Is it better to rent or buy a house?

There’s a lot to love about owning your first home. There’s no property manager coming to eyeball red wine stains. You can get an exotic fish without asking permission. No one is about to sell it out from under you, come barging in unannounced to ‘fix the dishwasher’ or raise your rent with little warning. Plus, you could paint your hallway in a VB shade of green – just because you can.

But speaking of green, what about the finances? How does home ownership stack up against renting when it comes to money in your pocket?

Home owners are paying themselves, not a landlord.

First up, you’re going to pay for somewhere to live. That’s a given, whether you’re renting or owning or investing in a caravan #vanlife. When you rent, every dollar you pay goes into someone else’s pocket. It carries the lowest upfront cost but offers little financial security in the long term.

You could think of home ownership as ‘paying’ yourself. The monthly payments are higher, but they’re going towards an asset you will eventually own. If you want to get really serious about it, put on a suit and conduct your own rental inspections with a real clipboard. You could even pay down your capital faster by increasing your ‘rent’.

Renters have unparalleled flexibility.

Ending a lease early can be expensive: you’ll probably have to pay re-listing and advertising fees, and even cover the rent until a new tenant is found. But it’s nothing compared to the cost of selling, where you’ll be hit with agents’ fees, commission, stamp duty and the cost to deck out your house in leased mid-century furniture.

Renters do have more flexibility. Got an amazing job offer interstate? Pack up and go. Met the love of your life and want to shack up? Rent a new place together. Moved in without realising the neighbours were in a Bon Jovi tribute band? You’re outta there.

Owning a home means leverage.

One of the big benefits of home ownership is ‘leverage’. By borrowing through your home loan, you can buy a far more valuable asset than you could manage with savings alone. Over time, it can really put you in front.

For instance, Jill and James have saved hard and now they each have $100,000. Jill uses her money as a deposit to buy her first home, which costs $500,000. James keeps his money in a high-interest savings account.

Over the past ten years, properties in Australian cities have risen by an average of 5.6% per annum[1]. It’s impossible to know how the market will perform in the future, but at that rate, 25 years from now Jill’s home will be worth almost $1.9 million. Not bad for an initial $100,000 investment.

By contrast, James invests his money in a savings account earning 3% interest annually. Assuming he doesn’t dip into his stash, Future James will have accumulated about $203,000 in 25 years. That’s just one-tenth of the wealth Jill has built up.

A home loan is a form of forced saving.

There are lots of ways to invest your money. You could launch that band of onesies for pets. You could stash it in medium-risk accounts that earn higher interest. Or you could buy a bunch of gold bars and hide them in your nuclear bunker.

By paying off your home loan you’re making a steady investment in your future without also stumping up for a monthly rental payment indefinitely.

There are pluses – and minuses – to both renting and home ownership. Weighing up the options is about understanding what’s right for you at a given point in time. Renting offers flexibility and freedom with lower upfront costs. But when it comes to financial and emotional security, paying off your own home is hard to beat.
 

[1] CoreLogic RP Data Hedonic Home Value Index, January 2016, 1 February 2016