As house prices continue rising in many capital cities, many are asking, “Should I rent or buy?”
Owning a home can seem like an impossible dream for many young Aussies, with 87% of Australians surveyed in early 2017 saying they think home ownership is becoming harder to achieve.
Rent vs Buy: which is better?
Renting vs buying a home is difficult question. Weighing up the pros and cons will help you decide. There are advantages to buying such as owning your own home without the restrictions of a landlord. There are also disadvantages of buying a house like trying to pay off a mortgage.
Although mortgage interest rates have been on a downward trend for some time now, the average mortgage repayment has still increased significantly over the past decade thanks to rising property prices. A survey in 2016 found that 1 in 3 first home buyers are worried about their amount of debt, and an increasing number of parents are having to go guarantor.
And yet people can feel pressured into feeling a need to own their home, to the point that they end up borrowing more than they can afford, after spending weeknights and every weekend searching for an affordable “dream home”. Even if you can afford it, is it still the best decision for your family?
Having said that, the story is not over yet – there are still pros and cons to both. Here are some of the advantages to renting, buying, or rentvesting, which might help you work out what is the best option for you and your family.
Advantages of buying a home
There are several advantages to buying your own home, such as the ability to make the space your own, avoid being forced to move, and hopefully build your wealth.
1. A mortgage is a form of enforced savings
Having the discipline of making regular mortgage repayments is a great way to force you to save money by putting it into your mortgage instead of spending it.
The added 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.
2. You can make your home your castle
You can paint, renovate, and landscape at any time without having to ask permission or be concerned about breaching a rental agreement. If you own your home, you can feel free to put hooks in the wall and hang some pictures.
3. It will hopefully build your wealth
Providing you choose a house wisely, your investment should hopefully increase in value over the long-term, at a rate greater than inflation.
Make sure you carefully consider flood-affected areas and have your property thoroughly inspected.
4. It gives you reasonable certainty about repayments
While interest rates do go up and down, a mortgage still gives you some certainty and the ability to budget for repayments.
You can even have a certain level of control over your repayments by choosing either a fixed rate or variable rate loan – or a split loan using both types of rates.
Rental costs, on the other hand, can fluctuate as a result of supply and demand. Your landlord can choose to increase rent when renewing your lease so that you’re faced with the choice of paying more or moving.
On the other hand, rates, taxes, repairs and maintenance will need to come out of your budget, which is worth remembering.
5. It gives you certainty of tenure
Owning your own home does give you a sense of security. Living in your own home means that you are not at risk of having to move due to a rental agreement finishing.
Becoming a part of your local community and having your children attend a local school for a number of years can be easier when you have certainty of tenure.
Advantages of renting a home
There are several advantages to renting, such as the ability to save money, live in a neighbourhood you might not be able to buy into, and up-size or down-size as needed.
1. More money in your pocket right now
Renting can (depending on the area) be cheaper than setting up a mortgage because of all the upfront costs involved in buying a home. This can free up some cash to invest or save for the future.
This can reduce financial stress during the more expensive years such as when you are trying to start a family or start a business.
Be sure to put the money you save by renting towards long-term investments; otherwise, you risk missing out on building’s your family’s wealth for the future.
2. Upkeep is not your problem
Renting means there are fewer ongoing costs to worry about – the rates, water utilities bill, home insurance, general maintenance, and repairs are covered by your landlord! In short, life is simpler when you rent, which can be great for young people who have just moved out of home for the first time.
Just don’t forget about contents insurance. Your landlord is not responsible for insuring the belongings you store on their property.
3. Greater flexibility about where you live
Renting means you can live in a suburb or property that you love and can’t yet afford to buy into.
What’s more, it means you can move house whenever you want (within the limits of your lease, of course). If you want to make a local move or a global move, whether for a career change, for family reasons, or simply to seek adventure, then when your rental lease expires, the world is your residential oyster.
4. Greater flexibility about house size
As your family composition changes, so do your housing needs. The ideal house layout for young singles is different to the ideal house layout for a family with young children – or teenagers. Likewise, the ideal student sharehouse is not the same thing as the ideal home for a family.
The great thing about renting is that you can “right-size”; if your family grows, you can move and increase the size and cost of your home as you need it. It is far easier and more cost-effective to change your home to suit your changing needs, rather than buying a new house or renovating every time someone your household grows or shrinks.
