Buying Or Renting: Which Is The Right Choice For You?

| March 27, 2014

For young Australians, the question of whether to buy or rent has no easy answer.

Stacks of Money and For Sale Real Estate Sign

Traditionally, owning your own home has been seen as something to aspire to, but people are increasingly beginning to question this. So what are the pros and cons of buying vs renting, and what do you need to consider before making up your mind?
The pros of buying

Owning your own home can give you more control over many things. You can decide whether to stay living where you are or to relocate. You can make alterations or improvements to your property, and perhaps most importantly, you will eventually pay off your mortgage and own your property outright. Over time, your mortgage payments will probably decrease as a percentage of your monthly outgoings, because your salary is likely to increase. The value of your home is also likely to go up. Many experts view a mortgage as a form of ‘forced investment’ for the future.

The cons of buying
However, especially with interest rates currently so low, it’s hard for aspiring home owners to save the 10 percent needed for a deposit, as well as the additional costs associated with buying a house, such as legal fees, house valuation, stamp duty, insurance and so on. You may find it difficult to afford a property where you want to live, and you become totally responsible for maintenance. Interest rate could rise, potentially making quite a difference to your monthly payments, and changes in your circumstances, such as redundancy or starting a family, may make repayments difficult.

The pros of renting
Although there are some costs associated with renting a property, such as finding rent in advance and paying a bond, costs are significantly less than those for buying. You won’t need to pay out for legal costs, house valuation fees etc. Monthly rental is likely to be less than a mortgage payment. The landlord is responsible for maintenance and repairs. You also have more flexibility about where you live, as you may be able to rent a property where you can’t afford to buy. You can also move at short notice.

The cons of renting

Renting is not all rosy, and does come with significant disadvantages. Firstly, you are at the mercy of your landlord, who can terminate your lease or increase your rent, making your life less secure. Money is not being put towards an asset that you will one day own; many people view rent as ‘dead money’. Ultimately, if you choose not to buy your own home, you are committed to paying rent for life. You may also face restrictions concerning alterations, decorating, and even matters such as pet ownership. Much also depends on the character of your landlord; a good landlord will take responsibilities seriously, keeping the property in good order and attending to repairs promptly, but a poor landlord may neglect your home and non-urgent repairs could be ignored.
Weighing up the pros and cons
Debate rages about whether buying or renting is the way to go. Canstar Research states that mortgage repayments have increased by 105 percent over the last decade, whilst wages have only increased by around 50 percent, and inflation has risen by 34 percent. Certainly, taking on the large debt of a mortgage is not something to be done lightly.

However, if you manage your mortgage to minimise fluctuations in interest rates, you have more certainty about your outgoings than if you rent, and, as we have seen, you will own your home in the end. Over the average 25-year mortgage, it’s likely that rental costs will rise more than mortgage repayments, so although renting may be cheaper initially, buying is probably more cost-effective. An example at Realestate.com shows how after ten years of mortgage payments the monthly cost would be less than renting, and after 20 years mortgage payments would be half that of renting.

Even experts have differing views on this on-going debate of buying vs. renting a property. Scott Pape (aka The Barefoot Investor), believes that wrongly targeted government ‘bribes…distort the market and encourage exactly the wrong people to move into mortgage stress misery.’ He personally prefers to invest in shares and rents his home, feeling this gives you more flexibility and less financial commitment.

In her article in The Telegraph, Jessica Irvine makes a strong case for ‘Generation rent’, saying that ‘the debt to income ratio has exploded over the past few decades, sending home prices soaring relative to incomes.’ She also views the interest paid on a mortgage as ‘dead money’, and prefers to pay lower rental costs and invest the remainder.
Naturally, everything depends on your individual circumstances, so take expert advice about both options to be sure you understand the implications of each. You can then make an informed decision.

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Category: Real Estate, rental properties

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