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Rent or buy a house?

The question to rent or buy a house is a complicated one. Ultimately it boils down to what you want out of life.

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In Australia the dream of owning "a quarter-acre block" persists (even if it was kind of a myth to begin with). Renting or buying doesn't seem up for debate.

But for all its frustrations, renting actually has some big upsides. If you want more freedom in choosing where you live and how you use your money, renting can work out better. It can even be more profitable.

Owning a home offers a form of stability and security, something more emotional than financial. But it means sinking an enormous amount of money into a property and absorbing some serious expenses, from mortgage interest to maintenance costs and stamp duty.

Let's dig into the upsides and downsides of the rent or buy dilemma.

The benefits (and downsides) of renting

Renting offers flexibility and tends to be cheaper per week than mortgage repayments.

Pros of renting

  • Rent is often cheaper than mortgage payments on the same property.
  • You don't have a large mortgage debt hanging over your head.
  • The landlord pays the rates and body corporate fees on the property and is responsible for repairs.
  • You can move more easily and live in areas which would be too expensive for you to buy in.

Because rent tends to be cheaper than owning a property you can use any extra money you may have to invest, save or spend as you see fit. This financial flexibility is one of the major benefits of renting.

Cons of renting

  • Your rent money is paying off your landlord's mortgage and helps them build wealth.
  • Your landlord can make decisions that affect your life, and may not fulfil all their responsibilities.
  • Landlords tend to increase the rent regularly.
  • Leases aren't permanent. Your landlord could decide to evict you if they want to sell the property.

Renting is an uncertain way to live. You can be evicted, landlords often fail to maintain their properties and you end up paying a lot of money that goes nowhere.

But if you find an affordable, good quality place to rent with a decent landlord you might find the convenience and flexibility are worth it. And you aren't tied to a mortgage and a single property for years.

The benefits (and downsides) of buying

Equity means the amount of a property you own (once the mortgage debt is subtracted). Properties are worth a lot and generally grow in value over time. So mortgage repayments are a kind of saving because you're building wealth. But it's a lot more complicated than that.

Pros of buying

  • Your mortgage payments build up your equity with each payment.
  • You have a roof over your head and no landlord to worry about.
  • You can personalise and renovate your home to increase its value.
  • Property values tend to increase in Australia.
  • You can choose to rent out your property if you want to live somewhere else, so your tenant is paying off your mortgage.

But buying your own home locks you in to a major asset and comes with many costs.

Cons of buying

  • You'll need to save a large deposit to cover the down-payment and fees associated with buying a property.
  • You have a large debt hanging over your head, probably for decades.
  • Interest charges on your loan can add up to hundreds of thousands of dollars.
  • Property values can fall, decreasing the value of your investment.
  • Stamp duty and real estate agent's fees can eat a huge chunk out of any equity you thought you'd built up if you decide to sell.

There's no guarantee that a property will rise in value. Sometimes prices fall and some areas get hit with significant price falls that take years to recover.

Is rent money really "dead money"?

A blue house with a red door.Rent is money you'll never get back. You don't build equity and you don't own anything. But when you buy a property you need a mortgage. And the amount of interest you pay over the life of the loan can end up being very significant. And there are many other costs when you buy a property.

It's impossible to confidently state that renting is cheaper than buying, or vice versa. There are too many factors involved. In a market with rising rental prices but low interest rates a mortgage could cost you less than rent. But there are many cases where the reverse is true.

The costs of buying

Let's say you buy a $650,000 home in Victoria with a 20% deposit.

  • Deposit: $130,000
  • Loan amount: $520,000
  • Mortgage: principal and interest loan with a 30-year loan term
  • Interest rate: 3.70%

Your costs

  • Land transfer (stamp) duty: $11,356 (this includes a concession for first home buyers)
  • Interest costs over 30 years: $341,649
  • Total costs (including deposit) = $1,003,005

And this isn't including maintenance costs, council rates, insurance and so on. This is a lot of money. Now of course your property will likely grow in value over time. This will partly offset the costs.

But when you sell the property you need to factor in costs such as real estate agent commission and stamp duty on your next property. This can erode some of your capital growth.

What about renting?

The maths here is very hypothetical because rental prices vary widely by property type, size, quality and location (the average Australian living in a capital city spends around 20–30% of their income on rent). Let's take the average weekly rent for a unit in Melbourne, which is $420.

  • $420 times 52 = $21,840 a year
  • Over 30 years that equals $655,200

That's $347,805 less than you'd spend on buying a property. That saving equals $11,593 a year.

Now, rent tends to increase over time, so this calculation isn't very accurate. But it would need to increase by at least $11,593 a year to make renting more costly than buying. Also, while we've chosen the average unit rent in Melbourne, we're comparing it to buying a $650,000 house. You could buy an apartment for less than this, and therefore pay less in interest. But it's a reasonable comparison: the average price of a house in Melbourne is much higher than $650,000, while the average rent for a house (not a unit) is $430, or $10 more than a unit.

What if you rent and invest the savings?

What if you took that extra $11,593 each year and put it into a low-maintenance investment product like an exchange traded fund (ETF)? According to recent ASX data the average return for an Australian ETF over 5 years is 6.83%. Investing that much per year, at that rate, would net you a profit of $786,909 over 30 years.

Of course, there's no guarantee future returns will equal this much on any particular fund (you can learn more about how to measure ETF performance here). But it illustrates how you can put your money to work as an alternative to a mortgage.

