The rent or buy decision comes down to more than numbers. It's about what you can afford and what you want from life.
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 means less worry about property maintenance because the landlord has to take care of that. And while home loan repayments might not be that much more than rent, over time you end up paying a lot in interest. Plus there are council rates, stamp duty and other costs. Of course, renters have fewer rights and renting often means moving many times and not feeling like you truly have your own home.
The benefits (and downsides) of renting
Renting offers quite a few benefits.
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 home is temporary and you are subject to the decisions of a stranger, your landlord.
- 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. As long as you're repaying the loan principal.
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.
- You may have to spend money on maintaining the property.
- 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.
- Buying comes with other costs like conveyancer's fees, lenders mortgage insurance premiums, strata costs and council rates.
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"?
Rent 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.
Let's break it down with some examples.
The costs of buying
Let's say you buy a $650,000 home in Victoria with a 20% deposit. You are a first home buyer.
- Deposit: $130,000
- Loan amount: $520,000
- Mortgage: Principal and interest loan with a 30-year loan term
- Interest rate: 3.70%
- Land transfer (stamp) duty: $11,356 (if you're not a first home buyer this jumps to $34,070)
- 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.
Use a loan repayment calculator to work out your mortgage costs
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 house in Melbourne, which is $430 according to Domain's Rental Report.
- $430 x 52 = $22,360 a year
- Over 30 years that equals $670,800
That's $332,205 less than you'd spend on buying a property. That saving equals $11,073 a year.
But rent and property values tend rise over time
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.
And there's one thing this calculation misses: rising property values. Let's say your $650,000 home rose in value a conservative 3% per year, for 5 years. Your property would then be worth $753,528. Over 20 years, it would be worth $1,173,972.
And once you've paid the mortgage off, your biggest living expense is finished. Meanwhile renters are still making that weekly rental payment.
What if you rent and invest the savings?
Property isn't the only way to grow wealth or invest. What if you took that extra $11,073 each year and put it into a low-maintenance investment product like an exchange traded fund (ETF)? Let's say you invested in an Australian ETF over 5 years with an average return of 7%.
Investing that much per year, at that rate of return, would see you with a total investment worth over $1 million in 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.
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