Is it better to rent or buy?
What is not owning your own home actually costing you?
Should you build your wealth through your own home or should you rent and buy investment properties?
These are the questions I’ve been trying to wrap my head around for the last month, so I thought I’d share my thoughts and findings after some basic research.
There can be a financial benefit in owning your own home vs. renting.
Owning your own home comes with a number of financial advantages:
- Capital gains
- Tax free income
- Tax savings
This calculator enabled me to run a number of scenarios, based on the numbers in the table below
|Monthly rent paid for accommodation||$1800|
|Property purchase price||$430,000|
|Mortgage interest rate (current variable rate)||5.3%|
|Loan period||30 years|
|Cost of buying and borrowing||$13,000|
|Quarterly council rates payment||$450|
|Conduct analysis at year (multiple years)||3, 5, 7, 10|
|Annual rent increases||2.5%|
|Return on invested funds (money invested in the bank)||5%|
|Yearly appreciation of home (conservative)||6%|
|Annual home maintenance||$2000|
What were the results?
As you can see below there can be financial benefit in owning your own home vs. renting. Based on the numbers above you would be $50,000+ better off in 3 years if you bought your own home, rather than continuing to rent, save your money and invest in at a modest 5% return.
|Years from today||Financial benefit in owning your own property vs. renting|
Have a play around with the rent vs. buy calculator, which will enable you to model your own situation.
What about lifestyle?
I hear you generation Y! We want lifestyle and we want it now!
A work college of mine told me today that she had just been approved $30,000 for a new car today.
I stupidly made the mistake of questioning why she would buy a new car when she didn’t own any property? Followed by the following questions.
1. How much deposit would she need to buy the house she had just found for $320,000?
- 5% of $320,000 = $16,000
- Closing costs = $7,000, with the other closing costs being added to the loan
2. How much would it cost her per week to own the property?
- $310,000 x 0.489% (current fixed, interest only, rate with NAB for 2 years) = $15,159 or $291 a week (+ the normal costs of owning a property – council rates, water, electricity, insurance, maintenance, etc)
3. How much better off would she be in 5 years, using the Rent vs. buy calculator?
- $34,000+ better off
- $164,000+ in equity in her home which would allow her to buy the car and another property in 5 years time without saving a cent
Im sure she will end up buying the car, but it was interesting to have a play around with the numbers and imagine where todays decision leave us in 5 years time.
The information provided in this blog is of a general nature only and in no way constitutes legal or professional advice, or specific advice in relation to any finance. In all cases we recommend you receive professional financial advice for your own personal circumstances.