Homeownership

The choice between renting and owning a home is a big one, and both sides have compelling arguments. This isn’t just a financial decision, but a lifestyle choice with implications for your freedom, security, and financial future. Let’s break down the pros and cons of each option:. Here’s a breakdown of the benefits of each:

Renting

Some people may try to tell you ‘rent money is dead money’ but that’s not necessarily true. There can be real benefits to renting rather than buying, although there are some downsides you should keep in mind as well. 

1. Flexibility

One of the key benefits of renting is the freedom it can bring. After all, because you’re not dedicating money to a mortgage each month, once your lease ends you can relocate whenever – or wherever – you like. This can be especially handy if you want to travel or if you’re in a job that requires you to move about.

2. Diversification

For most people who own, the home they’re living in is their biggest asset. This means their wealth can take a hit if the property market slides. If you’re not paying off a home loan, you’re free to invest any money you save into shares, managed funds or other assets, letting you potentially diversify your assets and decrease risk.

At the same time, if your investments rise more quickly than the property market, you also give yourself the opportunity to grow your wealth more than if you had it all tied up in your home.

3. Cost

Renting can often be cheaper than buying, especially when interest rates are high or when you don’t have a large deposit saved. If you’re on a tight budget or you want to devote money to other things, that can make a real difference.

Also, even where you do want to buy, renting for a while can give you the opportunity to save a larger home deposit so that you give yourself the chance to avoid lenders mortgage insurance (LMI) and need to borrow less.

4. Upkeep and maintenance

Plumbing leaking or backyard fence falling down? The good news is that when you rent, the upkeep and preservation of your home is generally your landlord’s problem, not yours.

That means you generally won’t face costly repair or maintenance work – unless, of course, you’ve caused the damage.

5. Privacy and security

While renting may give you the flexibility to move around and the freedom of not having to make repairs, this comes with disadvantages too. For starters, you won’t be able to make the place your own. If you don’t like the colour of the walls or the way the kitchen has been designed, you can’t do anything about it without the landlord’s express permission.

You’ll also be subjected to rental inspections, in which the landlord or real estate agent makes sure you’re keeping the property in good condition. And, if the landlord decides to sell or move into the home themselves, you may find you’ll be looking for somewhere else to live. 

6. Rental increases

With a rental property, your landlord can usually change the rent once the lease term ends. If you’re buying a home, the interest rate on your mortgage will be set by your bank and usually tied to official interest rates. You even have the option of taking out a fixed-rate home loan, where you know exactly what your repayments will be for up to five years. In other words, buying could mean fewer nasty surprises.

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Buying

Despite the advantages of renting instead of buying, there can also be real benefits to biting the bullet and taking out a mortgage. 

1. Saving

When you make a loan repayment, you’re also effectively saving money – at least if you take out a principal and interest loan. That’s because you’re paying off the cost of the home itself. At the end of your loan term, you’ll own the property outright, meaning that you have a valuable asset to your name.

2. Cheaper in the long run

While paying off a mortgage can often be more expensive at the start, in the long run, that often changes. That’s partly because rent tends to go up over time, while mortgage repayments are tied to an interest rate and – so long as you have a variable rate loan – can sometimes even go down. Also, once you pay off your home loan, you won’t have to pay anything at all, while a renter will still be paying rent.

3. Security

Owning your own home can provide you with enormous security. So long as you can make your mortgage repayments, you won’t usually be asked to move on – something that’s never guaranteed when you rent. You can also make any improvements to your home that you can afford – from hanging pictures wherever you feel to a full-scale renovation.

4. Building long-term wealth

As you start paying off your home loan you’ll begin building equity in your property. By refinancing, you could use this to buy other assets, such as an investment property or shares. That way, you can really grow your long-term wealth and potentially set yourself up for life.

5. Interest payments

One downside of buying is that, if you have a variable rate home loan, the interest rate could go up, meaning your repayments will rise also. After all, interest rates are currently at record lows but it’s unlikely they’ll stay here forever. When that happens, you could find that you’re paying more than you originally thought.

For that reason, it always pays to factor a buffer into your budgeting, just in case rates rise.

5. Upfront costs

When you buy a house, you have to save a deposit that you can put towards the home. But that’s not the only upfront cost. You may also have to pay stamp duty (although many state governments have generous stamp duty exemptions and concessions for first home buyers), as well as legal fees and other costs. These usually have to come out of your own pocket – you can’t borrow to pay for them.

On top of this, if your deposit is less than 20% and you don’t have a guarantor on your loan, you’ll have to pay lenders mortgage insurance (LMI). This won’t be charged upfront but will add to the cost of your home loan repayments.

6. Opportunity costs

As the name implies, an opportunity cost is the price you pay for lost opportunities. When you have to dedicate money to paying off a mortgage, that’s money you can’t use on other things, such as investing in shares, traveling, studying or starting a business.

That said, taking advantage of these opportunities requires discipline and dedication. If you buy a home and pay off a mortgage, you’re getting ahead financially – almost on autopilot. By using an offset account or redraw facility, you could get ahead even quicker.

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