Should I buy or should I rent? It's a dilemma that at first glance could seem impossible to answer. Weighing some of the benefits and drawbacks of owning a home, renting a home, or doing both is presented here so that you can make an informed choice.
The number of people owning their own homes in Australia has been falling steadily since 2016. It should come as no surprise that a growing number of people in Australia are opting to rent because the average price of a home in Australia is 681,100 dollars, as reported by the Australian Bureau of Statistics.
The question of whether it is better to rent or buy a home is still a hotly debated topic, despite the fact that purchasing a home has long been regarded as a defining characteristic of the "Australian Dream" or, at the very least, a significant investment choice. However, recent shifts in the housing market, as well as the lending and borrowing sectors, have provided a new point of view on the topic.
While climbing the housing ladder is considered by many people to be one of the most important milestones in their lives, others are quite content to continue renting. But is one of these options superior to the other? It's a question that the vast majority of people have pondered, and it's one that we'll do our best to answer for you.
Buying in Australia
There are a number of possible benefits that come along with purchasing your own home, some of which include safety, the chance to personalize the space, and the likelihood that it will assist you in accumulating wealth.
The positive aspects
Stability
Stability is one of the most significant benefits that come with acquiring a home. Because of the home loan agreements you've made, you are aware of the exact amount that will be due each month as well as the length of time for which it will be due. Your home has the potential to become a significant asset for your future finances, but this depends on the housing market as well as how well you take care of your property. If the value of the home rises and you decide to sell it at some point in the future, you could realize a substantial profit.
Assistance from the government
First-time buyers in Australia are provided with a variety of resources that make it easier for them to enter the housing market. Those who qualify for the First House Owners Grant receive financial assistance to put toward the purchase of their first home. In addition, a first home loan from BOQ is a good choice for homeowners who are looking for individualized attention and worry-free financing options.
Freedom to Make Alterations
When you own a home, you naturally have the freedom to do whatever you want with the land that it sits on. Some people take this to imply doing interior design work or renovating their homes, but a lot of younger people who buy property are just searching for a nicer environment for their animals to live in.
When you own your own house, you have the freedom to paint, renovate, and landscape whenever you like without having to get permission from your landlord or worry about breaking a rental agreement. This independence is one of the many advantages of home ownership.
Keep in mind, however, that if you decide to purchase an apartment, condo, or townhouse, there may be limits on property changes imposed by the person or entity that owns the building that you are required to abide by.
Assists you in the process of accumulating wealth
It is possible that the value of your property will rise over the long term at a rate that is faster than inflation, depending on the property and the market in your local area.
Although the value of real estate typically, and rather regularly, increases over the course of a lengthy period of time, this does not preclude periods of slow growth or even a drop in value. The Australian Property Institute (API) reported negative residential property returns across the country for the 2018/2019 period, which marked the first annual fall in property values in at least a decade. This finding lends credence to the notion that Australia is currently in the throes of a housing downturn, as some commentators have put forward this assertion.
Before you purchase a home, it is imperative that you do a comprehensive home inspection and give serious consideration to all factors of a property's location that may have an impact on its value. There may be changes in the value of your house that are foreseeable in the future if it is located in an area that is prone to flooding or if there is a likelihood that additional residential and commercial developments will be added to the neighbourhood in the near future. It is highly recommended that you seek the assistance of a professional conveyancer or a lawyer in order to assist you in navigating some of these issues.
If you have a mortgage, you will be required to save money
One strategy to drive yourself to save money is to direct any extra cash toward paying down your mortgage rather than spending it. This requires you to have the discipline to make your mortgage payments on time. One of the advantages of doing so is that a portion of your regular payment, known as the principle, will be applied to the purchase of your home rather than to the payment of your rent to your landlord.
You can schedule your repayments
A mortgage provides you with some security and the ability to budget for repayments, despite the fact that interest rates have a history of moving in both directions. On the other hand, the interest rate on a house loan with a variable rate is subject to change at any time because the lending institution is free to do so. This may imply that the predictability of your repayments is comparable to the unpredictability of the expenses of renting, which can vary as a result of high demand.
When you buy a home, on the other hand, as opposed to renting, you have the ability to exercise some kind of control over your monthly payments by selecting either a fixed rate or a variable rate loan – or even a split loan that utilizes both sorts of rates.
Greater assurance with regard to tenure
When compared to renting, owning your own home might provide you with a greater sense of stability and safety. If you own your home, you eliminate the possibility of being forced to relocate because your current lease is about to expire or because your current rent has become unaffordable.
