Housing affordability is a huge issue. Working out whether to jump onto the property ladder or continue renting can be a confusing decision. We’ll go through some of the pros and cons of both options to help you make an informed decision.
Renting: the pros
Frees up your savings
By choosing the renting life over home ownership, you’re not spending your savings on a deposit and all the costs associated with buying a home. You’re freeing up money to spend or invest elsewhere. Depending on where you invest the money, you may get a greater return on investment than if you’d bought a house. You need to think carefully about your investment goals and strategy.
Or you may be at a time in your life when you’re not yet ready to have all your savings and monthly income going towards a deposit and a mortgage. Does travel or study beckon?
It gives you more flexibility
Renting gives you flexibility. As a tenant you can freely relocate from home to home and area to area once your lease expires. The significant costs associated with buying and selling means that you have less flexibility when choosing to move house.
Allows you to diversify your investments
Buying a home, especially for first home buyers, often means that all your savings will be going towards the one asset. Do you feel comfortable with most, if not all, of your savings tied up in a single investment? Renting allows you to use your savings across a broad range of investments. By diversifying your investments, you’re also spreading out any potential risk.
Renting: the cons
Renting maybe more expensive
If history is a past indicator, the cost of renting will steadily increase over the years due to inflation and rise in property prices. Depending on where you live, your mortgage repayments may initially be higher than the cost of renting, but over the life of the loan, the interest charged reduces as the principal is paid off.
Many people pay off their mortgage in under 30 years. Sure they’ll still have costs for home maintenance and council rates, but they’ll be free of large monthly payments to live in their home. If you choose a life of tenancy, you’ll always have rental payments. Once you retire and your income is reduced, it may be difficult to find a large sum of money each month. You may also be less able to absorb rent increases.
No forced savings
A mortgage is like forced savings. You have to pay your mortgage every month – putting money towards an asset that is likely to increase over time. With renting, it can be tempting to spend spare cash rather than save or invest it.
Buying a house: the pros
It gives you stability and freedom
Buying a home provides you with certainty because there’s no risk that you’ll be displaced by a landlord. Tenants have very little say in how long they can occupy a rental property beyond the lease term. Living in your own home also allows you the freedom to renovate and decorate your home as you please.
Rise in house prices over time
Having an asset that may increase in value over time is appealing. While house prices have consistently risen over the long-term, they can also have periods of weak growth or even fall in value. You need to remember that home ownership is a long-term investment strategy.
You can use the equity in your home
Home equity is the proportion of your home that you own. Provided that the value of your house is increasing, as you pay off your loan, your equity will also be increasing. You may then be able to use the equity to invest funds in an investment such as shares or a managed fund.
Buying a house: the cons
You’ll be paying interest
The interest and fees you pay over the life of a loan can be significant. Be prepared for interest rates to fluctuate during the term of your loan, especially if you have a variable interest rate or if your fixed rate period expires.
There are opportunity costs
The ‘opportunity cost’ is the cost of having your money tied up in property, when it could have been used or invested elsewhere. If you choose a life of renting, you’ll have the money you would have saved for a deposit and mortgage payments to spend elsewhere. This might be for travel, study, entertainment or your own business. It could also be used for other investments that potentially could yield greater or quicker returns than a residential property.
Ownership costs are more than just a deposit and loan repayments
Buying and selling a home isn’t cheap. According to the Reserve Bank of Australia, it costs about 4% of the sale price of your home to sell, including agents fees, advertising. And about 6% of the purchase cost is spent on stamp duty, government fees, conveyancing costs, loan establishment fees. There’s also the ongoing running costs of owning a property, including council rates, repairs, depreciation, body corporate fees, water and insurance costs. It’s much more than just saving for your deposit.
Doing the sums: the best option for you
The decision to buy or rent isn’t simple. There are many different factors to consider including your financial resources, lifestyle, family needs, investment goals and appetite for risk. Doing research and talking to an expert is a good idea.
You can check out our home loan tools and calculators to see how much you could afford to borrow and how much repayments would be. You can also use our home loan product selector to see which type of loan account might be right for you.
You may also be eligible to purchase your first home with a deposit of as little as 5% with the first home loan deposit scheme.
To assist you with your decision speak to us on 02 9259 8111 today.
Source: NAB https://www.nab.com.au/personal/life-moments/home-property/buy-first-home/rent-buy
Reproduced with permission of National Australia Bank (‘NAB’). This article was original published at https://www.nab.com.au/personal/life-moments/home-property/buy-first-home/rent-buy
National Australia Bank Limited. ABN 12 004 044 937 AFSL and Australian Credit Licence 230686. The information contained in this article is intended to be of a general nature only. Any advice contained in this article has been prepared without taking into account your objectives, financial situation or needs. Before acting on any advice on this website, NAB recommends that you consider whether it is appropriate for your circumstances.
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