Owning a home has many benefts: You have more freedom to renovate and redecorate the property and you are building equity as you pay it off. And no landlord can ever kick you and your family out.
Renting offers quite a few benefits, though it can be 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.
| Response | |
|---|---|
| I already have one | 54.05% |
| Yes- in a few yrs | 14.12% |
| Yes- very soon | 12.41% |
| Maybe- if I work really hard for it | 11.87% |
| No- it's not achievable | 7.55% |
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.
Rentvesting is where you buy a property in an area where you can afford, while you continue renting in the area you want to live, but can't afford. Let's say you live in Sydney in a two-bedroom apartment, that costs $800 a week in rent. To buy that apartment might be $1m or more, which is out of your price range.
So, you buy an investment property in Queensland for $500,000. You save a $50,000 deposit and pay lender's mortgage insurance so you can buy with a 10% deposit, rather than the 20% the bank prefers.
Your tenants help you pay off the mortgage in your rental property, while you continue paying rent in the area you want to live in. Over time your investment property will grow in value while it's being paid off, so you'll eventually own it in full. In the meantime, you can continue renting in your desired location, and perhaps even use the money you make from your investment property to help you buy a home to live in one day.
"Trying to save in order to get into the area that the person wants very rarely works out, unless they are able to save faster than property prices are rising in that particular area. So, they are better off buying what they can afford in an area they can afford when they are ready and then letting the market appreciate and move into an area that is more desirable to them once they have built up some equity. Once you have your deposit and your mortgage approval in place and you have figured out what it is that you can spend, you then need to figure out your brief. Doing this up front will save you valuable time as you may discover that you are looking for something that is not achievable in your chosen area or price point. "
Renting is money you'll never get back. 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.
To figure out whether home ownership or renting is cheaper in the long run we need to look at how much a person will have to spend per week on housing as an expense if they choose to take on a home loan or rent. A key thing to remember is that buying a property includes the costs of maintenance/strata, council rates and water. Renting does not include any of these costs.
For simplicity, let us assume:
With those assumptions, the model shows young Australians looking to buy the average house will have to own it for over 37 years to start coming off better in weekly housing expenses compared to renting. For the average unit, they will have to own it for over 32 years to come off better than life time-long renters.
All this means, young Australians who purchase a first home at the age of 30, will be well into their late 60s before they start breaking even on total housing costs compared to life-long renters. In effect, young Australians face a 'mortgage hangover', having to own a home 11 years after paying off the mortgage to break even with renters.
After 37 years of owning a house, young Australians will have spent $1,599,732 on housing costs, which would be equivalent to $910 in rent per week. For the average unit, after 32 years, they will have spent $1,116,282 or the equivalent of $763 in rent. The key take away from this is that home ownership remains expensive for a number of years even after paying off the home loan. But owning a home does become cheaper than renting only in retirement.
Also, most importantly, at the end of this period – the homeowner owns an asset worth hundreds of thousands of dollars, perhaps even over $1m. Meanwhile the renter has no asset to their name. This is what makes home ownership the better choice for most people.
One advantage of buying a home is the equity built up over time. Although this doesn't discount the total money spent on housing costs, it provides an asset that can be used for other purposes.
Using the annual growth rate of home prices for the last 20 years, the average Aussie breaking even on house after 37 years will have an asset worth 475% more than what they paid for it over that period. On units they will have an asset worth 164% more.
One of the easiest ways homeowners can break even compared to renting faster is by making extra payments. RBA data shows excess payments on home loans have fallen to $3.441 billion per quarter, which is the lowest since September 2019.
On average, increasing the extra payments from $500 to $2000 per month will save homeowners 9 years on a home loan for house, and 8 years on a unit. This translates to breaking even 4 years faster on a house, and 3 years faster with a unit.
And once you've paid the mortgage off, your biggest living expense is finished. Meanwhile, renters are still making that weekly rental payment.
Although homeownership takes a significant amount of time, it leaves most Aussies with an asset worth significantly more than what they spent on it.
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.
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.
If you live in a pricey, popular neighbourhood and are happy there you might consider renting or even rentvesting. This way you're building slow, steady wealth through a property investment while enjoying the flexibility of rent.
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