Advantages of rentvesting (renting a home and buying an investment property)
A third possibility is what’s known as “rentvesting” – buying an investment property and renting out a separate home for yourself to live in. There are several advantages to rentvesting, such as the tax-effectiveness of an investment loan, investing for the future, and living in a neighbourhood you might not be able to buy into.
1. It can be tax-effective
While rent may be “dead money”, the mortgage and other costs associated with the investment property will be a tax deduction.
At present, even if an investment property is not “breaking even” or earning more in rent than the costs to keep it, negative gearing is available as a tax break to help investors stay afloat.
2. You can invest in property at a lower cost
While you may not be able to afford to buy a house in a location that you wish to live in, you can have exposure to the property market by buying a smaller, less expensive place as an investment property.
Investing – whether it’s in property, shares, or other assets – can give someone additional cash-flow if their investment loan costs less in monthly repayments, utilities, and upkeep than the rent they are receiving for it.
3. Live where you want, not where you can afford to buy
Rentvesting gives you the freedom to rent a home in your ideal location, even if you can’t afford to buy there. This can give savvy investors the best of both worlds – investing in affordable property and still living where they want to.
At the end of the day
Whether you decide to buy, rent, or do both, housing will probably be your biggest ongoing financial cost in Australia.
After weighing up the options, you should do what feels right for you and your family. It’s always a good idea to seek professional and personalised advice to help inform your decision.
Whether that is to rent, buy or do both, the important thing is that it should be the right decision for you. After all, it’s the family that makes a home – not whether you own that home or not.
Canstar experts talk renting vs buying
Renting versus buying is a question Canstar’s own Steve Mickenbecker was invited to answer on Sunrise some time ago:
Kochie: If you’re thinking of taking the property plunge and buying a house, have you considered whether it’s better to rent than buy? Here are some stats to consider in that decision making process.
In the past decade, the average mortgage repayment has increased 105%. Wages have grown by just 54%. Inflation, which gradually makes everything more expensive, only up by 31%. So the mortgage is taking a bigger chunk of our income now, despite low interest rates.
Steve Mickenbecker from Canstar joins me now. He’s been crunching the housing numbers around the country. Steve, good to see you. Were you a bit shocked by the increase in mortgage rates?
Steve: Well, I guess I was, Kochie, because when people talk about affordability in quite short-term measures, they say affordability is improving over the last couple of years. When you look at it over 10 years, you really see the impact.
Doubling of repayments for people entering the market is a massive hike up when salaries have only gone up by half of that amount. So, new home buyers are really paying a lot.
So, shocked? Well, should not have been – because property doubles (in value) every 10 years or so.
Kochie: And our loans are getting bigger. Let’s look at the state and territory breakdowns.
NSW mortgage repayments up 61%, Victoria 74%, Queensland 90%, South Australia 100%. Flip the page to WA 115%, Tassie up 130%, NT – top end – 152%. So, based on this, do you reckon it’s better to rent than buy?
Steve: Look, it’s the age old question. First home buyers in particular, they need to understand this: rent is almost always cheaper. Every now and then you’ll get an aberration, and there’s a few of those aberrations around now when interest rates are low, rent hasn’t declined at all in response to any market change. So rent, right now, can be more expensive in a minority of postcodes.
Generally though, rent is cheaper, (and) buying costs more in current terms. However, you don’t get the pleasures of home ownership, the stability of home ownership, and probably most importantly, you don’t participate in capital gains. And if properties double every ten years or so, and you’re renting, you’re actually funding that for your landlord.
Kochie: The secret that makes renting work is the difference in what you pay in rent, and what you would pay in a mortgage repayment on a similar house – you’ve got to invest that elsewhere. It takes personal discipline, and a lot of people don’t have that.
Steve: People don’t. People are a whole lot better at making repayments than they are at saving. When you see a nice healthy build up in an account, what do you think, “Oh, that holiday looks good, (or) I can afford that car.”
Kochie: It’s the discipline that counts. Thank you, Steve. We’ve got a whole lot more savings tips from Steve, head to our website. All those tips are there, plus a link to the Canstar Mortgage Reports, it’s all there for you to have a look at. Fascinating reading.
Learn more about Home Loans
- What is a mortgage?
- I’m self-employed/a contractor – will I be able to get a home loan?
- How much home loan deposit do I need?