The decision on whether to rent or buy is a difficult one in which to separate the head from the heart. Almost all marketing on the subject appeals to the emotions; it takes a little digging to get to the financial truth of question of whether it is better to rent or to buy a home. Today we examine the pros and cons of each, and help you determine which is best for your particular financial situation.
Why Buy?
For many people, the security of knowing that nobody can force you to move and that you don’t have to answer to anybody about the way you keep the house are enough to justify the extra spend on a mortgage. However, there are a range of financial advantages to buying a home as well.
Appreciation on the value of your home can be significant
The property market in Melbourne has demonstrated that for many investors over the past years. As Dr Harry Karamujic, property expert at the University of Melbourne, has said: “We have constrained supply and increasing demand so it is hard not to presume a rise in capital appreciation”.
First Home Owners Grant
If this is your first home, you should be eligible for the First Home Owners Grant of $7000. If you are building a new home, you’ll also be eligible for a First Home Bonus of $13,000 on top of that. If you are building in a prescribed regional area of Victoria, the government has an extra $6500 for you, bringing your grant total up to $26,500. Not to be sneezed at!
Why Invest?
The main advantage to investing in a home rather than purchasing one as your principal residence, is that interest payments on an investment property mortgage are tax deductible. This can mean quite a bit of cash back at the end of the year! You are also able to amortise your establishment costs on a loan for an investment property.
However, you will need to balance this against the fact that if you buy an investment property, you cannot claim the First Home Owners Grant on the house, nor in the future when you do buy a house to live in. Capital gains on investment properties are also subject to tax.
Why Rent?
Renting has advantages in flexibility and the removal of worry about maintenance, but also has financial advantages in some situations. For example:
- Weekly rent payments are inevitably lower than mortgage repayments
- Renters don’t pay rates, or water bills and emergency services levies in most areas
- If you save the difference between your rent payments and a mortgage payment, you can earn interest on it.
Rent vs Buy Calculators – Take them with a grain of salt
There is a wealth of rent vs buy calculators on the internet, which can be extremely useful if you’re equipped with the necessary information to take an informed decision away from their number crunching. When you’re using a rent vs buy calculator, be aware that:
- You’ll need to do your own research on property value appreciation in the area you’re looking at buying a home in. Many calculators include a standard value of 8% per year, and the actual figure can be quite a few percentage points either side of that.
- They assume that interest rates will stay stable over the calculation period
- They also assume that you’ll make no more than the minimum repayment on your home. Specialised programs set up by mortgage brokers in Melbourne can actually help you pay off your home in around a third of the time, using a variety of financial tools.
- Calculators assume that you have a deposit, and will invest it rather than using it to buy a home
In the end, the emotional factors involved in renting versus buying cannot be ignored. However, a thorough assessment of the financial implications may certainly help you feel differently about choosing, one way or the other!
appreciation · buying a home · deciding to buy · fhog · first home owners grant · renting