If you are currently thinking about applying for a home loan, the table below contains a comparison of some of the variable rate home loans that we have in our database, along with links to the websites of lenders who offer these loans to first-time home purchasers. This table is arranged from best to worst, according to the Star Rating, and then it includes a comparison rate (lowest-highest). The products displayed are principal and interest home loans that are available in the state of New South Wales for a loan size of $350,000 with a loan-to-value ratio (LVR) of 80% of the property value.
In the beginning, before you commit to a specific home loan product, you should check in with your lender and study the applicable loan documents to see whether the conditions of the loan meet your needs and whether you are able to repay the loan. You can browse a wider variety of home loan products by using the home loan selection that Canstar provides.
Buying a home commits you to a substantial investment and comes with a variety of associated expenditures.
The negative aspects
The decision to buy a home rather than rent one comes with a number of potential advantages and disadvantages, depending on the specifics of the transaction.
Financial Responsibility
When you buy a home, you take on a financial obligation that is (often) significant. Your mortgage and home loan payments need to be made on time; otherwise, you run the danger of sliding into debt and having your credit score suffer as a result. According to the ABS, persons who have a mortgage are the most likely to have excessive amounts of debt in Australia. This is unfortunate.
Of course, the only way to get into debt is if you can afford to buy a home in the first place, and climbing the housing ladder is not a simple task. However, if you can do those two things, then you can get into debt. Depending on the amount of money you bring in each month, putting money aside for things like the first 20 percent deposit, stamp duty, government fees, and conveyancing costs, among other things, may need you to make concessions in other aspects of your life.
Repayments that are missed could result in the property being repossessed
The risk of having your property repossessed if you are unable to keep up with your mortgage payments is widely regarded as the most major disadvantage associated with purchasing a home and taking out a mortgage loan to finance the purchase. In most cases, your lender will send you a default notice, which will provide you with a window of thirty days during which you can make up for any missing payments. However, if you are still behind on your payments after the notice has expired, your lender has the right to initiate legal action to repossess your property and sell it in order to pay off your outstanding debt.
There is a significant initial investment needed
The accumulation of the funds necessary for a property deposit is one of the most significant challenges that prospective buyers of homes confront in Australia. The initial payment that must be made on the purchase of a property will vary from lender to lender and from person to person. For instance, the borrower of certain loans is required to have a deposit that is at least equal to twenty percent of the value of the property being purchased. On the other hand, the needed deposit could be lower if you are qualified for the First Home Loan Deposit Scheme offered by the Federal Government or if you are ready to pay the lender's mortgage insurance (also known as LMI).
The Australian Bureau of Statistics reported that the average price of a residential residence in Australia in March 2019 was $636,900; hence, the minimum deposit necessary for a loan of 20 percent would be $127,380.
In addition to the down payment, there is the possibility of additional up-front costs in the form of stamp duty, depending on the specifics of your situation. Although this might potentially add thousands to your deposit, depending on the state, you can be eligible for a number of concessions and discounts.
Ongoing expenditures such as those for upkeep and repair
When you own your own home, you are responsible for a number of recurring costs, such as general upkeep, repairs, and council rates, which, if you were renting, may have been paid by your landlord. In addition, if your property is part of a body corporate structure, you can be required to pay fees to maintain the common parts of your building. These fees could be as high as $100 per month. When added to monthly mortgage payments, these costs can soon pile up to become an unmanageable burden on some people's finances, making it impossible for them to continue paying their mortgages.
It's possible that the value of your home will go down
One more thing to keep in mind is that although a home is typically considered to be a financial asset, this worth can be negatively impacted if you make poor decisions regarding home improvements or if the value of the surrounding neighbourhood falls.
There is always a chance that the value of your property will go down or stay the same, depending on the specifics of your home as well as the state of the market as a whole, despite the fact that purchasing a home is typically considered to be a worthwhile investment for the long term.
There is no assurance that the value of a property will go up over time. There are periods when prices go down, and certain regions are subject to large price drops from which it can take several years for prices to recover.
Renting in Australia
There are a number of advantages to renting, some of which include the possibility to save money while living in a community that you might not be able to purchase into, as well as greater freedom to increase or decrease the size of your living space according to your requirements.
The positive aspects
There are a lot of different reasons why Australians are opting to rent rather than buy, and it's not just about the money - it's also about having more flexibility. Those who aren't quite ready to root themselves in one location will find great allure in the freedom to relocate whenever their lease term expires.
