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Deciding whether to rent or buy your own place is a debate that has long raged in Australia. More so in recent years as property prices have skyrocketed and made it even harder for first home buyers to enter the property market.
Faced with the prospect of a sizeable mortgage and rising interest rates you may find yourself genuinely torn — is rent money really dead money?
Factors That Will Influence the Outcome
Chances are that depending on who you ask you will likely get a range of responses – this is because there are so many different factors that can influence the outcome and therefore make it really difficult to truly compare renting vs. buying, such as for example:
- How likely you are to remain in that property permanently
- Costs of maintenance and upgrades
- How much interest rates rise over the next 30 years
- How residential property prices perform in the face of rising interest rates compared to other investments
- How aggressively you pay down the mortgage or whether you extend the time frame each time you refinance
- Whether you are disciplined and comfortable to invest the difference between your rent and mortgage
- The size of your starting deposit
At the end of the day, having a roof over your head is the largest living expense you will incur and the sooner you secure accommodation that you no longer have to work to pay for, the sooner you will achieve financial independence. This can be achieved in two ways: buying a home and paying it off aggressively or renting and investing the difference. In theory, each strategy can be equally effective in helping you generate wealth, so ultimately it comes down to which one you feel most comfortable with.
Renting Is Right For You If….
- You aren’t sure where you want to live yet
- You don’t like being locked into one address
- The idea of a mortgage gives you anxiety
- It is cheaper to rent than buy in the area you wish to live
- You want to use the cash to start your own business or invest in your career development
- You are disciplined and comfortable with investing
Buying Is Right For you If…
- You prefer to have a permanent address
- You are a homebody and enjoy working on your home
- You don’t feel comfortable investing in the share market
- You can afford to make increased repayments when interest rates rise
- You don’t intend to move often, if at all
If you are leaning towards buying, here are a few factors to consider before you make your final decision.
How Much Can You Borrow?
Before you go shopping for a home it is important to know whether you can successfully obtain a loan for the type of property you desire. These days, there is a lot more to getting a loan than just choosing the bank with the lowest interest rate. One important factor to consider is their lending policy which can vary significantly among banks.
In other words, what criteria do you need to meet in order to be eligible for a home loan? In recent years, as a result of newly introduced banking regulations, banks have been tightening their lending criteria, making it harder than ever to get a loan. A great starting point is to speak with a mortgage broker who can closely assess your personal circumstances and give you guidance about your options.
How likely are you to move in the next five years?
When we compare renting versus buying, we often tend to focus on comparing the mortgage repayments against the rent payments, however, this is only part of the picture. It is also important to factor in the costs of buying and selling as stamp duty and agent fees can often tip the scales in favour of renting in the short term, especially if you intend on selling and buying again each time you move.
Could you keep it as an investment?
Life is full of surprises. If you bought a home and ended up needing to move, would you want to, or would you be able to afford to keep the existing property as an investment property? You might be able to save on some of the buying and selling costs if you’re able to retain the property rather than sell it when you move out. Plus there are some tax benefits available when you own an investment property too.
Can you afford the extra costs?
Owning a house doesn’t just mean a mortgage. Things like maintenance of the building, internal maintenance, bills like council rates and strata fees can become significant additional bills when you own. When you do the math, make sure you include every possible cost (including higher interest rates) to be certain you can afford it.
At the end of the day, the true answer to whether it is better to rent or buy comes down to math. But the math can be hard to predict because there are so many different factors that can influence the outcome. Then there is the fact that life and financial decisions are about more than just math. Our emotional needs are just as important (if not more) than our financial needs. When we are emotionally cared for, it is a lot easier to bridge the mathematical gap in financial decisions.
So, rather than making a decision purely based on the best financial outcome, focus your decision making on your emotional and lifestyle needs too.
Natasha Janssens is a Certified Money Coach (CMC)® and founder of Women with Cents. She is an award winning financial educator with a passion for supporting women to transform their relationship with money. If you don’t know what you don’t know when it comes to money and financial matters, her book Wonder Woman’s Guide to Money is for you. For more of Natasha’s tips follow her on Instagram and take the Money Type Quiz.
