While buying a house has long been widely considered a hallmark of the ‘Australian Dream’, or at the very least a solid investment decision, recent fluctuations in the housing market and lending and borrowing sectors have brought a fresh perspective to the rent versus buy debate.
According to a quarterly rental report conducted by Domain, over the three months ending in June 2019, average rental prices dropped across most capital cities for both houses and units. Median property prices are also down in many areas, but Domain reports that price falls appear to be slowing in Sydney and Melbourne – the Sydney housing market, for example, is back to early-2016 levels after experiencing the largest downturn since the 1980s.
Likewise, CoreLogic’s monthly index for July shows that capital city housing prices are stabilising on the whole, although it does note that they are unlikely to recover any time soon. According to Domain, this flat-lining is partly due to the Reserve Bank cutting the official cash rate twice this year. This has arguably contributed to an environment of record low interest rates on home loans and an increase in new loans being offered to households.
With this volatility in mind, it may be hard to choose which path to take on your residential journey. To help you figure out what the best option is for you and your circumstances, here are some of the potential advantages and disadvantages of renting, buying and rentvesting (where you buy an investment property and continue to rent elsewhere).
Buying a home
Advantages
There are several potential advantages to buying your own home, such as security, the ability to make the space your own, and the possibility that it could help build your wealth.
- You can make your home your castle
When you purchase your own home, you have the freedom to paint, renovate and landscape at any time without needing to ask permission from your landlord or being concerned about breaching a rental agreement.
Bear in mind, however, that if you choose to buy an apartment, unit or townhouse, there may be some body corporate restrictions on property modifications that you need to comply with.
- It could help build your wealth
Depending on your property and the market in your local area, it may increase in value over the long-term, at a rate greater than inflation.
However, Australian wealth management company, Stockspot, highlights that while property prices generally rise fairly consistently over the long term, they can also have periods of weak growth or may even decline in value. According to some commentators, Australia is currently in the midst of a housing downturn, with the Australian Property Institute (API) reporting negative residential property returns across the country for the 2018/2019 period, marking the first annual fall in at least a decade.
Make sure you carefully consider all aspects of a property’s location that may affect its value and have your property thoroughly inspected before you buy. Factors such as whether it’s in a flood-affected area or the possibility of further residential and commercial developments being added in the surrounding area may mean that there are foreseeable changes to the value of your home. You may want to get in touch with a professional conveyancer or solicitor, to help you navigate some of these matters.
- A mortgage is a form of enforced savings
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. Personal finance blog, Aussie Firebug, suggests that your principal loan repayments may 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.
- Buying gives you reasonable certainty about repayments
While interest rates do tend to go up and down, a mortgage still gives you some certainty and the ability to budget for repayments. On the other hand, a variable rate home loan may vary as your bank can change the interest rate on your loan at any time. This may mean that your repayments are just as unpredictable as rental costs which can fluctuate as a result of high demand
Unlike renting, however, you may 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.
- It gives you greater certainty of tenure
Owning your own home can also 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.
If you’re currently considering a home loan, the comparison table below displays some of the variable rate home loans on our database with links to lenders’ websites that are available for first home buyers. This table is sorted by Star Rating (highest to lowest), followed by comparison rate (lowest-highest). Products shown are principal and interest home loans available for a loan amount of $350K in NSW with an LVR of 80% of the property value.
Before committing to a particular home loan product, check upfront with your lender and read the applicable loan documentation to confirm whether the terms of the loan meet your needs and repayment capacity. Use Canstar’s home loan selector to view a wider range of home loan products.
*Comparison rate based on loan amount of $150,000 and a term of 25 years. Read the Comparison Rate Warning.
Disadvantages
On the other hand, there can also be some potential downsides to choosing to purchase a property rather than renting. For example:
- Missed repayments could equal repossession
Arguably the most significant disadvantage of buying a home and having a mortgage to repay is the possibility of repossession if you fail to make repayments. Generally, your lender will send you a default notice which allows you 30 days to catch up on missed repayments. However, if you are still behind after the notice expires, your lender can start legal action to repossess your home and sell it to cover your loan.
