Should you buy or rent your home?

Ask a group of Australians whether it’s better to rent or buy a home and you will get a different opinion from each one of them. Phrases like “safe as houses” and “rent money is dead money” may be thrown around, while others balk at the prospect of decades of housing debt.

Many people agonise over whether to rent or buy, but ultimately it’s your personal and financial circumstances that will help you choose one over the other. There are still a few things you should consider from a financial point of view before you decide.

Affordability

When you compare average rents and average mortgage repayments, you may be surprised by the difference between the two.

For example, CoreLogic’s Quarterly Rental Review for Q4 2022 found that on a national basis, the median weekly rent in Australia was $555 – around $2220 per month.

To compare this to the average mortgage repayment, consider that according to the Australian Bureau of Statistics (ABS) the national average loan size for an owner-occupier dwelling in November 2022 was $601,797. According to the Reserve Bank of Australia (RBA) the average home loan interest rate for an existing owner occupier in November 2022 was 4.39 per cent. Assuming a remaining term length of 25 years, this would mean monthly repayments of around $3308, or you could pay $827 per week according to a mortgage calculator.

Based on these hypothetical examples you may be paying $272 more per week to buy a property rather than rent.

These calculations are only accurate for the figures given, don’t account for fees or changes to rent or interest over time, and are presented for illustrative purposes only.

Wealth-building

Making principal-and-interest repayments on a mortgage means you’re taking small steps towards paying off a debt. Each repayment is one step closer to owning your own home, and you may be able to use the equity you build in the property to access other finance options in the future.

For instance, based on the previous average figures for a $601,797 loan, over five years you would make $215,020 in mortgage repayments compared to paying $144,300 in rent. That’s a savings of $70,720 by renting over buying. 

However, in five years of principal and interest mortgage repayments, you will have brought your mortgage principal down to $509,144. That means you will have put $92,653 in equity onto your home – a difference of $21,933 from the potential rental savings.

When you add the equity from your initial deposit on the property (anywhere from 5 per cent to 20 per cent of its value) plus any growth in your property’s value over this time, you could find yourself with more equity available in the property than you realise.  

These calculations are only accurate for the figures given, don’t account for fees or changes to rent or interest over time, and are presented for illustrative purposes only.

Is interest also “dead money”?

When you rent, you are paying off someone else’s mortgage and the only person who has something to show for it is your landlord. This is where the “dead money” maxim comes from.

However, a significant chunk of your mortgage repayments (especially at the start of your home loan) will be made up of interest charges, which goes straight to your bank or lender and doesn’t help to build your own wealth.

To return to the previous example, in the first five years of paying a $601,797 loan, out of the $215,020 in mortgage repayments, $122,337 of this would be made up of interest charges. Compared to the average rent paid over this time of $144,300, that’s a $21,963 difference in how much “dead money” you’d be paying. 

These calculations are only accurate for the figures given, don’t account for fees or changes to rent or interest over time, and are presented for illustrative purposes only.

Saving the deposit

Looking at your household budget, you may calculate that you could comfortably afford the repayments on a mortgage. But you’ll still need to save up a deposit of 20 per cent of the property value, which could be a significant sum, especially in Australia’s capital cities. You may be able to borrow with a smaller deposit of 10 or 5 per cent, but LMI charges could eat up more of your upfront cash.

Also, many lenders will want at least part of your deposit to be made up of “genuine savings” – in other words, money earned from your job. This could make it trickier to qualify for a home loan if your deposit will be coming from other sources, such as a gift or an inheritance.

Eligibility criteria

Fulfilling the requirements for a rental application can be challenging, but so can satisfying the eligibility criteria for a home loan.

To be a lender’s “ideal borrower”, you may not only need to pay a deposit, but also be able to prove you have a stable income and manageable household expenses. This can make applying for a home loan more challenging for Australians who work as contractors or freelancers whose incomes the banks may not consider “stable”, as well as those who have just started a new job.  

Less-than-ideal borrowers may be able to help improve their chances of approval by applying for a home loan with the help of a guarantor, though these options may not be available to everybody, and a potential guarantor will also need to fulfil the lender’s eligibility criteria.

Investment returns

While owning a property lets you grow your wealth by putting equity into a home that may increase in value over time, renting could leave you with more money available in your household budget. You may be able to invest this money into other assets of your choosing, such as shares or cryptocurrency.

Depending on how your investments perform, you could potentially enjoy improved returns from these alternative investments compared to the equity you’d build in a property. Of course, your financial risks could also be higher, and you could end up in a worse spot than you started if you’re unlucky or careless.

Property values don’t always rise

While property markets around Australia have traditionally risen over time, this is not always true for every property in every location, from economic upheavals to access to infrastructure to natural disasters. 

If your property’s value doesn’t rise as much as expected, or if it declines significantly over time, you may find that you don’t have enough equity in your property to easily refinance or sell your home, which could be an issue if you find yourself in a tight financial spot. It’s also possible you could find yourself in a negative equity situation, where the property is worth less than the mortgage you’re paying on it.

Flexibility

Owning a home and renting a home can offer Australians different types of flexibility.

Owning a home means you can do what you want with a property (keeping council and/or strata regulations in mind, of course). If you want to hammer a nail into a wall, put on a new coat of paint, or tear up the garden and re-plant, you can do so. Renters may need to ask the landlord to make any changes to their living space, which may not be approved or attended to in a timely fashion, depending on the landlord.

On the other hand, renting can offer Australians more flexibility in their living arrangements. You may not be able to afford to buy the type of property you want in the area where you’d most like to live, but you may be able to rent there. And if you need a place with more space or different features and benefits, you have the option to pull up stakes and move to a different rental property, which is a relatively simple matter compared to a homeowner selling their property or converting it to an investment property.

Responsibility

When you’re renting, there’s a lot that the landlord is expected to look after on your behalf, such as home insurance, building maintenance, council rates and/or strata fees. And if there are problems around the home, many of these can be resolved with a call to the real estate agent and/or the landlord (though some are better at responding to problems than others).

As a homeowner, you’ll be responsible for looking after the property and its expenses yourself. Even if you can afford your mortgage repayments, adding up the costs of rates, insurance, bills and more can make your home pricier than you realise. And if something breaks, it’s on you to organise a repair or replacement yourself.

Stability

When you’re renting, even if you’re a good tenant that pays on time, there’s always the chance that the landlord could decide to raise your rent, sell the property, or move into the property for themselves. This could require you to quickly organise new living arrangements, which can be expensive and stressful.

Owning your home means you can more easily stay at one address for a longer period of time, with a much lower risk of being forced to move. While variable rates may rise or fall over time, you may have the option to fix your interest rates for a limited time to keep your budgeting consistent.

Should you rent or buy?

At the end of the day there are positives and negatives when it comes to renting versus buying property. The best choice for you will depend on your financial situation and personal goals. 

If you think buying a home is the right choice for you, you can compare home loans online to find a mortgage deal that may suit your needs. Contacting a mortgage broker could also help you get extra support in finding and applying for a home loan

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