Rent vs buy: Should you rent or buy?
Is buying a house worth it? If you’re unsure of how to tackle this big decision, we break down some of the pros and cons of renting vs buying.
Key points:
- The question of whether it’s better to buy or rent a house has no easy answer, but there are some important things that could help you decide.
- Buying a house, though it involves high initial and ongoing costs, could help you build wealth and equity in the long term, and could bring security.
- Renting, on the other hand, could free you up to invest in other areas, as well as from the costs of home ownership, but might leave you in an insecure position.
Owning a house has long been considered part of the great Australian dream but, in these times, many of us may be questioning the practicality of buying. With home ownership becoming more challenging as house prices and interest rates continue to go up, you may be weighing up the pros and cons of buying and renting.
What are the potential pros of buying a house?
There are a number of reasons why buying a house might potentially represent a sound personal and financial decision, such as the ability to have a place of your own and build your wealth as well as add to your potential financial security in the long term. The reasons could include:
You’ll have a place that belongs to you
There’s nothing like having a house to call your own – you can put your own pictures up without risking the wrath of the landlord, and renovate and remodel at your leisure. Bear in mind, though, that if you choose to buy an apartment, unit or townhouse, there may be some body corporate restrictions on property modifications.
A chance to build your wealth over the long term
Depending on your property and the market in your local area, it may increase in value over the long-term, and the equity you have in the home could continue to grow. This means you could end up with a home worth more than what you paid, and have access to equity that could allow you to do a variety of things from investing in another property, organise some home renovations or consolidate other debts.
Make sure you carefully consider all aspects of a property’s location that may affect its value and organise a detailed inspection before you buy. Factors such as whether it’s in a flood-affected area or the possibility of further residential and commercial developments nearby could affect the property value. You may want to get in touch with a professional conveyancer or solicitor to help you navigate some of these matters.
A mortgage could force you to ‘save’
Having the discipline of making regular mortgage repayments is one way to force you to save money by putting it into your home loan instead of spending it. Your principal loan repayments may, in effect, act like a forced savings plan. The benefit of this is that part of your monthly repayment (the principal) is going towards paying off your own property, rather than your landlord’s property.
A fixed rate could give you more certainty
When paying off a mortgage, you can opt for either a fixed or variable interest rate, or a split home loan, that combines the two. While variable rates are prone to rising with interest rates, locking in a fixed rate (which you can typically do for a period of up to five years) can give you a sense of certainty in your repayments, as you will know exactly how much you’ll owe with each mortgage payment, and be able to plan and budget accordingly.
Home ownership could help build financial and personal security
Owning your own home could give you more of a sense of security than renting. Living in your own place means that you are not at risk of having to move due to a rental agreement finishing or your rent becoming unaffordable. In addition to this, a home can be a valuable asset to own during retirement, and you may be able to pass it on to future generations of your family.
What are the potential cons of buying a house?
There are a number of reasons why you might exercise caution before jumping into the housing market, including the risk of foreclosure, vulnerability to rising interest rates, and the high initial as well as ongoing costs of home ownership. Some of the potential disadvantages of buying a home could include:
You could risk foreclosure if you can’t service the debt
Arguably one of the more significant disadvantages of buying a home and having a mortgage to repay is the possibility of foreclosure and repossession if you fail to make repayments. A foreclosure is the legal process by which a lender takes possession of a property and sells it when the homeowner fails to make their mortgage repayments.
Variable interest rates are prone to rises
When the Reserve Bank of Australia moves the official cash rate, banks and lenders tend to follow by raising their own home loan variable rates. This means variable rates are prone to significant rises, a situation that occurred in Australia when many who purchased homes at low rates in the wake of COVID saw their variable interest rates skyrocket and their home loans become significantly more expensive as the RBA hiked rates drastically. This means that some homeowners are paying much more in mortgage repayments than they would have a few years ago. This could put pressure on your budget.
A house purchase can involve large upfront costs
Saving up for a home deposit can be hard – really hard! The deposit required to purchase a home will vary depending on the lender and your circumstances. For example, some loans require the borrower to have a deposit of at least 20% deposit of the property’s value, which is challenging in an environment where house prices are already high and continuing to rise, and salaries are not keeping up with inflation.
However, if you are eligible for the First Home Loan Deposit Scheme (FHLDS) or willing to pay lenders mortgage insurance (LMI), the deposit required may be reduced. Another potential upfront cost, depending on your circumstances, is stamp duty. Although this could potentially add thousands to your deposit, there are a number of concessions and discounts that could be available to you.
Home ownership also involves many ongoing costs
As a homeowner, there are ongoing expenses such as general maintenance, repairs and council rates that may otherwise be covered by your landlord if you were renting. Additionally, if your home is part of a body corporate arrangement, you may need to pay fees in order to maintain the common areas of your building. These expenses can add up fairly quickly, and for some people may become an unaffordable financial burden, particularly when combined with the interest and fees you pay back over the life of a loan. You can find out about the current interest rates on home loans.
Your home may decrease in value
Although owning a house is generally considered a solid investment in the long run, there is the possibility that your property may decrease in value or remain the same, depending on your property and the overall strength of the market. For example, if you buy an apartment that doesn’t have capital gains due to a lot of new, similar complexes being built in the same area, and not enough housing demand, you might do the sums and work out it could have been cheaper to rent. If the value of your home decreases below the level of what you borrowed, that’s called negative equity. If you sold your home, you wouldn’t get back enough money to pay out the loan, and would have to keep paying down that debt while also paying the cost of finding somewhere else to live.
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What are the potential pros of renting?
