Homeownership has long been The Great Australian Dream. But with rising cash rates, interest rates, fluctuations in property prices and increasing housing costs, it can be easy to ask yourself what are the comparisons of a rent vs buy scenario.
We will deep dive into some of the considerations you should have before jumping onto the property ladder, the affordability of doing so and introduce some of the alternative options to consider.
Overall, owning a home isn’t always straightforward and neither is the stress of needing to move at the end of your lease or at your landlord’s discretion. So it is important to know what option is best for you.
The benefits and disadvantages of renting
Firstly diving into renting, there are several reasons why this is distinctively different to buying a home. Seen as the more affordable option and an easier entry point due to the lower cost of entry compared to buying a home.
Advantages of renting
More affordable
The cost of renting is seen to be more affordable than purchasing a home, due to the upfront investment as well as the ongoing maintenance costs involved with buying a home. When you rent a home you don’t need to pay a large upfront deposit and purchase costs.
Less upkeep
There are significantly fewer maintenance needs in a home you are renting and when something does go wrong you are always able to call on your landlord to fix the issues. Your landlord has a responsibility to ensure a property is habitable and maintain the existing fixtures and fittings.
More flexibility to move
If you decide you don’t like where you are living or you need the flexibility to move for work or life circumstances, renting provides the ability to leave when your lease is over, or you can break your lease early for a fee if essential.
Disadvantages of renting
Lack of security
Renters typically sign up for a 6-month to 18-month lease. Past this, the certainty is slim. Tenant’s rights also aren’t as secure as other countries in the world.
Limited freedom
Limited ability to be able to paint your house, hang pictures on the wall and really make it your own. You really can’t feel a sense of belonging or community in an area that you may have to move out of when your lease does end.
Real estate inspections
Consistent inspections by real estate agents to ensure that the house and tenancy agreement is being upheld. In the case that something has gone wrong, your bond is at risk.
No investment potential
A myth about renting is that renting is dead money, this isn’t exactly true as having a place to live is essential and it could be the best option for you. Although it is true that the money you are paying isn’t off your own mortgage and building equity in an asset, like a mortgage, would.
The benefits and disadvantages of buying a home
Advantages of buying a home
Stability and freedom
The stability to know you won’t get kicked out of your home at the end of a rental period is one of the biggest benefits of homeownership. It gives families the stability and freedom to build relationships in their local community and allows kids to be settled in schools and sporting commitments.
It also gives you the freedom to paint, decorate and hang things on walls whenever you wish!
Rise in house prices over time
Capital gains are a great outcome of homeownership. By purchasing a property, you are growing your capital wealth alongside your repayments paying off your mortgage.
Home buyer grants
There are Australian Government schemes that have the purpose of helping get people into their homes.
First-home buyers in Australia have access to grants that support lower deposits, stamp duty exemptions and cash incentives for buying a new home.
You can use the equity in your home
Equity is built up in your home when home prices increase. This can then support you to purchase another property later or use the money to complete renovations on your home.
A home lender can help with the amount you can top up your mortgage for another purchase or renovations.
Disadvantages of buying a home
Expensive
The upfront costs of buying a home are very expensive and one of the largest barriers to entry to homeownership in Australia.
Some of the costs include:
- Deposit
- Stamp duty
- Upfront fees and charges
- Mortgage interest
- Transaction costs
Home may decrease in value
When you purchase a home there is the risk that the housing market falls and your loan is suddenly bigger than the value of your home. Property values often fluctuate in markets and although the long-run average of property in Australia is always trending upwards, in the short term this can present a liquidity risk if you are unable to sell immediately.
Ownership costs are more than just a deposit and loan repayments
The costs of homeownership are larger than the costs of renting. There are ongoing costs to consider including council rates, strata, water rates, maintenance, and unexpected costs, such as repairs.
Mortgage rates rising and so mortgage repayments fluctuate
Mortgage interest can make up most of your monthly repayments on your mortgage in the early years. But in the long term, there are risks to having a mortgage, including interest rate rises, which ultimately impact the cost of your monthly mortgage repayments.
What are my options to get into the housing market?
We have compared the options that are available to start your journey to homeownership in Australia and have written comparisons on the options.
Guarantor
To avoid LMI, many opt for a guarantor home loan. In this arrangement, a family member pledges some of their own home equity to the lender and combines that with your smaller deposit to make up the 20% deposit value.
The person providing the additional security guarantee for your loan is called the guarantor.
Low deposit
For Australian first home buyers, saving up for a deposit is one of the biggest hurdles when getting into the property market. This is especially so when the average house deposit amount (usually 20% of the property's value) is larger than the average Australian annual income.
Find out more about the no deposit home loans and low deposit options in Australia.
Typical mortgage
The traditional pathway to homeownership we discussed is a traditional mortgage.
Here’s everything you need to know about the Australian mortgage process.