- A large up-front cost is required
One of the biggest obstacles faced by potential home buyers in Australia is saving up the amount required for a home deposit. 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. However, if you are eligible for the Federal Government’s First Home Loan Deposit Scheme or willing to pay lender’s mortgage insurance (LMI), the deposit required may be reduced.
According to the ABS, the average price of an Australian residential dwelling in March 2019 was $636,900, so the 20% deposit required for a loan would be $127,380.
Apart from the deposit, 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, depending on the state.
- Ongoing costs like maintenance and repairs
As a homeowner, there are a number of 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, when combined with mortgage repayments.
- 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.
Renting a home
Advantages
There are several advantages to renting, such as the ability to potentially save money while living in a neighbourhood you might not be able to buy into, along with greater flexibility to up-size or down-size as needed.
- More money in your pocket right now
As recent ABS data shows, renting will likely be cheaper than paying off a mortgage would be.
Moreover, how affordable or expensive your rent is will depend on the area you rent in. Renting rather than buying may free up some cash for you to invest or save for the future and could reduce financial stress during an expensive period of your life, for example if you’re starting a business or a family.
While traditionally many people have viewed the cash you spend on rent as “dead money”, online property and urban development network, The Urban Developer, suggests that rent payments are essentially no different in this regard to repaying the interest on a mortgage. It also explains that renting can provide the opportunity to use the money you can often save by renting to explore other, potentially more fruitful, investment options outside of the property market.
- Upkeep is not your problem
Renting normally means there are fewer ongoing costs to worry about – the rates, home insurance, general maintenance and repair costs are generally covered by your landlord, unless you have caused the damage in which case the cost could be deducted from your rental bond. 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.
- Greater 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). Personal finance blog, Aussie Firebug, lists flexibility as a major benefit of renting over buying; whether for a career change, for family reasons, or simply to seek adventure, saying that when your rental lease expires, the world is your residential oyster.
- 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 for a family with young children or teenagers. Likewise, the ideal student share house is not likely to be the same thing as the ideal home for a family.
One benefit of renting is that you can “right-size” relatively easily – if your family and income grows, you can move and increase the size and cost of your home as you need it. It can be 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 your household grows or shrinks.
Disadvantages
On the other hand, there can also be some potential downsides to renting that may outweigh the positives. For example:
- No investment potential
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.
- A lack of 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 generally required to give advance notice of these.
- 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 the presence of pets on the property.
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. This is becoming an increasingly popular option for those wanting to enter the housing market; the Australian Bureau of Statistics (ABS) recently reported that around 340,000 Australians are rentvestors in 2019. There are several possible advantages to rentvesting, such as the fact that you can invest for the future, while still living in a neighbourhood that you might not be able to buy into.
- It can be tax-effective
According to the Australian Taxation Office (ATO), if your investment property is not making a profit out of rental income or “breaking even” compared to your interest and other expenses on it, you may be able to claim a tax deduction for your losses when you complete your annual tax return. This tax break is known as negative gearing and is available to help investors stay afloat.
- 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, when rentvesting you can give yourself exposure to the property market by buying a smaller, less expensive property as an investment property.
Online financial advisory company, Empower Wealth, suggests that if you are paying lower rent, compared to a very large mortgage, the surplus cash can be turned into an investment strategy. For example, if you’re able to find tenants for the property you buy, your rental income may be used to help pay off your mortgage or subsidise your income after repayments. Investing in property may give you additional cash-flow if your investment loan costs less in monthly repayments, utilities, and upkeep than the rent you are receiving for it.
Disadvantages
In saying that, some disadvantages of rentvesting may be:
- Rental income requires a tenant
The idea of using rental income from an investment property as a cash flow source is good in theory, however, in practice it may be difficult to find reliable, long-term tenants. It could be worth considering whether you will be able to continue meeting mortgage repayments if you can’t find a tenant or if unexpected maintenance expenses arise.
- Investor loans may be more expensive
Keep in mind that investor loans generally have a higher interest rate than those for owner-occupiers. Additionally, depending on where you live, some schemes such as the first home owners grant may require that you occupy the house for a period of time in order to be eligible to receive the benefits.
Additionally, according to the ATO, your principal place of residence is the only property asset that is generally exempt from capital gains tax, therefore, you’ll have to pay capital gains tax should you decide to sell your investment property.
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