There are several potential advantages to renting, such as the ability to avoid the trap of rising interest rates, the potential to diversify your investments, and the fact that you won’t be tied to a house that could become a maintenance headache or lose value. Some of the potential advantages include:
You can avoid the trap of rising interest rates
Rent money is sometimes called ‘dead money’, on the basis that if you are renting, you are potentially helping your landlord pay off their own mortgage. It is worth considering, however, that in an environment of high interest rates, you could also potentially say the same about spending thousands of dollars a month on home loan interest repayments, in addition to paying off the principal of an expensive home loan. It is worth keeping in mind, though, that as interest rates rise, landlords paying off their investment properties may use the opportunity to raise rents as their own mortgage repayments get higher.
You can diversify your investments
Returning again to the perception of rent money as ‘dead money’, it is worth considering that renting rather than buying could free up your finances a bit to help you explore investment options outside of the property market. While renting doesn’t bring the promise of possible capital gains in the long-term future, it doesn’t bring the risk of going into negative equity with a real estate investment either, and rather than spending all your savings on a large house deposit, you can invest in other areas.
Upkeep (usually) won’t be your problem
Renting normally means there are fewer ongoing costs to worry about, as council rates, home insurance, general maintenance and repair costs are generally covered by your landlord, unless you have caused the damage (where the cost could be deducted from your rental bond). Likewise, if a house falls into significant disrepair over time and needs significant money spent on repairs, upkeep or a remodel, then this will be something for the owner to financially contend with, not you.
Your landlord is also not responsible for insuring the belongings you store on their property. Renters are responsible for protecting their own property and may want to consider taking out contents insurance.
You could have flexibility in where you live
Renting means you may be able to live in a suburb or property that you love but might not be able to afford to buy into. It also gives you the flexibility to move house whenever you want (within the limits of your lease agreement, of course).
As your family composition changes, so, too, can your housing needs. The ideal house layout for young singles is generally different to the ideal house for a family with young children or teenagers. Likewise, the ideal student share house is not likely to be the same as the ideal home for a family.
While the rental market can be challenging, it could also be challenging to be locked into a 30-year mortgage on a house that is suddenly too small for your family, with limited prospects of getting out other than purchasing another home.
Realistically, finding a new home to rent or buy can be easier said than done, especially in a market of high inflation and rising rates, but you may feel that renting can allow you to ‘right size’ your home as needed more than owning can.
What are the potential cons of renting?
On the other hand, there can also be some potential downsides to renting that may outweigh the positives. These include a lack of investment potential, limited privacy and security and limited freedom when it comes to your home, as well as the fact that you’ll still be vulnerable to rate rises whether you are buying or renting. The potential disadvantages could include:
You’ll still be vulnerable to rate rises
While you may not have a mortgage to pay off as a renter, your landlord may very well have one, and when rates start to rise and their home loan repayments become more expensive, they will pass these costs on to you as a tenant in the form of rent rises. Given that this is the case, you may decide that saving for a deposit and attempting to purchase a property you can afford, even if it’s not your dream home, could offer a measure of security.
You won’t have a home as an investment
While some homeowners may eventually pay off their mortgage, rental payments are required forever. Unlike loan repayments that can eventually result in you fully owning a house, rent is essentially contributing to someone else’s mortgage repayments or investment income.
You may lack privacy and security
Changing property markets and being at the whim of property managers and landlords means that renting can be unpredictable at times. For example, if your landlord decides to sell, you may be forced to move house, which may be stressful and expensive. Another negative aspect of renting is the potential lack of privacy due to regular inspections, although landlords are usually required to give advance notice, and this is commonly set out in the terms and conditions of your lease agreement.
You’ll have limited freedom when it comes to your home
While renting can offer greater flexibility with regards to location and your choice of house, having a landlord may restrict your freedom when it comes to decorating and making the house your own space. For example, your landlord may restrict the cosmetic changes you can make to the home or tell you that you cannot have pets (or they may even want you to send through a photo and description of possible pets for their review and approval).
You won’t have the same forced incentive to save
Without a mortgage to incentivise you to put money towards a capital asset regularly, you could find it tempting to spend the difference between what you pay on rent instead of saving it towards a home deposit or another savings goal. As a result, your savings might not increase over time if you’re too tempted to spend the cash. A mortgage, as we’ve mentioned earlier, is a form of ‘forced’ savings of sorts, so it can help in terms of directing savings towards an asset that may increase in value over time.
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If you are in negative equity or experiencing financial stress, free financial counselling is available from the National Debt Helpline on 1800 007 007.
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This article was reviewed by our Deputy Editor, Canstar Amanda Horswill before it was updated, as part of our fact-checking process.
Alasdair Duncan is a Senior Finance Journalist at Canstar, specialising in home loans, property and lifestyle topics. He has written more than 200 articles for Canstar and his work is widely referenced by other publishers and media outlets, including Yahoo Finance, The New Daily, The Motley Fool and Sky News. He has featured as a guest author for property website homely.com.au.
In his more than 15 years working in the media, Alasdair has written for a broad range of publications. Before joining Canstar, he was a News Editor at Pedestrian.TV, part of Australia’s leading youth media group. His work has also appeared on ABC News, Junkee, Rolling Stone, Kotaku, the Sydney Star Observer and The Brag. He has a Bachelor of Laws (Honours) and a Bachelor of Arts with a major in Journalism from the University of Queensland.
When he is not writing about finance for Canstar, Alasdair can probably be found at the beach with his two dogs or listening to podcasts about pop music. You can follow Alasdair on LinkedIn and Twitter.
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