Rent or buy: The choice depends on you

The decision to buy or rent is not a debate, it's a question whose answer depends on your life goals and financial position. Here are some hypothetical scenarios.

I've got a young family and we like where we live

If you have a family and you want some stability and security then buying makes sense. If you're already established in a neighbourhood (maybe your kids are in school and are very happy there) and you can afford to buy there, even better.

We're a childless couple and we love living in an inner-city unit (but we can't afford to buy)

If you live in a pricey, popular neighbourhood and are happy there you might consider renting. You'll probably have more spare cash this way, although you may have to move apartments every once in a while. If you're interested in investing some of your disposable income then this approach is even better.

You could also consider rentvesting, which means renting where you want to live (expensive, trendy area) and buying a cheaper investment property somewhere else. This way you're building slow, steady wealth through a property investment while enjoying the flexibility of rent.

Check out these home loans and apply today

Data indicated here is updated regularly
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Loan purpose
Offset account
Loan type
Repayment type
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Name Product Interest Rate (p.a.) Comp Rate^ (p.a.) Application Fee Ongoing Fees Max LVR Monthly Payment Short Description
UBank UHomeLoan Variable Rate - Discount Offer for Owner Occupiers, Variable P&I Rate
2.49%
2.49%
$0
$0 p.a.
80%
Enjoy flexible repayments, a redraw facility and the ability to split your loan. Plus, pay no application or ongoing fees.
St.George Basic Home Loan - LVR 60% to 80% (Owner Occupier, P&I)
2.54%
2.56%
$0
$0 p.a.
80%
Up to $4,000 refinance cashback. A competitive variable rate loan from St.George. Refinancers borrowing $250,000 or more can get $4,000 cashback (Other terms, conditions and exclusions apply).
Athena Celebrate Home Loan - 60% LVR  Owner Occupier, P&I
2.34%
2.34%
$0
$0 p.a.
60%
Owner occupiers with 40% deposits or equity can get this competitive variable rate loan. No upfront or ongoing fees.
Westpac Flexi First Option Home Loan - Basic Variable Rate (Owner Occupier, P&I)
2.29%
2.72%
$0
$8 monthly ($96 p.a.)
95%
Up to $3,000 refinance cashback.
A flexible and competitive variable rate loan. Eligible borrowers refinancing $250,000 or more can get $2,000 cashback per property plus a bonus $1,000 for their first application. Other conditions apply.
homeloans.com.au Low Rate Home Loan with Offset - LVR Under 60% (Owner Occupier, P&I)
2.29%
2.31%
$0
$0 p.a.
60%
A competitive rate with no application or ongoing fee. This loan is not available for construction.
HSBC Home Value Loan - Promotional Offer (Owner Occupier P&I)
2.59%
2.60%
$0
$0 p.a.
80%
Get a low interest rate loan with no ongoing fees. Plus you can make extra repayments and free redraw online.
Yard Variable Home Loan - LVR 80% Special (Owner Occupier, P&I)
2.39%
2.42%
$0
$0 p.a.
80%
A very low variable rate loan for home buyers with an optional offset account ($10 monthly fee). 20% deposit required.
Well Home Loans Balanced Variable - LVR 80% Special Offer (Owner occupier, P&I)
2.17%
2.20%
$250
$0 p.a.
80%
A very low interest rate for home buyers with 20% deposits saved. Add an offset account for a small fee. This special discount rate is available for new borrowers who apply and get approved by 30 November 2020. Not available for construction purposes.
Virgin Money Reward Me Variable Home Loan - LVR ≤ 60% (<$500k Owner Occupier, P&I)
2.64%
2.81%
$300
$10 monthly ($120 p.a.)
60%
$3,000 refinance cashback.
A variable rate loan for owner occupiers with a 40% deposit (or equity) borrowing under $500,000. Get a $3,000 cashback when you switch to Virgin Money with a loan amount of $300,000 or more with an LVR up to 80%. You must apply by 29 November 2020 and settle by 28 February 2021.
Athena Liberate Home Loan - 70% to 80% LVR Owner Occupier, P&I
2.44%
2.38%
$0
$0 p.a.
80%
A competitive variable rate mortgage for owner occupiers $0 application and $0 ongoing fees. This interest rate falls over time as you pay off the loan.
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Credit services for Aussie Select, Aussie Activate and Aussie Elevate products are provided by AHL Investments Pty Ltd ACN 105 265 861 (“Aussie”) and its appointed credit representatives, Australian Credit Licence 246786. Credit for Aussie Select products is provided by Residential Mortgage Group Pty Ltd ACN 152 378 133, Australian Credit Licence 414133 (“RMG”). RMG is a wholly-owned subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 AFSL and Australian Credit Licence 234945. Credit for Aussie Activate products is provided by Pepper Finance Corporation Limited ACN 094 317 647 (“Pepper”). Pepper Group Limited ACN 094 317 665, Australian Credit Licence 286655 acts on behalf of Pepper. Credit services for Aussie Elevate products are provided by AHL Investments Pty Ltd ACN 105 265 861 Australian Credit Licence 246786 (“Aussie”) and its appointed credit representatives. Aussie is a trade mark of AHL Investments Pty Ltd ABN 27 105 265 861. Credit and any applicable offset accounts for Aussie Elevate are issued by Bendigo and Adelaide Bank Limited ABN 11 068 049 178 AFSL / Australian Credit Licence 237879.

Aussie is a trade mark of AHL Investments Pty Ltd. Aussie is a subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124. ©2020 AHL Investments Pty Ltd ABN 27 105 265 861 Australian Credit Licence 246786.

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