Home-ownership – it’s the great Aussie Dream…and with close to 70% of Australian households being owner-occupied1, that desire to live under a roof you can call your own is not going away anytime soon. Yet there’s also a vocal minority who advocate renting as a smarter choice for some. So what’s the reality of the rent versus buy debate? Here are some of the pros and cons to help your decision-making.
For many of us, renting is a necessity rather than a choice, with home-ownership being a struggle from a financial perspective. Renting obviously offers lower upfront costs – and depending on where you live, rent can work out cheaper than mortgage repayments on a week to week basis. And with maintenance and repair costs covered by the landlord, renters avoid having to fork out for everything from a leaky tap to a full-scale flood.
There’s also much more freedom for renters – which is especially attractive for anyone who wants to travel light, move around for work, or even try out a neighbourhood before committing to buying. And even more appealing is the fact that many renters get to enjoy living in areas and houses they couldn’t ordinarily afford.
There’s no denying that investing in buying a home ties up a lot of your money in one asset – but on the other hand, solvent renters are able spread risk across a much wider range of smaller investments.
As the saying goes, rent money is dead money. Your rent is essentially going towards paying off someone else’s mortgage, giving them the investment potential, and leaving you with nothing much to show once your tenancy is up.
Which brings us to the next key negative: the fact that once your agreement is up, you can be asked to vacate, often within less than a month. Renting offers zero security, which can make for an uncertain and unsettling home life.
Rental costs have been steadily increasing in Australia, to the point where it’s often now equivalent to the interest you pay on a mortgage. And the very fact that renting is less of a commitment means that many renters are more likely to spend their spare cash, rather than saving it towards repaying a mortgage – meaning that a renter lifestyle generally won’t lead to the same financial rewards enjoyed by their often thriftier counterparts.
Renting may offer greater flexibility and freedom in some ways, but there’s not much of that when it comes to rental rules and regulations – which means you’ll likely have to live with that lime-green wall and the ‘70s kitchen. And for pet-lovers, renting can be a highly frustrating experience, with many landlords refusing pets, and even being wary of families with young kids.
There’s no doubt that security is one of the most attractive propositions for anyone wanting a home of their very own. Not only do home-owners get to enjoy the feeling of knowing they have a concrete asset that can be developed and improved over time, but the threat of eviction is also removed, bringing greater peace of mind, pride, and even a stronger connection to the wider community.
Financially, home-owners are generally in a much stronger position than renters. Owning a home gets you on that ‘first rung of the ladder’, enabling you to use the equity in your home to potentially buy another and build a valuable property portfolio.
It’s hard to miss the fact that house prices have generally been rising steadily over the last few years, especially in metropolitan areas – and while that may be pricing some out of the market, lower growth markets in more regional areas makes housing more affordable for those living outside cities, while still being expected to offer good opportunities for growth over the long-term.
Perhaps the biggest drawback to buying – and the one that proves prohibitive for most – is the large upfront cost and ongoing outlay required. Not only do house purchasers need to stump up the required 5-10% deposit, but they’re also required to pay everything from mortgage repayments (which can fluctuate) to regular maintenance and repair costs, strata fees and council rates, not to mention the interest rates and other fees on top of the loan. Along with the costs of selling a home, it’s estimated that the total costs, just of buying and selling alone, can run to as much as 7.3%2 – all of which can eat into your potential for profit.
Home-ownership isn’t always a guaranteed sound investment, either. ‘Negative equity’ is one term that will likely send a shiver down the spines of most home-owners, and market pressures or other unforeseen economic factors can make it a risky business, with little or no control.
Deciding whether renting or buying better suits your own particular lifestyle and requirements is a highly personal decision, and depends on your goals, your financial stability, your commitment to a particular place and your lifestyle.
If you need advice on this, talk to us so we can put you in touch with a financial adviser.
1. Source: Australian Bureau of Statistics
2. Source: SBS.com.au