Rent or buy: which puts you on top?

If you’re thinking of taking the plunge into the property market, have you considered whether it’s better to rent or buy? New research has renewed the age-old debate.

A study by research house Canstar has revealed that in the past decade the average mortgage repayment has increased by 105 percent and inflation by 31 percent, while wages have grown just 54 percent.

The mortgage, therefore, is taking a bigger chunk of our income now, despite lower interest rates. But is it cheaper to rent than buy?

Steve Mickenbecker, head of research at Canstar, said generally speaking, rent is cheaper and buying costs you more in current terms.

“People talk about affordability in quite short-term measures. But when you look at affordability over 10 years you really see the impact,” he told Seven’s Sunrise.

“Renting is almost always cheaper (in the short term). However you don’t get the pleasures of home ownership, the stability of home ownership and probably most importantly you don’t participate in capital gain.”

Author and principal adviser with Castellan Financial Consulting, Bruce Brammall, says let’s assume two identical houses. One is up for rent, the other for sale. The rent is $1670 a month, the mortgage (assuming 7 percent, 25-year loan) is $3280 a month, or nearly double.

“The mortgage will bounce around with interest rates. Rent will rise with the value of the property (assumed 5 percent). Now let’s compare the “dead” money,” he told News Ltd.

After 25 years, the total rent bill is $954,000, which the buyer has paid about $458,000 in interest, he said. After maintenance, let’s say the buyer is ahead $400,000. But she also owns an asset worth $1.7 million.

“After 26 years, the renter will be paying $67,000 a year. The buyer will be paying nothing. Well, some rates and maintenance,” he said.

The pros and cons

Owning a home is like an enforced savings plan that provides long-term financial gain, says Canstar finance editor and commentator Justine Davies.

“Ownership enables you to make your house your castle and can give you a great sense of permanency and community – provided you can afford to buy in the area where you actually want to live,” she said.

“However, renting gives you greater flexibility about location, puts more money in your pocket in the early years (which you can use for other forms of wealth-generating investment) and enables you to upsize your residence when you need to. And ongoing maintenance is someone else’s problem.”

But, she says, the negatives include an often competitive rental market and rising costs over the years, unlike mortgage repayments which will fall in real terms.

“Another option, of course, is to buy a well-located investment property and rent a place to live in. That gives you all the flexibility of renting, plus the warm fuzziness of home ownership. It also makes a lot of your mortgage/holding costs tax-deductible. Bonus!”

To calculate mortgage repayments and determine what you can afford, try a free home loan calculator such as the one at RateCity.

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