To Rent or to Buy
It’s a dilemma that may seem hard to resolve. To help you make your decision, we weigh up some of the pros and cons of renting a home, buying or doing both.
While buying a home has long been widely considered a hallmark of the ‘Australian Dream’, or at the very least a solid investment decision, recent fluctuations in the housing market and lending and borrowing sectors have brought a fresh perspective to the rent versus buy debate. According to a quarterly rental report conducted by Domain, over the three months ending in June 2019, average rental prices dropped across most capital cities for both houses and units. Median property prices are also down in many areas, but Domain report s that price falls appear to be slowing in Sydney and Melbourne-the Sydney housing market, for example, is back to early-2016 levels after experiencing the largest downturn since the 1980s.
Likewise, CoreLogic’s monthly index for July shows that capital city housing prices are stabilising on the whole, although it does note that they are unlikely to recover any time soon. According to Domain, this flat-lining is partly due to the Reserve Bank cutting the official cash rate twice this year. This has arguably contributed to an environment of record low interest rates on home loans and an increase in new loans being offered to households.
With this volatility in mind, it may be hard to choose which path to take on your residential journey. To help you figure out what the best option is for you and your circumstances, here are some of the potential advantages and disadvantages of renting, buying and rentvesting (where you buy an investment property and continue to rent elsewhere).
Buying a Home
Advantages
There are several potential advantages to buying your own home, such as security, the ability to make the space your own, and the possibility that it could help build your wealth.
- You can make your home your castle When you purchase your own home, you have the freedom to paint, renovate and landscape at any time without needing to ask permission from your landlord or being concerned about breaching a rental agreement.
- It could help build your wealth Depending on your home and the market in your local area, it has strong potential to increase in value over the medium to longer term at a rate greater than inflation. In Australia residential property has averaged a growth rate in excess of 10% since 1900. Make sure you carefully consider all aspects of a property’s location that may affect its value and have your property thoroughly inspected before you buy. Factors such as whether it’s in a flood-affected area or the possibility of further residential and commercial developments being added in the surrounding area may mean that there are foreseeable changes to the value of your home. You may want to get in touch with a professional conveyancer or solicitor, to help you navigate some of these matter s. Your Odyssey Financial Broker will be able to refer you to a preferred and recommended conveyancer.
- A mortgage is a form of enforced savings Having the discipline of making regular mortgage repayments is one way to force you to save money by putting it into your home loan instead of spending it. The principal portion of your Principal an Interest loan acts like a forced savings plan. The benefit of this is that part of your monthly repayment (the principal) is going towards paying off your own property, rather than your landlord’s.
- Buying and having a home loan gives you reasonable certainty about your monthly commitments While interest rates can go up and down, a home loan still gives you some certainty and the ability to budget for repayments. It looks like Australia is in a long term low rate environment, and with rates around or below 3% budgeting should be relatively easy to manage. And in many cases the repayments on a home loan are actually lower than the rent that you would be paying on a similar property. If you did want to lock in certainly of repayment you can elect to have a Fixed rate loan. This is where the interest rate is fixed for a period of time, generally from one year to five years. Or you can have a combination of a fixed rate loan and a variable rate loan. Your Odyssey Finance Broker will discuss all options with you.
- It gives you greater certainty of tenure Owning your own home can also give you more of a sense of security than renting. Living in your own place means that you are not at risk of having to move due to a rental agreement finishing or your rent becoming unaffordable.
Disadvantages
On the other hand, there can also be some potential downsides to choosing to purchase a property rather than renting. For example:
- Missed repayments Arguably the most significant disadvantage of buying a home and having a mortgage to repay is the possibility of having to sell your home if you fail to make repayments. Your broker will explain what might happen in these circumstances. A large up-front cost is required One of the biggest obstacles faced by potential home buyers in Australia is saving up the amount required for a home deposit. The deposit required to purchase a home will vary depending on the lender and your circumstances. For example, some loans require the borrower to have a deposit of at least 20% deposit of the property’s value, while some others are happy with only 5% of the purchase price. According to the ABS, the average price of an Australian residential dwelling in March 2019 was $636,900, so a 5% deposit required for a loan would be nearly $32,000 Apart from the deposit, another potential upfront cost, depending on your circumstances, is stamp duty. Although this could potentially add thousands to your deposit, there are a number of concessions and discounts that could be available to you, depending on the state. If you speak with an Odyssey Broker they will be able to explain how you can avoid the need for any deposit at all when using shared equity or a family pledge.
- Ongoing costs like maintenance and repairs As a homeowner, there are a number of ongoing expenses such as general maintenance, repairs and council rates that may otherwise be covered by your landlord if you were renting. Additionally, if your home is part of a body corporate arrangement, you may need to pay fees in order to maintain the common areas of your building. These expenses can add up fairly quickly, and for some people may become an unaffordable financial burden, when combined with mortgage repayments.
- Your home may decrease in value Although owning a house is generally considered a solid long term investment there is the possibility that your property may decrease in value or remain the same, depending on your property and the overall strength of the market.