Renting Vs. Buying a House: What’s Right for You?
Rent money is dead money, but so is loan interest? Buying a house vs. renting is an age-old conundrum, and considering the rising costs of living and owning property, one that people are faced with now more than ever.
So buying vs. renting a house, which is best for you? Urban.com.au know a fair bit about property, the hidden costs associated with buying it, and all of the other things you need to consider. For this reason, we've gathered the pros and cons of buying a house vs. renting here for you to help with your decision.
The positives of renting
If you have spent time building up your savings renting saves it from going onto a deposit and the other costs associated with home ownership. Many people opt to become permanent renters so they can use their hard-earned savings elsewhere or on different types of investments to generate growth. The property market is a little less of a safe bet these days, so if you are a good investor, and you may see a higher return on that money with a different strategy to property.
It also depends on your life goals and stage, perhaps travel or study is a little more important to you at the moment than laying down some roots? Renting gives you more flexibility to relocate, travel for extended periods, and change location without the hassle and cost of buying and selling.
When all of your savings go towards the one asset, you are tied up in a single investment. Renting allows you to diversify across a range of investments, spreading out any potential risk. In some cases your utilities may also be paid for as part of the rent and if any major issues occur with the property, it will be fixed by the landlord with little to no organisation and expense on your part.
Another advantage to renting is the flexibility about where you live and the kind of home you have. Often something or somewhere unattainable by purchase like inner-city or CBD locations. You are also able to move house whenever you want based on a career change, or simply for an adventure. You may decide that a particular area isn't for you or want to see what a different one is like and you have that option by not being tied down to a purchased property. Many people move frequently while renting to help decide which area they would like to buy in.
This is also quite handy as your family composition changes. That one-bedroom apartment you bought in your twenties may not be suitable as you move into the stage where you may start a family. The ideal house layout changes as your family grows and renting allows you to tweak this home setup as you need it. Changing homes when renting is more cost-effective than buying a new house or renovating.
The downside of renting
The cost of renting will likely increase over time due to inflation and rising property prices, especially in desirable areas. When owning, your mortgage repayments will probably go down as the interest charged on the loan reduces.
The mortgage payments will often end after a maximum of 30 years; however, a life of tenancy means that rental payments will forever be a part of your expenses. You will need to consider this as you approach retirement, and your income reduces. You will also need to take into account the bon, which is quite a significant sum of money that is due initially, and when moving there may be times where the ending and starting period of a new lease crosses over, meaning you will need to pay one bond before receiving (hopefully) the previous one back.
The other downside of renting is the effect it can have on your savings, which you aren't technically forced to make like you are with a mortgage. The mortgage payments you make every month goes towards an asset that may increase over time, rent money however, is gone.
You also have less control over any modifications to your home, you'll need approval for significant changes and are at the mercy of the homeowner who may ask you to move out at any point, a reason why more people are attempting to negotiate long-term rental leases.
The upside of buying a house
Unlike our last point, buying a home means you don't have to deal with a landlord, and you have no risk of being evicted. You have stability and create a home that you may live in for a significant period of time. You have the freedom to renovate or decorate in any way you please.
Property is an asset that will likely increase in value over time, and while it is a long term investment strategy, it is a tried and tested safe bet in most cases. You will be able to use the equity in your home as you pay off your loan to fund another investment, be it more property or shares.
If you are purchasing property to act as a rental investment, this will provide you with a steady stream of income into your retirement years as well. While interest rates will fluctuate, you still have a level of certainty when it comes to how much you will be spending on your mortgage. This makes it easier to budget for repayments, and you will even have a level of control by choosing a fixed rate, split, or variable rate loan. Rental costs can fluctuate more dramatically based on supply and demand, and rent increases are sometimes non-negotiable when renewing a lease forcing you to pay more or move out.
First home buyers can also receive assistance and stamp duty concessions in certain states to assist in their first purchase.
The downside of buying a house
There are many hidden costs when purchasing a home that makes it an expensive endeavor. There is a significant amount of interest and fees that you will be paying over the life of a loan, and interest rates will fluctuate if you have a variable interest rate. This can sometimes work in your favour, but you also need to be prepared for when it doesn't.
Homeownership is also a commitment that may limit you in life as your money is tied up in the property. This may hinder things like travel, study, and entertainment as you are committed to your repayments and the added costs of owning property. You may also decide from an investment point of view that the return on property is not as significant as the stock market.
The cost of ownership goes far beyond the deposit and loan repayments, even selling the home can be expensive, just as buying it can be. The Reserve Bank of Australia states the sale of a house will cost 4% of the sale price on agents fees and advertising and buying a home is around 6% of the purchase cost on stamp duty, government and loan establishment fees, and conveyancing costs.
There is also ongoing running costs, including:
Council rates
Repairs
Depreciation
Body corporate fees
Utilities
Insurance
Property manager fees (if used as an investment)
Which option should you choose?
There are obviously many choices, and the answer to buying a house vs. renting an apartment isn't glaringly apparent as it is somewhat subjective. You need to consider your financial situation, which stage in life you are as well as your wants and goals. Is travel more vital to you than an investment at this point, or are you looking for a way to ensure a comfortable retirement period?
Once you have decided, you will want to do some additional research, or even speak to an accountant or financial planner to ensure you are considering a path that is right for you. There are rent vs. buy calculators available online, which can help you decide if you can afford a home loan and you may need to consider sacrificing the location of your dreams to enter the property market initially.
No matter what you decide, financial security should be at the forefront of your mind, and you should never commit to a situation that may jeopardise that. Be conservative about your financial choices and remember that you may have to sacrifice an ideal home now, for the perfect home later.
