Passing down property is a thoughtful way to leave a legacy and a big part of Intergenerational Wealth Transfer in Australia but both benefactors and inheritors must be prepared for the financial, legal, and emotional complexities involved.
Is it better to rent or buy a house?
The question of whether to rent or buy a house haunts many potential first home buyers.
Homeownership is engrained in the Australian psyche as the “Great Australian Dream”. On the other hand, renting is linked to negative slogans like “rent money is dead money” and “you’re paying off someone else’s mortgage”.
You might be surprised to know that these are not always correct representations. Renting and homeownership each have their own pros and cons. One, the other or a combination of both is suitable to each individual and their circumstances.
To make the decision-making process easier, we’ve broken down whether it’s better to rent or buy a house in the current economy and share other, more manageable solutions to buying your first home.
The pros and cons of buying
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Pros |
Cons |
| It’s a form of enforced savings
Few people are able to build up the savings needed to buy a home in 10 or 15 years. When you take on a mortgage, this becomes a kind of enforced savings — albeit you also pay a considerable interest. It’s an appreciating asset A home is one of the most secure assets you can own. If you have an eye for property price movements, the home you buy will likely be more valuable in the future. This is accentuated if you buy in a location that becomes more popular over time because of external factors like new commuter hubs and amenities. For some perspective, house prices rose 27.5% in 2021 and 4.7% in the final quarter alone. It was the strongest annual growth in property prices on record. You have the freedom to renovate When you own a home, you can do whatever you want with it. You can completely refresh the interior design, add a second or third storey, or even build a granny flat in the backyard for additional space or rental income. You can essentially turn it into your own personal paradise. No matter what changes you make, you do not have to answer to a landlord or worry about those dreaded inspections from the real estate agent. You’ll have peace of mind No one can force you out of your own home. Even if the government wanted to forcibly acquire the land for national interests, you would be compensated handsomely. |
Your money is tied up
Most mortgages require a minimum deposit of 10%. This can run into the hundreds of thousands for homeowners and is a hefty cash investment. There is an opportunity cost associated with homeownership. Before deciding to invest in a home, the question must be asked: what else or where else could I invest this money for a better return? You are fixed to the area Buying a home essentially means that you have chosen to settle in that area, and live there for the foreseeable future. You cannot move without making arrangements to sell or rent the house to someone else. These are things that take time. |
The pros and cons of renting
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Pros |
Cons |
| You can live wherever you want
In today’s competitive property market, renting can help you live where you want to live, not necessarily just where you can afford to buy a home. It’s easier to relocate You can simply hand in your notice if you want or need to move. Renting provides more flexibility. You can invest your money elsewhere Instead of investing a considerable amount in one asset, you can diversify your investment portfolio by renting and investing the money elsewhere. You can invest in more than one asset, increasing the diversification benefits |
Uncertainty
You can be forced out of a rented home or raise the rent if the landlord follows the required procedures. This can create a sense of uncertainty, especially if you have had to move repeatedly. Moving is touted as one of the most stressful things we endure. It also adds costs to renting as each move can be an expensive exercise. There are no (forced) savings There are no “forced savings”, unlike mortgage payments. This may boost the temptation to spend money on frivolous things. Restrictions As a tenant, there are many restrictions around what you can do on and do to the property. Depending on your rental agreement, even mundane home decorations cannot be hooked into the walls without breaking the tenancy agreement. |
The flexible alternative: rent-vesting
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What most aspiring homeowners fail to realise is that there’s a flexible alternative in the decision to rent or buy a house… and it’s a combination of the two. It’s called “rent-vesting”, where you buy a home and rent it out to someone else while you rent elsewhere.
It might sound like a strange concept, but it enables you to live where you want to live while still having forced savings and your rental income. Depending on your ROI, this income can help pay off your mortgage and even supplement your own rent.
Contact us for more advice on whether to rent or buy a house or rent to own in Newcastle
Whatever you decide is best for your needs, the important thing is to always put money away for the future. Burning all of your income on “non-appreciating assets” will not help grow your wealth now or in the future.
Elliot Watson Financial Planning provides expert financial advice for those just starting out in the housing market. We can provide wealth management tips, identify the best possible avenue for your homeownership goals and if necessary, help find a mortgage that meets your unique needs and income capacity.
Contact our team of experienced financial advisors for actionable recommendations and advice today!
The information within, including tax, does not consider your personal circumstances and is general advice only. It has been prepared without taking into account any of your individual objectives, financial solutions or needs. Before acting on this information you should consider its appropriateness, regarding your objectives, financial situation and needs. You should read the relevant Product Disclosure Statements and seek personal advice from a qualified financial adviser.
The views expressed in this publication are solely those of the author; they are not reflective or indicative of the licensee’s position and are not to be attributed to the licensee. They cannot be reproduced in any form without the express written consent of the author.
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