For most of us the first step you take into independent living is to rent a house. But how do you know when (or even if) you should take the plunge into home ownership? We’ve explained the pros and cons of buying a home, and compared them to the pros and cons of renting a house – so you have all the info.
Rent a house
- Renting can sometimes be cheaper than home loan repayments
- It can be a more affordable way to live in better areas/close to the city
- There are fewer upfront costs
- Renting can free up your savings
- Finding a rental can sometimes be easier than finding a home to buy
- Renting can be more flexible than owning a home (where you live, how long you live there/relocation)
- It’s less of a commitment
- You can spread the cost with roommates (although you can still do this when owning a home)
- Your landlord covers the costs for maintaining the property – and covers the rates and body corporate fees
- You don’t have any large debt (like a home loan)
- Some properties have rent that is more expensive than a home loan repayment
- Rent money is sometimes considered dead money (you’re paying off someone else’s house)
- Your rent could increase over time
- You get no investment/asset growth when renting (because you’re in someone else’s asset)
- You have less security and certainty
- The property isn’t yours (can’t improve or renovate without permission)
- You’ll need to have inspections and deal with your landlord’s requests
- You’re not forced to save (home loan repayments build up equity in your home that can be used later)
The pros and cons of renting a home
Renting can get a bit of a bad rap because there are quite a few perceived downsides to living in someone else’s property. Aside from the high cost and the fact that your money is paying off someone else’s home loan, you also have less certainty in your living arrangements because your landlord could raise your rent, or worse, end your lease. On top of that you’ll need to deal with having inspections and relying on your landlord to maintain your property (which can be difficult depending on your landlord).
But renting isn’t all doom and gloom, there are some upsides to renting instead of buying a house. For instance, renting a house can free up your savings because you aren’t putting it towards a deposit or the fees associated with getting a home loan. This means you could use that money to invest elsewhere, allowing you to diversify your investments instead of putting all your money into one asset (a house). And sometimes these investments can even get better returns for than investing in a property (but there’s unfortunately no guarantee of this).
While renting may not offer you a lot of security, it can offer you flexibility and is less of a commitment. Renting a property means you can easily move around and choose where you live. Depending on the area you want to live in, renting a property in that area can sometimes be cheaper than buying a property in the same area.
Buy a house
- Your home is your own asset
- Your property’s value can increase over time – which means more money for you
- The more you pay down your loan the more your equity will grow
- You can use the equity in your home to spend on other things (renovations, holiday, purchasing a car)
- You can modify the property however you want
- Sometimes mortgages can work out cheaper than renting
- Security – you can live in your home as long as you want
- Government grants can help you to buy a home
- You can rent out your property if you want to move (It can be part of your investment portfolio and help diversify risk)
- You’ll be paying interest on your home loan (which can add up to thousands of dollars, depending on what repayment type and frequency you opt for)
- You have less flexibility (You’ll need to rent out or sell your property if you want to move)
- There are costs associated with buying AND selling a home
- Upfront costs to buying a home can be BIG (deposit, stamp duty, government and third party fees, LMI etc), especially for established homes
- It’s a big financial commitment (For the average punter, buying a home is usually the biggest purchase you’ll make and you may need to borrow a large amount of money, aka debt)
- Your home can be taken away from you if you don’t pay your home loan
- Properties can sometimes decrease in value due to a lack of market demand
- You have to maintain the property and pay all of the costs associated with it (strata costs, maintenance costs, council rates, utilities and insurance)
- Your money (deposit and repayments) will be tied up in your property, meaning it won’t always be available to invest in other things
- Stamp duty and fees can eat up your equity when selling your property
The pros and cons of buying a home
Now for the other side of the coin, buying a home. Home ownership is a dream for many people so it is often seen as the better of the two living arrangement options. But it’s not all sunshine and roses as there can be some big costs associated with buying and owning a house that you should be aware of. The first one is obviously your deposit, you’ll need to save up a fair chunk of change before you can even think about looking for a house to buy. And if you can save up at least a 20% deposit, you may need to pay Lenders’ Mortgage Insurance (LMI) as well. Why? Because your deposit amount doesn’t include fees. What fees? There are government fees, lender fees, and third party fees that you’ll need to cover, not to mention the interest accrued over the life of your loan. There are also costs associated with maintaining the property once you own it (maintenance and strata costs for example). You’ll also have fees and stamp duty to pay if you ever decide to sell your home, which can end up eating up the equity you’ve built up. Overall it’s a really big financial commitment and it can be quite expensive, so it’s understandable why some people decide to rent instead of buy.
With all that being said, buying a house does have some pretty good benefits as well. For starters buying a house will eventually mean you own a pretty big asset (this also depends on the property and value growth over time), and the repayments you make on your home loan build equity in that asset that you can use later down the track. On top of this, your property can increase in value which further increases your equity and potential profits if you ever decide to sell your house. And while buying a house could limit you in some respects it does give you the freedom of no inspections and being able to modify/renovate the property however you want!
Should I rent or buy?
Time for the big question, should you rent a house or buy a house? Unfortunately, the only person who can make that decision is you because it really does depend on your individual circumstances and preferences. Your finances are going to play a big role in this decision (because you need to be able to afford whatever decision you make). And the way you live your life will also impact your decision – do you like to move around a lot or stay in one spot? Whichever way you’re leaning, it's always a good idea to seek out financial advice from experts that can help you before you make any big financial decisions.