Should you rent or buy? It’s a tough choice but we’re here to help. Here are the pros and cons of buying or renting to judge if buying a home is right for you.
Many of us have felt the pressure to buy a house. It’s a badge of adulthood that we can wear to show the world that we’re finally an adult. It’s the kind of security that means your mum no longer worries about you as much.
Think before you sign the mortgage
Buying a house is a huge commitment and it needs to be the right choice for you at the right time. The pressure of expectations, real or perceived can often push us into a decision, including proving that we’ve achieved a mark of adulthood. The rush to buy a house might also be to avoid paying “dead money” on rent. The “dead money” stereotype about renting ignores the benefits that being a renter can bring, including the freedom to choose where you live and how you spend your time and money.
Is buying a home right for you?
To answer that question, we’ll go through the pros and cons of buying or renting to judge if buying a home is right for you. You might surprise yourself that you’re far better off being a renter. If you’re set on a decision, we would love you to then see a financial advisor to work through your individual circumstances.
Want to buy a home?
PROs of buying a home
1. Stability and security
- Owning your own home means that you have the security of a roof over your head.
- You don’t have to worry about a landlord because you are your landlord.
- If you’re in living in your home, you have the stability of knowing that you’re in your home for the long haul. There’s no threat of your lease being ended.
2. It’s your space
- If you want to paint your bedroom walls today, go right ahead.
- You own the space and don’t have to get a landlord’s approval before doing anything. You can put up pictures, own whatever animal you want. It’s your home and your choice.
- The changes you make to your home, including home improvements or renovations, add value to your home. As you own your home, that added value goes in your pocket, not the landlord’s pocket.
3. It’s an enforced saving habit
- If you buy a house, most of us will have a mortgage attached to that purchase.
- Paying a mortgage means you have to save money in order to make those mortgage payments. You have to save that money rather than just spending it on shoes.
- This enforced saving will help you create a great savings habit over time.
4. You still have options
- You have options about how you pay down your mortgage.
- This includes getting a flatmate who can pay rent to you, which goes towards your mortgage. The extra cash can help you pay down your mortgage quicker.
- If you want to travel, you can also rent out your home while you live elsewhere. Bear in mind that this is likely to attract costs if you use a rental agency to manage inspections.
5. It’s an investment
- Buying a home is an investment similar to buying shares on the stock market.
- However, some people prefer property as an investment because it’s an asset they can see and it’s tangible.
- It also enables you to build equity as you pay down your mortgage, increasing your financial options.
CONS of buying a home
1. You need a deposit
- In most cases, you’ll need to save up a large deposit to be able to secure a mortgage.
- This deposit sum covers both the down payment to get the house and any fees that come with buying a house. These fees include local and state taxes like stamp duty.
- How quickly you save this deposit can depend on whether you can save, how much you earn and whether you won the parent lottery and have parents who will loan or give you the money.
2. You’re locked in
- Buying a home is a major financial commitment and locks you into paying a mortgage.
- A mortgage is effectively a debt so it’s not something you will need to focus on paying back and this locks up your money for a number of years.
3. Interest rates
- Having a mortgage means that you will need to pay interest rates on your loan.
- The fees and interest rates will likely vary over the term of a loan, particularly if you have a variable interest rate.
- Be prepared to be more of an economics nerd and look at the decisions of the national bank in your country who make interest rate decisions. This includes cutting the interest rate, a saving that your bank may choose to pay onto you (or not!).
4. A house purchase does not guarantee a profit
- We’ve all seen TV shows about flipping houses to make a quick profit.
- The reality is that housing is often a long-term investment, particularly given the fees you’ll pay on your initial investment.
- It’s important to note that property values can also fall so you might need to hold onto your house during a downturn to avoid losing money.
5. It costs money to maintain your home
- Buying a home includes upfront costs including stamp duty, conveyancing costs, and other hidden local or state government fees.
- You’ve also got ongoing costs including land tax or council rates, body corporate fees if you live in an apartment, insurance, and utilities.
Would you prefer to rent?
Renting comes with convenience and flexibility in how you spend your money and your life choices. You aren’t tied to one place of financial commitment for years. Instead, you get to enjoy the freedom of not being tied to one place and the option to save as you go to buy a house when you’re ready. Let’s see if renting might be for you.
PROs of renting a home
1. More life choices
- Renting a home frees up your money to make a great variety of life choices.
- You could choose to spend your savings going traveling or investing in a degree to pursue your dream career.
- You can use your money to fund a variety of life choices, which you wouldn’t be able to do if you were beholden to a mortgage.
2. More choices with money
- The money you save up for a deposit will be locked away if you decide to buy a house. It’s not liquid.
- Instead, you might choose to invest that money elsewhere in stocks and spread it across a diversified portfolio. The benefit of this is that can lower your risk profile rather than tying up your money in the house as a single investment.
3. You have time to save money
- Renting can be cheaper than mortgage payments would be on the same property.
- This can provide an opportunity for you to save up money for a deposit, and to then purchase a home when the timing is right.
4. Hello freedom
- Renters don’t have a mortgage to tie them down.
- This means that you have greater freedom in your choices about where you want to live and how long you want to be there.
- You also have greater freedom over how you spend your time as you don’t have to work at a job you don’t like just for money to pay down your mortgage.
5. Someone else maintains the property
- As a renter, you have to respect the space you are renting by keeping the property clean and looking after it.
- However, your landlord maintains many of the property’s ongoing costs, including paying council tax and body corporate fees that you would have to pay if you owned the home.
- The landlord will also pay for aging assets such as replacing an old boiler or dishwasher so that you can continue to use the property facilities as a tenant.
CONs of renting a home
1. Lack of security
- It’s important to remember that a lease is for a fixed period of time, it isn’t permanent.
- This means that your landlord can decide not to renew the lease or end the lease in certain situations, including if they want to sell the property.
- This can mean that you need to move at short notice, which can add up over time.
2. Your landlord’s actions directly affect you
- Your landlord makes decisions that affect you such as whether they raise the rent.
- This includes whether they fix broken facilities promptly, which can directly impact your mood as a broken boiler means cold showers until it’s fixed.
- You will also need to open up the house for regular rental inspections.
3. Rent is dead money
- A common stereotype about renting, which pushes people to buy a home, is the idea that renting is dead money.
- What we mean by dead money is that the money isn’t being put towards your future. It is an expense rather than being invested in an asset like a home.
- Ultimately, rent money pays off your landlord’s mortgage and helps them build long-term wealth.
4. Lifestyle inflation
- Renting can enable you to save money compared to the cost of mortgage repayments.
- However, not having an enforced savings regime means that you can forget to save that money towards a deposit.
- Lifestyle inflation is often the result, which means that you’re spending your spare cash on new expenses rather than saving it.
5. Renting could end up being more expensive
- Rents often rise along with property prices and inflation. They are fixed costs which you will have to continually pay to a landlord.
- Buying your home means that after you’ve paid off the mortgage, the house is yours and you only need to then pay ongoing running costs.
- By buying a house, you’ve eliminated the burden of paying the rent each month.
Ultimately, whether you decide to buy a home (or rent) depends on how healthy your finances are and what your priorities are.
By providing the pros and cons of buying a house or renting, we want you to think about the different impacts of your decision. As a next step, it’s a great idea to go and see a financial advisor or planner to provide individualised advice for your specific situation. In fact, we’d love it if you did.