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Have you ever asked: Isn’t it cheaper and less worry to rent than to make mortgage repayments on a similar property? This is a valid point – for the short term.

While it may first appear that renting is the cheaper option, I encourage a look into the future, beyond a two to three year time frame.

Take an example of a $500,000 property with a full mortgage. It will set you back around $2000 per month just on interest repayments. Then add to this other ownership costs such as maintenance, rates and insurance and body corporate fees. In comparison, you could rent an equivalent property for $1950 a month without any extra costs.

Based on this scenario it seems renting would be cheaper. Why would you consider buying?

To properly assess this, the first thing is to fully break down the costs.

Home owners have short-term costs which include the one-off purchase of the property and then ongoing costs. These include:

  • Stamp Duty
  • Legal and other costs (e.g. Building/Pest Inspections)
  • Moving house expenses
  • Mortgage interest repayments (The interest portion only is the true expense as the principal portion is saving and investment)
  • Rates, Body Corporate fees, maintenance and insurance (approximately 1 per cent to 2 per cent of the property value each year)
  • Moving house expenses
  • Monthly rent

It still seems dismal to buy a property doesn’t it? Beware though – there are what I call the “hidden economics” they are not always obvious but are crucial to consider.

Frequent moving costs

If you’ve ever moved house, you’d know that it’s stressful, time-consuming and costly.

Tenants move house more than a home owner. Think of it this way – every time your lease is up for renewal, your future is in the hands of your landlord. They may decide to sell, or they may increase the rent beyond your means. Consequently, tenants often move every two years or so.

If an average move costs $5000, this adds an additional $50 onto your weekly rental costs.

Rising rental expenses

The beauty of being a home owner is having the advantage of fairly stable mortgage repayments (fixed rates and so on). Unfortunately as a tenant, your landlord can increase your rent yearly, factoring in the inflation rate and if the property is in a sought-after area.

For example: if your weekly rent is $450 and it rises by 5 per cent a year, in five years’ time, your rent will be $575 per week. In 10 years this will be $730 per week.

Owning a growing asset

As you’d know, you’ll never own your rental property. However home owners gain an asset that increases in value over time, where a tenant is left with nothing to show for their spent money. Sure, you could use the money you ‘save’ on rent to invest elsewhere, but there are very few investments in Australia which provide the tax advantages, leverage possibilities and long-term steady growth that residential property does.

For example: Looking back at the $500,000 property I mentioned earlier: After 10 years, it’s likely to be worth $1 million. Even if you haven’t paid any of your mortgage off and just paid interest only, you are sitting on an asset worth $500,000 of your own clear of the mortgage.

And going further, the home owner can use this equity to buy more properties, setting themselves up with even more assets for a comfortable retirement. As a renter, you’ll never have access to this proven strategy so many use to build large property holdings.

Long term – retirement

It’s never too early to start planning for retirement. In fact, it’s essential for people to really plan for retirement as early as possible.

The last thing you want to be doing in retirement is paying rent. You’d still have a regular expense that you can’t escape, and now have little income to pay for it.

Renting may seem like your best option at the moment, but I really encourage you to see that it’s not the best long-term option. Set your goal to own your own home. The short-term sacrifices are worth making for the longer term benefits.


Posted by Tim Boyle – Sydney Morning Herald on 1st April, 2015