Your financial worries will be reduced, and you will have the extra money in your pocket
In most cases, renting is significantly less stressful financially than buying a home. When compared to the upfront costs of renting, which often only involve a bond and a couple of weeks' worth of rent in advance, saving for a first home deposit can take a significant amount of time and require significant sacrifice. After then, the only payments that tenants are responsible for are the rent and the utilities. Although the cost of renting a house can be quite high depending on where you rent and what kind of dwelling you rent, these costs are typically split between roommates or a partner in order to be more manageable. The homeowner is responsible for bearing the major costs, such as those associated with property tax and maintenance of the property (usually).
Because renting allows you to spend less money, you will have more money to spend on things that interest you (brunch, anyone?) or to put away for a down payment on a house in the future when you are ready to settle down.
According to the most recent data from the ABS, paying rent will almost certainly be less expensive than paying down a mortgage.
In addition, the location in which you rent will determine the affordability or expense of your monthly rent payment. Renting instead of purchasing could free up some income for you to invest or save for the future, and it could minimize the amount of financial stress you feel during an expensive time in your life, such as when you are beginning an expensive endeavour like a business or a family.
In the past, many people have held the belief that the money spent on rent is "dead money." However, research conducted by The Urban Developer, an online network that focuses on real estate and urban development, suggests that payments made toward rent are, for the most part, not dissimilar to payments made toward the interest on a mortgage. It also explains that renting can provide the opportunity to use the money you can often save by renting to explore other, potentially more fruitful investment options outside of the property market. This opportunity can arise because renting can provide the opportunity to use the money you save renting.
You do not have to worry about upkeep
If you rent instead of buying a home, you will typically have fewer ongoing costs to worry about. This is because your landlord will typically cover the costs of your property taxes, homeowner's insurance, general maintenance, and repairs unless the damage was caused by you, in which case the cost may be deducted from your security deposit. The personal property that you keep in the storage on the premises owned by your landlord is not covered by the landlord's insurance policy. Renters are responsible for the upkeep and security of their personal goods and should give some thought to purchasing content insurance.
Greater versatility with regard to the location of one's home
When you rent, you have the potential to live in a neighbourhood or on a piece of property that you adore but might not be able to buy due to financial constraints.
Additionally, it enables you to relocate whenever you choose thanks to its flexibility (within the limits of your lease agreement, of course). According to the personal finance blog Aussie Firebug, one of the most significant advantages of renting rather than buying a home is the flexibility it provides. Whether it be for the purpose of making a career switch, caring for a family, or simply seeking adventure, the blog states that when your rental lease expires, the residential world is your oyster.
Greater adaptability with regard to the dimensions of the dwelling
Your housing requirements will adjust to reflect the new make-up of your family. The floor plan of the optimal house for a young couple living together is not the same as the floor plan of the perfect house for a family with young children or teenagers. In a similar vein, the ideal house for a family is not going to be the same thing as the ideal house for a group of students to share.
If your family and/or income grows, you will be able to "right-size" relatively rapidly if you rent rather than buy a property. This means that you will be able to move and purchase a larger and more expensive home as your needs change. Rather than buying a new home or renovating your current one every time your family expands or contracts, you might find it more convenient and cost-effective to make adjustments to your existing home so that it better meets your evolving needs.
Because paying rent is typically less expensive than paying mortgage or property taxes, you can use any excess money you have toward investments, savings, or spend however you see fit. One of the most important advantages of renting is the increased financial flexibility it provides.
The negative aspects
On the other hand, renting can have a number of potential disadvantages as well, some of which may be more significant than the benefits.
When it comes to renting, flexibility may be both a benefit and a drawback in equal measure. Because of the continual upheaval in the real estate market, property managers and landlords are perfectly within their legal rights to adjust the monthly rent payment after the term of a lease agreement has expired. It's possible that this will compel renters to move out and look for cheaper housing elsewhere, which can be a very stressful time, especially if you weren't quite ready to go yet. Rent is an ongoing expense, unlike a mortgage, which can be paid off, but if you rent an apartment or house, you are required to continue making payments on it indefinitely.
Finding the "ideal" place to rent is frequently a challenge that tenants are required to overcome. Even though purchasers are often required to compromise "perfection," buyers at least have the ability to make improvements and alterations to their space without first obtaining approval from their landlord.
There is no opportunity for investment
Rent must be paid on an ongoing basis, in contrast to the possibility that some homeowners will one day pay off their mortgage. In contrast to making loan payments, which could eventually lead to you fully owning a house, paying rent is mostly contributing to the mortgage payments or investment income of the person to whom you are renting from.
