Is it cheaper to rent or buy a home in Australia?
Rent or buy? Is rent money dead money?
Rent or buy? Is rent money dead money?
Homeownership has long been The Great Australian Dream. But with rising interest rates, fluctuations in property prices and increasing housing costs, it can be easy to wonder whether it’s better to rent vs buy.
Owning a home isn't always straightforward, nor is the stress of needing to move at the end of your lease if your landlord decided to hike rents or not extend the lease.
Whether it’s better to rent or buy will depend on your needs and goals—and the good news is that there are great options for both.
Let’s get into it!
The advantages and disadvantages of renting
Renting is distinct from buying as it allows you to live in a property without needing to pay up-front, in cash, the full value of the property. Instead, you pay for your time in the property in instalments. Renting tends to be a more accessible living arrangement as you don’t require a lump-sum to begin renting.
Advantages of renting
You have somewhere to live without needing significant savings up front. The cost of renting is seen to be more affordable than purchasing a home due to the upfront investment and ongoing maintenance costs involved with buying a home. You don't need to pay a large upfront deposit and purchase costs when you rent a house.
There are significantly fewer maintenance needs in a home you are renting, and when something goes wrong, you can always call on your landlord to fix the issues. Your landlord is responsible for ensuring a property is habitable and maintaining the existing fixtures and fittings. In rental contracts, the legal obligations of landlords are stipulated, often alongside emergency contacts for plumbers, electricians and technicians.
More flexibility to move
You’re free to live where you choose, for the length of time you choose. If you fancy a seachange, or are required to move for work or life circumstances, you can. Renting enables you to leave when your lease is over, or you can break your lease early for a fee if essential. Break fees were fixed in NSW to reduce the financial burden of breaking leases.
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, some other countries have more strict rules around evicting tenants and increasing rent.
You have limited ability to be able to paint your house, hang pictures on the wall and make it your own. You can't feel a sense of belonging or community in an area where you may have to move out of your lease ends.
Real estate inspections
Your landlord is legally allowed to require rental inspections, carried out by real estate agents. These inspections are to confirm if the house is in good condition and to confirm that the tenancy agreement is upheld. It can be intrusive to have strangers enter your home, and if something is found to have gone wrong, your bond may be 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. However, the money you are paying isn't contributing to long-term financial security or building equity in an asset, as a mortgage, would. You are, in effect, helping your landlord pay for their mortgage.
The advantages and disadvantages of buying a home
Advantages of buying a home
Stability and freedom
The stability of knowing you won't get kicked out of your home at the end of a rental period is one of the most significant 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. Property values in most cities climbed at least 5 per cent per annum, on average in the past 30 years.
Home buyer grants
There are Australian Government schemes that have the purpose of helping get people into their homes.
First-home buyers in Australia can access 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.
Homeowners who own their property historically retire with 20x more wealth than renters.
Disadvantages of buying a home
The upfront costs of buying a home are costly and one of Australia's most significant barriers to entry to homeownership.
Some of the costs include:
- Deposit (3% - 20% options are available).
- Stamp duty
- Upfront fees
- Mortgage interest
- Transaction costs
Home may decrease in value.
Property values often fluctuate in markets. When you purchase a home, there is the risk that the housing market falls and your loan is suddenly larger than the value of your home. Although the long-run average of property in Australia is constantly trending upwards, in the short term, this can present a liquidity risk if you cannot sell immediately.
Ownership costs are more than just a deposit and loan repayments.
The costs of homeownership are higher than the costs of renting. There are ongoing costs, including council rates, strata, water rates, maintenance, and unexpected expenses.
Mortgage rates are 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?
There are many ways to get onto the property ladder if you’ve decided that homeownership is right for you. Here is a summary of options..
Lenders Mortgage Insurance
Lenders mortgage insurance (LMI) is insurance that protects lenders against loss if a borrower defaults on a home loan.
It's usually a one-off payment to be paid on settlement day. It may be required whether it's your first home purchase or looking to refinance.
To avoid LMI, many opt for a guarantor home loan. In this arrangement, a family member pledges some of their 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.
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) has crossed 6-figures in 2021.
The traditional pathway to homeownership we discussed is a traditional mortgage. We have written an article to explain mortgages and their comparison to the rent-to-own model below.
Rent-to-own is a hybrid situation where you rent a home with the option of buying it several years later (usually 2-7 years). Both parties will also lock in a future purchase price at the start of the agreement.
We can't speak for other rent-to-own schemes, here's a closer look at our services at OwnHome in more detail below.
Rent-to-own with OwnHome
Rent-to-own (sometimes called rent-to-buy) is a financing option that allows aspiring homeowners to rent a property they plan to buy in the future.
You enter into a purchase agreement with a company . They will assess your situation and tell you which homes you qualify for. After you make your choice, the company will take care of the buying process and set up a contract with the option to buy the property.
You can learn more about how rent-to-own works on our blog.
Rent-to-own combines the benefits of both renting and owning. You get the benefit of being a renter while you save money to purchase the home, whilst also having the security of a home to call your own.
How to qualify for OwnHome:
- At OwnHome, we require a household income of over $180,000 in NSW and $150,000 in QLD.
- People are willing to seek independent legal advice and consider whether OwnHome and a rent-to-own agreement are right for them.
- Savings - while you don't need the traditional 20% deposit, stamp duty and fees. At OwnHome, we have a 3% upfront fee, where 1% of this goes immediately into your security deposit, which comes off your purchase price at the end of the agreement.
- A credit score of at least 600. If you currently have bad credit, you can contact us for a path forward—we'd be happy to help.
- At least three months of steady income, whether self-employed or working for a company. However, we may be able to help if you've just changed jobs.
- People who want to buy property in Queensland, including Brisbane, the Gold Coast and New South Wales; including Greater Metro Sydney, Newcastle and Wollongong. However, we're always working on expanding our services to other capital cities so we can help more first-home buyers. So apply anyway, and we'll see what we can do.
At OwnHome, we use a simple five-step process.
Discover if OwnHome is the right path to homeownership for you and your buying power below.
Disclaimer: This article is intended to be general in nature and is not personal financial product advice. It does not consider your objectives, financial situation, or needs. In particular, you should seek independent financial advice and read the relevant product disclosure statement (PDS) or other offer documents before making an investment decision in relation to a financial product (including a decision about whether to acquire or continue to hold).