While buying a house has long been widely considered a hallmark of the ‘Australian dream’, or at least a solid investment decision, renting can offer an enviable lifestyle, freedom and flexibility. So, what’s the best choice? In this article, we cover:
What are the pros of buying?
There are several possible advantages to buying your own home, such as security, being able to personalise where you live, and hopefully greater wealth if you are able to make the repayments on a home loan and own the property outright long-term.
1. A home can be a castle… yours!
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, though, that if you choose to buy an apartment, unit or townhouse, there may be some body corporate restrictions on property modifications.
2. Wealth creation
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. You can discover the top 10 areas tipped for property growth in Australia.
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.
3. Enforced savings with a mortgage
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.
4. Repayment certainty
While interest rates do tend to go up and down, a mortgage still gives you some certainty and the ability to budget for repayments, particularly if you opt for a fixed rate. There can be some differences in repayments though if you have a variable rate home loan, because the bank can change the interest rate on your loan at any time. There’s also the option of having a split home loan.
5. Financial and personal security
Owning your own home can 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. Plus, owning a home can be a valuable asset during retirement. You may also be able to use the equity in your home to invest in another property, organise some home renovations or consolidate other debts.
Compare Home Loans
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.
What are the cons of buying?
On the other hand, there can also be some potential downsides to choosing to purchase a property rather than renting. Here are some disadvantages to buying a home.
1. Foreclosure risk
Arguably the most significant disadvantage 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. If you in negative equity or experiencing financial stress, free financial counselling is available from the National Debt Helpline on 1800 007 007.
2. 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. 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.
3. 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.
4. 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.
What are the pros of renting?
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 upsize or downsize as needed.
1. More money to save today
Renting is often considered cheaper than buying, depending on where you choose to live and the style of housing (home, apartment, townhouse etc.) that you choose. This 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, such as if you’re starting a business or a family.
2. Diversify your investments
Renting can be perceived as ‘dead money’ but it might also 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.
3. Upkeep is not (usually) your problem
Renting normally means there are fewer ongoing costs to worry about – the council rates, home insurance, general maintenance and repair costs are generally covered by your landlord, unless you have caused the damage. In this situation, 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.
4. Flexibility in where and how 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 do 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. 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.
What are the 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.
1. 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.
2. 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 usually required to give advance notice, and this is commonly set out in the terms and conditions of your lease agreement.
3. 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).
4. Renting could be more expensive than buying
Depending on the circumstances (such as the current housing market, where you’d like to live, how you’d like to live, interest rates, rental repayments and so on), renting could be more expensive for you than buying. Canstar has identified suburbs where it may be cheaper to buy than rent. Plus, we’ve covered the most affordable and most expensive capital cities for rent in Australia.
5. No forced savings
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.