Times have been tough for tenants in recent times as vacancy rates have tightened to record lows and asking rents have risen by double-digit percentages for consecutive years.
But homeowners still paying off their mortgages have had their challenges. The RBA cash rate has risen from 0.1% to 4.35% and banks have hiked interest rates on their loans accordingly. Two years ago, people were paying off houses at sub-2% interest rates. Now, most variable rates are above 6% and people are paying hundreds or thousands extra each month on their mortgages.
So, what would suit you better, being a renter or a homeowner? Let’s look at the pros and cons of both.
Renting pros
Financial flexibility- Rental payments are generally lower than mortgage repayments and you aren’t obliged to see things through for decades. You don’t have to pay for repairs and, if a home no longer meets your needs, you can move out at the end of the lease.
Geographical freedom- If you need to up and leave town for a career opportunity or a lifestyle change, you can relocate without the financial and logistical burdens that come with selling a property.
Cheap set-up- There are lower upfront costs when renting a new home instead of purchasing. You may need a month’s rent in advance, but it’s nothing like a 20% deposit on a million-dollar house, with stamp duty on top.
Low risk- Renters don’t have to worry about property value fluctuations or market downturns. They are exposed only to a year of rental payments.
Renting cons
No equity- Renters can feel like they’re paying for someone else to build wealth, because you can rent for 10 years and have no equity to show for it.
No returns- Homeowners can benefit from the appreciation of a property’s value, as well as the rental income it generates. Renters get none of the above.
No control- Renters have limited control over the property and depend on landlord approval for maintenance and repairs. They are also restricted from changing the home to suit their personal needs or tastes.
Rent increases- As we have seen in recent years, renters can be exposed to significant rent increases in certain market conditions. It can be hard to stay on top of rising bills and grocery costs without long term certainty around how much rent you will be paying.
Ownership pros
Building equity- Accumulating wealth for the future is the major benefit of owning. The more you pay off, the more ownership of the property you have.
Stability- Ownership gives you some control over your living space. You can personalize and modify the home and you know that as long as you make your repayments, you won’t have a landlord suddenly informing you that you need to move out.
Investment potential- Real estate is Australia’s favourite asset class. As long as you stay in your home for long enough, you will make a positive return if you end up needing to sell. You can also access the equity in your home along the way to invest in other properties and build wealth.
You can lock in payments- If you want even more stability, you can fix an interest rate with the bank so you can budget for the long term without wondering if your mortgage repayments will increase. Just make sure you’re fixing at a rate that isn’t going to cost you if interest rates begin to decrease.
Ownership cons
Big commitment- Owning a home will be the most significant and enduring financial commitment you make. You will be responsible for expensive ongoing costs for between 20 and 30 years, including repayments, taxes, maintenance and repair costs and insurance.
Volatility- Property tends to increase in value over the long term, but there are no guarantees. If you buy at the top of the market, then are forced to sell in a correction phase, you may find you lose money and even need to keep paying back the bank.
Limited flexibility- There is a lot more at stake if you need to move cities or have a change in personal circumstances that requires you to sell. Your wealth can be affected by the market, plus the selling process can be costly and take time.
