If you’re looking to take on a new home, you’ll be weighing up the options carefully and deciding what’s best for you. Should you be buying your home in order to secure your future, or could you actually make yourself better off through renting?
Traditionally, home ownership was the best way for an individual to grow their personal wealth. With house prices rising and equity in your home increasing, you could create a strong investment for your own future, or for your family. However, a shift in the market over recent years has actually caused the tables to turn. If property investments continue to shirk the average and instead climb at a slowed rate, it will take much longer to make your investment back and for your home to start working for you. For some, renting may actually be the smarter long-term option.
Buying a home is an emotional decision
To some extent, personal feelings will override the financial decisions when it comes to selecting property. After all, owning your own home means that you have the freedom to do with it as you please – it belongs to you, and you can alter it or use it any way you please. Once the property is paid off, it becomes yours completely, and you can pass it down to your family or sell it on when you’re ready. You can also make money from your property through renting it out, or through taking in a lodger while living there yourself. On the other hand, renting is often tightly controlled by your contract and you’re restricted in what you can do with you home. You pay for it every month, but there’s nothing to show at the end of it – in effect, you’re paying off a stranger’s property for them when you could be paying for your own. If you’re choosing a home for you and your family, buying may win out regardless of the financial implications.
More people choosing to rent
It seems that more people, particularly the younger generation, are choosing not to buy properties and to rent their homes instead. According to the Reserve Bank of Australia, the number of mortgage applications that concerned first time purchases fell by 1% between June and July 2014, and 2015 has seen the decline slowly but steadily continue. Renting may traditionally have been seen as dead money, but these days people are seeming less willing to be tied down to a property.
Renting gives you the freedom to move whenever you choose, without relying on finding a buyer and getting the right price. You have a much better chance of getting a place in the area that’s desirable to you – as long as you don’t mind paying a little extra, that is. You’re also free to relax and know that there won’t be any unexpected surprises: if the heater breaks down, the roof starts to leak or a window gets broken, it’s not you who’ll have to foot the bill. This is one of the real savings that renters can make. By removing home maintenance costs, that saving can be invested elsewhere and allow the building of an investment foundation for the future.
There are some downsides to renting that can put people off. While the freedom to move can be desirable for some, for others a more permanent living arrangement is preferred. Your landlord could choose to sell for their own reasons at any time, so once a fair notice period is up – you’ll need to move on, even if you’re settled. Buying your home means that even if financially you’re worse off, you can remain in your home for as long as you choose. This, of course, depends on you meeting the mortgage repayments: if you don’t, you could also risk losing your home.
Property investments aim to secure your future
If you’ve chosen to invest in property, you should be aware that you’re getting into it for the long haul. Unless you’re buying outright you’ll be setting the cost against the mortgage you’ve secured, which will depend on the price of your home, your deposit and your own personal circumstances. The value of your property should rise over time if current rates continue, and you’ll start to see a return on your investment in the coming decades.
At the current national average rate of 2.4% inflation you can expect to see the difference in savings after eight years of ownership, according to figures released by the Reserve Bank of Australia. Michael Yardney, director of Metropole Property Investment Strategists suggests that in this time, the amount invested in a property could reasonably be doubled.
However, the real rate has fallen in recent years to around 1.7%, and could potentially change the value of property investments. At the current rate, it will take around 30 years to see the investment pay off. So could renting be the solution? You might find a different kind of investing is the way forward for you, and that you make savings through renting, which can accumulate interest for your future. If you still feel purchasing is the better option, there are ways to ensure that your investment is more secure and that you’ve got a good chance of increasing the property’s value.
Adding value to your property
If you’ve chosen to buy instead of rent and if your purchase was an investment for you, you’ll want to make sure that you’ve got the best chance of a high return percentage. It’s up to you how you change and adapt the home you have bought, and by making improvements you’ll be adding to the value. If you really want to make the most of your investment, consider adding some desirable features such as a pool, renovations, an extension or a basement conversion. By renovating wisely, you can multiply an initial investment many times over and remove mortgage concerns, freeing up your equity sooner and leaving you in a great financial position.
Conversely, you should be careful not to decrease your property’s value through poor maintenance or alterations that don’t sell well. A unique home may suit you and your family, but on the market a buyer might be hard to find – lowering the value. When you’ve got a mortgage to pay and bills coming in, it can be tempting to scrimp on maintenance costs for non-urgent and minor problems. If these problems worsen over time through neglect, they could be much more costly to you when you’re trying to sell. Defects will always lower the price of a house, and repairs for larger issues can eat into the profit you’ll be making. Protect your investment with timely repairs.
The hidden cost of property buying
If you’re buying a property for the first time, you might not be aware of all the costs that you’re going to face. From solicitors’ fees to stamp duty, extra considerations need to be made along the way. You may also find that the property needs work before you can move in or start to rent it out, and this could cost you as well. Not only that, but you’re responsible for that building and everything it needs – home maintenance can be expensive and time-consuming. Renters have the support of their landlord when something goes wrong, and don’t have to pay anything towards the upkeep of the building. This can make a big difference when it comes to savings – often a home owner will need to dip into funds allocated elsewhere in order to deal with unexpected costs.
