Renting vs buying a house, the debate is never ending.
Housing affordability is a growing issue. Working out whether to jump onto the property ladder or continue renting can be a confusing decisions. We take a look at the pros and cons of both options to help you make the right decision.
Frees up your savings
By choosing the renting life over home ownership, you’re not spending your savings on a deposit and all the costs associated with buying a home. You’re freeing up money to spend or invest elsewhere. Depending on where you invest the money, you may actually get a greater return on investment than if you’d bought a house. You need to think carefully about your investment goals and strategy.
Or you may be at a time in your life when you’re not yet ready to have all your savings and monthly income going towards a deposit and a mortgage.
It give you more flexibility
Renting gives you flexibility. As a tenant you can freely relocate from home to home and area to area once your lease expires. The costs associated with buying and selling means that you have less flexibility when choosing to move house.
Allows you to diversify your investments
Buying a home especially for first home buyers, often means that all your savings will be going towards the one asset. Do you feel comfortable with most, if not all, of your savings tied up in a single investment? Renting allows you to use your savings across a broad range of investments. By diversifying your investments, you’re also spreading out any potential risk.
If history is a past indicator, the cost of renting will steadily increase over the years due to inflation and rise in property prices. Depending on where you live, your mortgage repayments may initially be higher than the cost of renting, but over the life of the loan, the interest charged reduces as the principal is paid off.
Many people pay off their mortgage in under 30 years. Sure they’ll still have costs for home maintenance and council rates, but they’ll be free of large monthly payments to live in their home. But if you choose a life of tenancy, you’ll always have rental payments. Once you hit retirement and your income is reduced, it may be difficult to find a large sum of money each month.
No forced savings
A mortgage is like forced savings. You’re obligated to pay your mortgage every month – putting money towards an asset that could potentially increase over time. But with renting, it can be tempting to spend spare cash rather than saving or investing it.
It gives you stability and freedom
Buying a home provides you with certainty – there’s no risk that you’ll be displaced by a landlord. Tenants have very little say in how long they can occupy a rental property beyond the lease term. Living in your own home also allows you the freedom to design and decorate your home to suit the way you live.
Rise in house prices over time
Having an asset that may increase in value over time is appealing. While house prices have consistently risen over the long term, they can also have periods of weak growth or even fall in value. You need to remember that home ownership is a long term investment strategy.
The ability to use the equity in your home
Home equity is the proportion of your home that you own. Provided that the value of your house is increasing, as you pay off your loan, your equity will also be increasing. You may then be able to use the equity to fund an investment such as shares or a managed fund.
There are opportunity costs
This is the cost of having your money tied up in property. If you choose a life of renting, you’ll have the money you would have saved for a deposit to spend elsewhere. This might be for travel, study, entertainment or your own business. It could also be used for other investments that potentially could yield greater or quicker returns than a residential property will.
Ownership costs more than just the deposit and loan repayments
Buying and selling isn’t cheap. According to the Reserve Bank of Australia, it costs about 4% of the sale price of your home to sell (agents fees, advertising) and about 6% of the purchase cost to buy (stamp duty, government fees, conveyancing costs, loan establishment fees). There are also the ongoing running costs of owning a property including council rates, repairs, depreciation, water and insurance costs.
The best option for you
As we’ve seen, the case for buying or renting isn’t a simple one. There are many different factors to consider including your financial resources, lifestyle, family needs, investment goals and appetite for risk. Doing research and talking to an expert is a good idea.