Rent vs. Own a Home: When to buy a home

It’s a common question asked by those considering the purchase of their first home – when is the right time for me to buy a home? Should I continue to rent and build up my savings for a large deposit, or should I get on the property ladder as soon as possible? What are the benefits of renting over buying and vice versa?

Here we take you through the considerations and give you some more information to help you make that decision.

Benefits of owning a home & having a home mortgage

• When you buy a home your monthly payments are going towards ownership of a major asset – a home. Whereas when renting you are effectively working hard to pay someone else’s mortgage.
• Owning a home also comes with the chance that your home could increase in value over time, depending on the market. If you can sell your home for more than you paid for it, you may earn money  by buying and selling a home.
• Purchasing a home earlier in your life means that you will own your home outright sooner. This can take some of the weight off your shoulders in terms of retirement planning.
• Having a home mortgage can help improve your credit score as long as you have a good credit rating, and continue making timely payments.
• By purchasing a home, you are free to personalise your home any way that you like, and these improvements will increase the value of your home if you do decide to sell it one day.
• Buying your home, especially if you intend to live there for several years, allows you stability, and the opportunity to plan for the future – you decide how long you want to stay, and when you want to leave.

Drawbacks of owning a home & having a home mortgage

However, the responsibilities of owning a home can have some drawbacks.

• Rather than calling on your landlord when something goes wrong in your home, you are now responsible for all costs and fees, including maintenance, upkeep, utility bills, local government rates, insurances, etc.
• While the cost of a rental is set in your contract, the cost of a home can vary. The value of the property can change based on the market and how well you maintain the property, while interest rates can also climb and add thousands to your mortgage interest. Owning a home means that all financial risk falls on you.
• If you decide that you no longer want to live in your home, moving takes more than simply not signing your lease for another term. You have to go through the process of finding a buyer, changing your mortgage, paying fees and filling out the appropriate paperwork.

Benefits of renting a house

On the other hand, renting also has its benefits, especially if you haven’t yet saved for a house or you haven’t decided where you want to live.

• When you rent a home, maintenance and upkeep that are part of natural wear and tear are generally taken care of by the homeowner, and your only cost is rent (and probably utilities). When the air conditioning breaks in the heat of January in Perth, the cost of replacing it will not fall on you!
• The cost of taxes, Local Government and water rates, insurances and other fees also fall on the homeowner, and as a renter, your only costs are rent and utilities. Rental costs are fixed for the lease term, while a mortgage payment may change, depending on the type of mortgage you have.
• Those who are looking to avoid debt or financial responsibility can also benefit from renting – it does not require a mortgage, which means you won’t owe interest or the cost of the home to a lender. Your outgoings are fixed for the term of your lease, so no need to worry about property prices or interest rates.
• If you haven’t decided where you want to live long-term, renting allows you flexibility without the burden of finding a buyer and dealing with paperwork and fees in selling a home and changing mortgages.

Drawbacks of renting

• While a mortgage payment is working towards home ownership, rental payments are considered ‘dead money’, as they are essentially paying off the landlord’s debt. It does not earn the renter anything, but the homeowner earns equity in the home as he or she pays off a mortgage.
• Renting a home also means that the renter can only personalise the home within the terms of the lease, and does not have the freedom to make improvements without the permission of the homeowner.
• Similarly, the homeowner can decide to sell the property at any time, so the renter may only live in the rental while the homeowner allows it.

Getting on the ladder early vs. saving a deposit

Every person’s situation is different, and there is no one correct solution to this dilemma.

However, take this scenario as an example: if you have the option to pay $450 in rent per week or $600 per week on a mortgage, assuming you can afford either payment, you could save $150 per week ($7,800 per year) by renting while saving for a deposit.

Based on the average home price in the suburbs of Perth ($540,000), in order to have a 20 percent deposit and avoid paying lender’s mortgage insurance, you would need a deposit of $108,000, plus stamp duty (which could be up to an additional $24,000). At this rate, with no other savings, it would take you nearly 17 years to save enough for your home! However, on the other hand you need to consider that getting on the property ladder with a deposit of less than 20 percent means you will have to take out lender’s mortgage insurance, adding to the cost of your loan in the long-run.

As you can see it is difficult to give a definitive answer to this question without knowledge of the variables in your individual situation. Your savings, income, rent costs, desired home and many other reasons will determine whether you should purchase a home sooner.

It is always best to come speak to a professional about your situation, and that’s where we can help – with free advice!

How can G7 Finance help?

The mortgage lending professionals at G7 Finance are here to help you evaluate your current situation, and find the best home situation for you. Contact us today to schedule an appointment with one of our professionals for free and no-obligation advice.