Many financial models that discuss the benefits of property only consider the savings made against rent through taking out a mortgage and making the purchase. Those hidden costs are hard to account for and there is no official consensus on an average figure, so this may not be included in the investment projections you have considered. For this reason, you could find your property costing you more than you first imagined, and when coupled with the possibility of a lowered rate of inflation you might not get the return you hoped for.
Making your financial investments elsewhere
Renting in itself isn’t going to make you any money – the rent you pay is often referred to as ‘dead money’ because it does nothing for you in the long term. You can be paying out thousands of dollars in rent each month, and while your landlord’s mortgage gets paid off, you leave with nothing to show for it. That said, an investment doesn’t need to be in property and there are plenty of ways to make good money for the future outside of home equity; the stock market, for example. Seeing as though you’re not saving for a deposit or paying out in home maintenance costs, you’re going to have more income to allocate for savings. Invest those savings wisely and you could see a fantastic return, while enjoying all those benefits renting can bring.
You may even feel that you’re saving enough in rent to make a property purchase viable in the future anyway. Alternatively, you could buy to rent out your home, and remain renting yourself. If you get the figures right, you can cover your mortgage and some of your rent, giving you more opportunity for savings. Calculate your take-home pay and put together a budget to properly understand your financial position.
Discussing the potential of renting over buying
There is currently some debate over which is the better option, because national trends have changed in recent years. The RBA’s research suggests people need to own their property for over three times as long before the investment is worthwhile, but this is speculation based on the current lowered rate of inflation. This rate is slowly rising as the effects of the global economic crisis lessen and as personal incomes improve, so it is possible that we could return to the 2.4% rate or higher. This figure, which has been steady for six decades until recently, gives far more potential to property investments. This may make property buying seem like a bit of a risk, but you can look into the figures with a personal financial advisor and you can discover whether it is the right choice for you.
Location matters when making your decision
The choice over renting or buying could be settled for you if you’re tied to a particular area. If you plan to live in a particular area for family reasons or for work, then whether you buy or rent may simply depend on what you can afford. Cities in particular have high rents and house prices. One possibility is to buy where you can afford, bring in tenants to cover your costs and then rent where you’d like to live. This can sometimes give you the best of both worlds – although you will still be responsible for maintenance costs at your owned property, so you may not save as much as a non-owning renter can.
The Australian Property Monitors recently carried out a survey which found that the state you live in determines to some extent whether financially you should rent or buy, and that there are some geographical trends to be spotted in the results. Typically, anyone buying on the East Coast and in Central Australia will get greater value from their investment, while renters could regret their choice (as well as seeing higher rents that reduce their savings potential). Meanwhile the West Coast, Northern and Southern states all show that renting might actually be the better option – assuming that investments are made elsewhere in order to grow your savings.
When a mortgage is the right choice for you
Taking out a mortgage for the first time can be a scary and confusing experience, and even seasoned property buyers may find all the different deals and options overwhelming. There are more financial services and buying routes open to you than ever before, and if you get the right deal you’re well on the way to success. Many estimates on buying versus renting costs assume the involvement of a 25 year variable rate mortgage, but you may have taken a less typical route to owning your property.
Although the hidden costs can be hard to estimate and there are a lot of extra fees and charges to take in, the right property at the right price is a great way to secure your future. There are also lots of benefits open to you as a home owner, such as tax deductions on equity and interest for qualifying individuals. If you can offset some of your costs, the value of your investment increases and you’re left with spare cash to improve your property further. As you start to get the debt against the home paid off, you’ll see your available funds rise and you’ll have more options for renovation.
Making the right decision
Whether you buy or rent may ultimately be decided by your emotional responses – if you’re looking for something you can keep in the family, buying is the only choice. If you wish to remain in or move to a particular area, your own budget could force your hand on the matter. However, if you’re looking to make a more financially wise decision there are a few more factors to consider. Where the property is situated, the average rental cost in the area and the mortgage deal you can get will all play a part in determining whether buying is a good investment for you.
Based on current predictions, rising house prices should see a property purchase having the financial advantage over renting, but a smart renter will invest their savings and could actually see a better return. The property market always has an element of risk to it, and another global event or a national crisis could vastly affect the value of homes in the future. No investment is a guaranteed success, but if you plan well you can manage your home in a way that suits your finances and prepares you for the future.
Ultimately, the decision will come down to your own circumstances. There’s no right or wrong choice, and either route has the potential to make your financial future look brighter. As long as you take into account the logistical aspects as well as the emotional ones, and seek independent financial advice that considers your own situation fully, you’ll have the knowledge you need to make an informed decision for yourself.