euros of it is interest and 147 euros is principal.
Add real estate tax and insurance, say 20 euros a month, and a repair reserve of about 1% of the flat's price a year, which is 100 euros a month. If the down payment could earn 3% a year in a deposit, that is another 45 euros a month of lost return.
The owner's unrecoverable costs come to about 505 euros a month. If a similar flat in the same area rents for less, renting and saving the difference is the better deal financially. If rent is higher, buying starts to pay off. Every number here is an assumption. Put in your own and the method works the same way.
Price-to-rent ratio: the quick test
Divide the flat's price by a year of rent. If the flat costs 120,000 euros and a similar one rents for 600 euros a month, the ratio is 120,000 / 7,200 = 16.7 years.
The higher the number, the more expensive buying is compared with renting in that spot. The number does not decide anything on its own. It helps you compare areas and buildings with each other.
How long you plan to stay
When you buy, you pay one-off costs: the state fee for registering ownership in the Land Register (Zemesgrāmata), the notary, bank fees and the valuation. If you sell after two years, these costs and the selling costs are spread over just two years, and renting often comes out cheaper.
Read more about buying costs and how to work out the monthly mortgage payment.
- You plan to stay in one place for several years
- You have the down payment saved plus a buffer for a few months
- Your income is stable and the payment survives a rate increase
- You have compared the price with real deals in the same area
It's not only about money
Owning your flat means nobody can end your lease, and you can renovate the way you like. Renting gives you the freedom to move for work or family without selling. If the numbers come out close, these things decide it, and either choice is a sensible one.
Common questions
Is it cheaper to rent or buy a flat in Riga?
It depends on the area and on how long you plan to stay. Compare rent with mortgage interest and the other owner costs. The principal part is savings, so leave it out of the comparison.
Is a mortgage payment the same as rent?
No. Only the interest part is a cost like rent. The principal part reduces your debt, and that money stays in the value of the flat.
How long do I need to live in a flat for buying to pay off?
Usually several years, because buying and selling costs are spread over the time you live there. The exact number depends on the price, the rate and rents in the area.
Sources
- Slēdzot hipotekārā kredīta līgumu · Patērētāju tiesību aizsardzības centrs
- Dzīvojamo telpu īres likums · Likumi.lv
This article is for information only and is not legal, financial or tax advice. It may contain mistakes or be out of date, so check it against official sources or with a specialist before you decide. m²cena accepts no liability for any loss or damage arising from the use of the information in this article.