Rent vs buy: Is it worth buying a property?
Renting
The flexibility of renting can be beneficial for those who may need to move frequently or are not ready for the long-term financial commitment of buying a home. Here are some key reasons to consider when it comes to renting.
Advantages
- Flexibility: You’ll have the freedom of not being tied to a mortgage. As a renter, you can move locations and homes once your lease has expired.
- Avoid maintenance and repair costs: It is part of the landlord’s responsibility to manage on-going expenses such as maintenance, repair, council rates, and insurance bills that come with home ownership.
- Rental costs: For some, renting can be a cheaper alternative to buying a home. Depending on several factors such income, location, lifestyle and expenses, your monthly rental payments could be less than what your mortgage repayments might be if you were to purchase a property.
Considerations
- Rising rent: You might have heard Australia is in a rental crisis1 with demand exceeding available supply, this has caused low vacancy rates and high rental costs. Bear in mind, rent may currently be the cheaper option, however, rent will also eventually rise in line with the increasing property values.
- Instability: Although there will be a lease agreement in place, the tenants have very little say in how long they can occupy a rental property after that expired period. Ultimately, the landlord can ask you to move once your lease expires and they can also terminate your lease early for several reasons.
- Rent money is ‘dead money’: It’s the saying we’ve all heard, but it doesn’t always ring true. Unlike a home loan, paying rent does not financially contribute to your own personal portfolio and/ or give you any return on investment. However, depending on your financial circumstances and investment goals, rent could be a stepping stone to building wealth through savings and careful planning.
Owning a home
Buying your own home can also offer long-term financial advantages, however, it is also a major financial commitment but at the same time it can be great investment towards your future. Understand the benefits and costs involved before taking the leap.
Advantages
- Security: When you own a home, you’re in control. Your loan term also means having an end date, so you may be able to go into retirement without the added worry of paying rent. Owning your own property gives you more stability, plus the freedom to make it your own, from renovations to your own choice of décor. It’s a long-term commitment, but one that offers a strong sense of permanence and freedom of choice.
- Long term capital growth:Though the rate of change is variable, property prices can rise and fall. However, owning a home could be a powerful way to build wealth1. Capital gains over time could help you grow your financial portfolio for future investments in the long-term.
- Government incentives to get your foot in the door: As a first home buyer, you may be eligible for government grants such as the First Home Owner Grant or the Home Guarantee Scheme. These grants could help you buy or build your home sooner with a lower deposit, making owning your first home more achievable.
Considerations
- Upfront costs: Apart from your deposit, which can range from 5 - 20% depending on the property, there are several other upfront fees that need to be accounted for.
- Fluctuating interest rates: It’s the hottest topic every time there’s an RBA cash rate announcement. Increasing rates can lead to higher mortgage repayments, which can impact your monthly budget and overall financial stability. When considering a home loan, it's crucial to think about how rate changes might affect your ability to make repayments in the future. Fixed-rate loans can provide some protection against rate increases, but they may also come with higher initial rates compared to variable-rate loans.
- On-going costs of home ownership: Owning a home comes with continuous expenses such as property taxes, home insurance, maintenance, and repairs. These costs can add up over time and may be higher than anticipated, impacting your overall financial planning.
In conclusion, both renting and buying have their own unique pros and cons. Renting offers flexibility and room to grow, while buying provides long-term stability and potential financial benefits. Consider your personal circumstances and financial goals to make the best decision for you.
Can I afford to buy a house?
CommBank can help you assess your finances clearly on every step of your home buying journey, from dreaming all the way up to settlement.
Step 1: Assess your financial position and think of your future
Take a close look at your current income, expenses, and any existing debts. It’s crucial to have a clear picture of your financial health to determine how much you might be able to afford to spend on a home.
Then, carefully consider what your finances might look like in the future. For example, are you planning to change jobs, travel or make any other major life changes that might significantly impact on your financial situation? And if not, do you have enough savings to keep you afloat should anything unexpected happen? These are all important things to think about before taking on a long-term financial obligation like a mortgage.
Need some help? Calculate your living expenses here.
Step 2: Calculate how much you can afford to pay
Consider your budget and how much you can comfortably afford to pay in mortgage repayments. Use our Mortgage Repayments Calculator to help get a clearer estimate based on your income and expenses.
Step 3: Leverage any eligible government grants
As a first home buyer, you may be eligible for government grants such as the First Home Owner Grant or the Home Guarantee Scheme. These grants could help you buy or build your home sooner with a lower deposit, making owning your first home more achievable.
Step 4: Check interest rates and make home loan comparisons
Interest rates can significantly impact your mortgage repayments. It's essential to compare different loan options and find the one that best suits your needs and unique situation. However, it's also important to understand the potential risks associated with interest rate changes. Here are some related issues you may want to consider.
- Comparing Loan Options
When comparing loan options, consider both fixed and variable-rate loans. Fixed-rate loans offer stability with consistent repayments, while variable-rate loans might offer lower initial rates but come with the risk of rate fluctuations. Some loans also offer a combination of both, known as split loans, which can provide a balance of stability and flexibility.
- Impact on Loan Repayments
If you choose a variable-rate loan, your repayments will change in line with interest rate movements. While you might benefit from lower rates initially, there's a risk that rates could rise, increasing your monthly repayments. It's important to factor in potential rate increases when budgeting for your home loan to ensure you can manage higher repayments if they occur.
Visit the CommBank Home Hub and access helpful tools or speak to a Home Loan Specialist to help you assess your situation clearly.
Step 5: Apply for conditional pre-approval
Before you start house-hunting, it’s a good idea to get conditional pre-approval for your home loan. This helps you get a better idea of how much you can borrow and could streamline the buying process substantially.
Discover more about how to apply for a home loan.