It’s an age-old question: is it better to rent or buy a place to live? Unfortunately, there’s no easy answer as there are many factors to consider, including your financial situation, the state of the real estate market, your stage of life and the area you live in.
In reality, both renting and buying have pros and cons. Here we examine some of these, to help you make a decision that’s right for you.
Renting your home comes with some great advantages – you’re more likely to be able to afford to live where you want, it’s easier to move and can be cheaper than buying a home. But there are some distinct disadvantages too.
Renting can give you greater freedom because a lease only locks you in for one year (or sometimes less). If you don’t mind potentially incurring some additional costs, you can even break your lease and move whenever you want – or need – to. This flexibility means it’s easy to move to a new area or rent a more, or less, expensive property if your financial circumstances change.
Renting can be more affordable as the only property-related expenses you generally face over and above rental payments are a lump-sum bond deposit, utilities and contents insurance. This means you could save money to invest or spend on other things you might want to do in life. Of course, whether your rent is cheaper than the costs associated with buying a home depends on the type of property you rent and where in Australia you choose to live. For example, weekly rent in inner-city Sydney and Melbourne may be more expensive than weekly mortgage repayments plus housing-related costs in regional South Australia.
Live where you want to
Property prices in some of Australia’s biggest cities can be pretty expensive, so if you crave that inner city café lifestyle, you may be more likely to be able to afford to live in the suburb that you want by renting.
Wait out the market
While in the longer-term property prices generally rise in value, there are market fluctuations. If you’re in the position to buy, but feel the property market might take a hit due to an economic downturn or recession, you may choose to rent and then buy a property when prices have dropped, potentially saving yourself tens of thousands of dollars.
Renting can be less stable and secure as your landlord could choose to sell the property or move into it themselves at any time. Your landlord may also choose to increase the rental payments, which could make the property unaffordable. If any of these things happen you might not get much notice, which means finding a new place to live quickly.
Less control over the property
As a tenant you’ll have less control over the property you live in. For example, it may not be decorated to your tastes, be as modern as you’d like, or you might not be able to keep a pet.
More expensive long term
You’ve probably heard of rental payments referred to as dead money. This is because rather than building up your future financial wealth, rent money goes into your landlord’s pocket. There’s also no end date to rental payments and you’ll need to continue to make them for as long as you rent. So if you plan on always renting, you’ll need to build rental payments into your retirement savings.
How to decide if renting is right for you
The decision about whether renting is right for you might be an easy one based on your financial situation and whether or not you can afford to buy. But it could also help to consider your lifestyle and aspirations for the future, and if you value flexibility over stability, renting could be a better option for you than home ownership.
There are several advantages to buying a home, such as greater stability, being able to make the property just how you want it, and long-term financial benefits. But on the downside, it’s also harder and more expensive to move, and there’s the potential for greater financial risk.
Owning a home can give you more certainty and stability around where you’ll be living in the future, which can be important if you have other family members to consider, or you’re approaching or in retirement.
More control over the property
Because you own your home, you can modify it to your taste, and alter or renovate it to suit your lifestyle. However, if you own an apartment, townhouse or villa, there may be restrictions in the strata agreement on what modifications you can make to your property. Being a property owner also means it’s up to you if you want to share your home with a pet.
Better financially in the long term
Buying a home can give you a sense of financial predictability as you’ll know how much you’ll be paying for housing (subject to changes in the interest rate if you have a variable home loan) and how long you’ll be making mortgage repayments for. With an average mortgage lasting around 25 to 30 years, after that time you’ll own an asset that may have risen in value, depending on movements in housing prices. Paying off a mortgage by the time you retire can be beneficial, as you won’t have to factor in housing repayments when you’re no longer earning a salary.
Many state governments around Australia offer financial incentives to home buyers, including first home buyers and those who build new properties.
More expensive short term
There’s no escaping the fact that buying a home will give your savings account a workout as it comes with a lot of initial costs. On top of saving for a deposit, you may also have to pay stamp duty, legal and conveyancing fees, loan establishment fees, and interest on your home loan, along with council rates, insurance, ongoing maintenance and strata fees (if you buy a strata-title apartment, villa or townhouse).
You might not be able to afford to buy where you want to live
Big-city lifestyles often have a price tag to match. You might have to compromise on location when buying a home if you can’t afford to buy in the suburb where you’d like to live.
As a home owner, it can be more difficult – and definitely more expensive – to move whenever you want to. Moving when you own a property usually involves selling (unless you’re renting it out), which can be a lengthy and costly process.
More financial risk
While history tells us that property prices do tend to increase, there’s no guarantee this will happen. As a home owner this could mean you end up with an asset that’s worth less than what you paid for it, which could have an impact on your finances. There’s also the possibility that you may not be able to make your mortgage repayments if your financial circumstances change, which could affect your credit rating and result in you being forced to sell the property.
How to decide if buying is right for you
Based on your financial situation and whether or not you can afford to buy, deciding if buying a house or apartment is right for you might be an easy one. But if you value stability over flexibility and are interested in building your wealth over the long term, buying a home could be the right move.
There’s another option that could potentially give you the best of both renting and buying: ‘rentvesting’. This is when you buy a property as an investment, rather than to live in, and live in a rental property. Below, we’ll explore some of the pros and cons of rentvesting.
Live in an area or property you mightn’t be able to afford to buy
If you can’t afford to buy where you’d like to live, you can continue to rent in your preferred area while buying an investment property in a cheaper area. This strategy could also help if you can’t afford to buy the size or type of property you’d like to. For example, if you need a family home but can’t afford to buy one, you can rent a larger property and invest in a smaller apartment instead.
Help build future wealth
Rentvesting gets you on the property ladder, and as a landlord the rent you collect from your tenants will help to pay off your home loan, building your equity in the property. If the property rises in value, you could stand to make money when you sell it.
If you don’t make a profit from the rent on your investment property you might be able to claim a deduction on it at tax time. This is known as negative gearing.
Potential for financial stress
If there are times when your investment property is untenanted you could find yourself having to pay both your rent and your mortgage repayments, which could be financially stressful. And if the rent on your investment property doesn’t fully cover the mortgage repayments, you’ll have to pay the difference. As well as budget for maintenance and other ongoing costs associated with property ownership.
Higher costs and less financial incentives
The home loans available to investors usually have a higher interest rate than those available to owner occupiers, and as an investor, you may be ineligible for some of the government incentives available to first time home buyers or home buyers who build a home.
As the property you own is an investment and not your principal place of residence you may have to pay capital gains tax when you sell it.
We're here to help
If you’d like some help weighing up your options when it comes to the pros and cons of renting and buying, it may be worth seeking professional advice and talking to a financial adviser. If you don’t have one already, you can use our find an adviser tool to search online, or call us on 131 267.
Any advice in this article is provided by AWM Services Pty Limited ABN 15 139 353 496 (AWM Services) and is general in nature only. It doesn’t consider your personal goals, financial situation or needs. It’s important you consider the appropriateness of any advice and the relevant product disclosure statement or terms and conditions before deciding what’s right for you. You can read our Financial Services Guideonline for information about our services, including the fees and other benefits that AMP companies and their representatives may receive in relation to products and services it provides. You can also ask us for a hardcopy. AWM Services is part of the AMP group and can be contacted on 131 267 or firstname.lastname@example.org.