Is rent money really ‘dead’ money? Yes it is

Buying a home is not on everyone’s radar as the extra costs you’re lumped with can be quite daunting to raise, compared to renting.

You first need to save for a home loan deposit of at least 10 percent of the purchase price as a good start – that’s $30,000 for a $300,000 property. And don’t forget all of the other fees and charges that come with setting up a mortgage, such as establishment, legal, valuation and documentation costs.

There’s also lenders mortgage insurance (LMI) if you borrow more than 80 percent of the value of the property and stamp duty, the list goes on. And with RateCity’s recent survey of rental prices compared to the cost of buying, it’s no wonder that many people are trapped under the rental web.

RateCity found that the average national rental price was $1520 per month (according to Australian Property Monitors (APM)). And mortgage repayments for the average loan size of $289,300 (Australian Bureau of Statistics) with the average comparison rate for this loan amount at 7.09 percent (RateCity research) would cost about $2061 per month. That’s a difference of $541 extra for a mortgage compared to renting.

But here is where it gets interesting. If rental prices increase by 5 percent over the next five years and property prices increase by 10 percent for the same period, Australians could be more than $41,000 better off by paying off a mortgage in five years compared to renting, according to RateCity (assuming the interest rate remains).

This is because the national median house price according to APM is $558,540 and the equity in your property is likely to increase higher than rental prices. In fact, APM recorded house prices increased on average by 15.6 percent year-on-year in June 2010. That’s while rental costs only went up by 4.33 percent for the same period.

Of course there are many Australians who are not able to afford that extra $541 to pay off a mortgage each month. I know I have many moments of wanting to spend $500 on shopping as oppose to paying a lender mortgage repayments! But those that can and are contemplating to renew their rental agreement for another term or purchase a home can significantly benefit with buying property – even with a mortgage.

Don’t forget that these are average prices in the RateCity study and can vary by location. What you may not realise is how much the costs can also differ between lenders, which can make an even bigger impact on your repayments costs as well as how much you need to save. For instance, one of RateCity’s top variable home loans is by State Custodians with a comparison rate for a $300,000 mortgage of 6.46 percent. Compared to 7.09 percent, that’s a difference of $120 per month or potentially $36,000 over the course of 25 years.

It’s worth doing your research and make sure you check the details including fees and charges before signing up to a home loan.

Posted by Michelle Hutchison – NineMSN on 19th November, 2010