An Absence of Confidentiality and Safety
Renting can be unexpected at times due to factors such as fluctuating property markets and the fact that tenants are subject to the whims of property managers and landlords. For instance, if your landlord makes the decision to sell, you might be required to relocate, which can be a difficult, time-consuming, and costly process. Although landlords are normally obligated to provide early notice of inspections, the possible loss of privacy that can result from renting a property is another disadvantage associated with this lifestyle choice.
Your home comes with only a certain amount of freedom
When it comes to decorating and making the house feel like your own space, having a landlord may limit the amount of freedom you have, despite the fact that renting can provide greater flexibility in terms of location and the property you choose to live in. For instance, your landlord may place restrictions on the kinds of cosmetic improvements you're allowed to make to the home as well as the kind of animals that are allowed to live on the property.
Renting a home is a risky way to spend your life. You run the risk of being evicted, landlords frequently neglect to maintain their properties, and you wind up paying a significant amount of money that is wasted.
However, if you are able to locate a property to rent that is not only reasonable but also of the appropriate quality and has a reputable landlord, you may discover that the convenience and flexibility are well worth the cost. You won't be stuck with a mortgage and a single property for a number of years either.
Is it accurate to refer to rent money as "dead money"?
Paying rent is money that will be lost forever. You do not accumulate any equity, and you do not own any of the property. However, in order to acquire real estate, you will need to obtain a mortgage. Additionally, the total amount of interest that you will wind up paying for the loan can end up being a pretty large sum. When you buy a home, you also have to pay for a variety of other things.
It is not possible to say with certainty that renting is less expensive than buying or that buying is less expensive than renting. There are far too many different aspects to consider. When loan rates are low but rental prices continue to rise, it's possible that purchasing a home will be more affordable than continuing to rent. However, there are a lot of situations in which the opposite is true.
The price of purchasing
Let's say you buy a $650,000 home in Victoria with a 20% deposit.
Deposit: $130,000
Loan amount: $520,000
Mortgage: principal and interest loan with a 30-year loan term
Interest rate: 3.70%
Your fees
$11,356 in fees for the land transfer stamp (this includes a concession for first home buyers)
Total interest paid over a period of 30 years: $341 649
$1,003,005 is the total cost (including the deposit).
Additionally, maintenance expenses, council fees, insurance, and other expenses are not included. Such a large sum of money. Naturally, the value of your house will probably increase over time. This will reduce the costs in part.
However, you must take into account expenses like stamp duty and real estate agent commission when you sell the property. Some of your capital growth may be reduced by this.
Consider renting
The estimates are highly speculative due to the fact that the expenses of renting largely vary on the type of housing, its size, its quality, and its location (the average Australian living in a capital city pays 20 to 30 percent of their salary in rent). Take, for example, the average weekly rent of $420 in Melbourne, which is for an apartment.
$420 times 52 = $21,840 a year
Over 30 years that equals $655,200
That is a savings of $347,805 compared to the total cost of purchasing the home. This discount amounts to $11,593 saved annually.
This computation isn't particularly accurate considering the fact that the cost of rent almost always goes up over the course of time. However, in order for it to become more expensive than purchasing, the annual cost would need to increase by at least 11,593 dollars. In addition, we will contrast the cost of buying a home in Melbourne for $650,000 with the cost of renting an average flat in Melbourne. If you had less than this amount, you would be able to buy an apartment, which would save you money on interest. In Melbourne, the average price of a house is significantly higher than $650,000, and the average rent for a house (as opposed to a unit) is $430, which is $10 higher than the average rent for a unit. Nevertheless, there is some validity to the comparison.
To Rent or to buy: The choice depends on you
The choice of whether to buy or rent is not up for debate; rather, it is a consideration based on your financial situation and life objectives. Here are some speculative situations.
Purchasing makes sense if you have a family and seek stability and security. Even better if you already have a home in a neighbourhood where you can afford to buy and your children are delighted to attend school.
We are a childless couple who adore our apartment in the city but can't afford to buy it.
If you enjoy living in your expensive, well-liked neighbourhood, you might think about renting. Although you might occasionally have to change apartments, you'll probably have more extra money this way. This strategy is much more effective if you want to invest part of your extra cash.
You might also think about reinvesting, which entails renting in your desired neighbourhood (a pricey, upscale location) while purchasing a less expensive investment property elsewhere. In this approach, you can benefit from the flexibility of renting while slowly and steadily increasing your wealth through real estate investments.