Should you rent or buy? Improving your financial future
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.
How to use this calculator
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.
Home equity vs savings balance
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.
Understanding maintenance costs
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
The benefits of buying over renting
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;
- Your net worth can be substantially higher, than if you were to rent.
- Compulsory mortgage repayments keep you on-track to building in equity, compared to voluntary deposits being made into a savings account.
- You will ideally cease mortgage repayments within 25-30 years, which is the time many expect to finish paying off their home loan; whereas renting continues.
- You have more say in terms of what is done to the property; whether that be it undergoing renovations or being turned into a rental that can provide another source of income.
Understanding appreciated value
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.