Loan-to-value ratios lower as higher interest rates smash borrowing capacity
New research has found borrowers took out smaller loans compared to their home’s value in ...
29 Nov, 2023
This calculator shows you how your finances will look seven years after buying a home or continuing to rent, allowing you to make an informed decision between the two.
Over the past 25 years, median house values have risen by a mammoth 412%, having tracked an annual growth rate of 6.8%, according to a recent CoreLogic report presented by Aussie.
Still, the renting versus buying dilemma continues to be heated, with the benefits and set-backs of each option thrown around, back and forth.
Whilst one option is most admired for its flexibility yet attached to the ‘rent money is dead money’ stigma, the other is appealing for the security it provides, but not for the additional interest rates that are entailed.
So which option - renting or home ownership – is most likely to advance your finances in the long-run?
Your Mortgage’s Rent or Buy calculator will help you to uncover how much better off you could financially be if you were to rent, compared to if you were to buy.
In order to assist you in making an informed decision on whether to rent or buy, the calculator will show you how your finances are expected to look like several years after you buy a house or continue to rent a property.
The calculator will ask you to provide some information which includes; the monthly rent paid for your rental accommodation, versus, your property’s purchase price, the total amount of money you will need to take out on a home loan, the total lifetime or period of the loan, the amount of interest you will pay on the loan, the quarterly council rates to be paid, and the costs of buying and taking out a loan with a lender.
There are certain deciding factors and assumptions already pre-set by the calculator, which will help to determine your results; such as your annual rent increasing by 2.5%, your return on invested funds at 5.3%, the yearly appreciation on the home tracking at 1.8% growth, and your annual home maintenance costs sitting at $3,000. The analysis has also been clocked to reveal your results after 7 years.
Of course, you are able to alter these assumptions so that they best mirror your circumstances or plans, especially if you are in a position to know the precise figures of each.
It should be noted, however, that the calculator only provides estimated results, and further independent research should be conducted with a qualified and experienced mortgage broker or financial adviser.
Results also don’t take into account the standard variable interest rate changing over the life of the home loan.
One of the main reasons people opt into purchasing a home is for how it allows them to build in equity. In this way, a home can become a buyer’s greatest financial asset. But how does building in equity through home ownership work?
When a home buyer takes out a home loan with a lender, they will be required to provide a cash deposit - which, with the introduction of Lenders Mortgage Insurance, used to be at least 20% of a property’s value but is now just 5%.
In this scenario, to begin with, you won’t have much in equity, especially if your deposit was only 5% or 10% of the property’s value. In fact, your raw equity will only be the total value of your home on the market, minus the amount of money you still owe to the bank.
But as you can imagine, over the years, as you place more money down on the home loan through compulsory repayments, your equity will gradually grow. And imagine the result if your property’s value increases on the market? Or doubles?
On the opposite side to home equity is your ability to save whilst you rent, otherwise known as increasing your savings balance.
You may not be able to afford to buy in a specific location, but you could afford to rent there, and save money at the same time. So, any extra cash whilst renting can be voluntarily put aside, or into an investment that could breed a high return rate.
If your financial circumstances change and you need to access more disposable income, or put more towards savings, renting provides the flexibility to move into more affordable accommodation.
However, it should also be noted that whilst mortgage repayments can stop at the end of your home loan’s period, usually between 25-30 years later, renting will follow you throughout your entire lifetime.
When purchasing a home, it’s important to understand and factor-in the additional costs that apply. This includes the cash deposit, stamp duty, mortgage application and maintenance fees, conveyancing fees, and estate agent fees.
In fact, it can cost a buyer approximately an additional 6% of the properties purchase price to tend to the associated costs.
On the other hand, renting avails you of these, as the landlord becomes responsible for handling the fees that come with buying and managing an investment property.
See more of the true costs of buying a home
Ultimately, buying will provide you with more security than if you were to rent a property. There is no-one to tell you to vacate the premises, or drop-in every few months for an inspection. The further benefits of buying include;
Buying a home? Use our comparison table below to see some of the lowest home loan rates in Australia:
|4.5 STAR CUSTOMER RATINGSINCLUDES NOV RBA RATE INCREASE|| |
Variable Home Loan (LVR < 90%)
Variable Home Loan (LVR < 90%)
Neat Variable Home Loan (Principal and Interest) (LVR < 60%)
Up Home Variable (Principal & Interest) (LVR ≤ 90)
Up Home Variable (Principal & Interest) (LVR ≤ 90)
Real estate property is termed as an appreciated asset, so buying into it can see you profit from a return once you sell it on. In other words, it has the ability to increase in value over time, in comparison to, let’s say, a car.
This ultimately depends on how the market will pan out over time, and it doesn’t always mean a home’s value will always ride an upwards trajectory.
It’s not only the physical characteristics of a home that can influence it’s increase in value, but most predominately, where it is located and the behavior of market trends and demands in that area.
The results and comparisons provided by the calculator are to be taken as a reference or guide only. Results only rely on the information provided and the assumptions that have been pre-set; results don’t factor in that interest rates can alter or fluctuate throughout the entire life of the home loan, that your financial circumstances can change, and that the suburb’s market can also experience changes.
It should also be noted that results do not indicate the future financial circumstances of a buyer or renter, nor do they act as a determiner. A formal assessment should be independently sourced, advisably to be done with a financial adviser or mortgage broker who can provide a more accurate result.
Rent prices move up and down with market forces and supply and demand. However, landlords cannot raise rent prices during a fixed-term agreement unless the tenancy agreement states the amount or way a rent increase will be calculated. In some states, rents can’t be increased more than once every 12 months, or at least 6 months have to pass between rental increases.
There is no definitive answer as to whether renting or buying is better. The answer depends on your personal situation - your lifestyle, finances, and personal goals. Some people prefer the flexibility renting offers and may never want to own a home because they don’t want to be ‘tied down’ to one specific location. Other people want the stability home ownership offers. You need to weigh up the benefits and costs of each option based on your income, savings, and lifestyle.
Deciding whether to rent or buy a house can be a difficult decision and there is no easy answer because it depends on what you can afford and what your personal goals are. Owning a home comes with many benefits: you’re building equity as you pay the mortgage off, you have more stability than renters, and you have the freedom to renovate. But buying a home can get very expensive: you need to fork out a significant deposit and other upfront costs, not to mention money spent maintaining the property and the fact you’ll have a huge debt hanging over your head for decades potentially.
On the other hand, renting is more flexible and means you can move more easily and live in areas that would otherwise be too expensive to buy in, you don’t have to worry about property maintenance (beyond keeping the place clean) and you don’t have a big debt hanging over your head. But you’re at the mercy of landlords who can raise the rent, may not be responsive in dealing with maintenance requests, and can evict you if they want to sell the property.
Another option is rentvesting, which is where buyers purchase an investment property while continuing to live in their preferred area in a rental property.
The 5% rule compares the monthly cost of owning a home vs renting which estimates the three costs homeowners face that renters don’t. Property tax is assumed to be 1% of the value of the property, maintenance costs are also assumed to be 1%, and the cost of capital (mortgage and the deposit) is assumed to be 3% of the value of the home.
You multiply the value of your home by 5% and then divide by 12. The result is the breakeven point, where renting is financially equivalent to buying. If you can rent a home for less than the breakeven point, you’re better off renting. If it would cost you more than the breakeven point to rent a comparable home, you would be better off buying.