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.
Finder survey: How many Australians think taking out a home loan is an achievable goal?
| 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% |
Source: Finder survey by Pure Profile of 1112 Australians, December 2023
Is buying always cheaper in the long run?
With historically high home prices and recent interest rises raise the question of whether owning a home is cheaper in the long run, or whether it has made renting more cost effective. 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 a 1% growth per year in property maintenance/strata, water bills, electricity bills, and council rates, an average 4% interest rate over 30 years, a 20% deposit, and $500 in extra monthly payments.
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.
Use a loan repayment calculator to work out your mortgage costs
But rent and property values tend rise over time
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.
How financially better off a person is from owning a home compared to renting depends on what they use the equity built up in their home for. If a person simply buys a property and lives in it as an owner-occupier, the model shows that owning a property becomes cheaper only in retirement. But, if a person is able to use their home equity into making other investments they can grow their wealth further.
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.
