Buy or rent – the great debate
Many Australians believe buying a home is the key to long-term financial security, and renting nothing more than 'paying off someone else's mortgage'. So it’s clear why many of us prefer to buy.
But is home ownership always the best option?
Unfortunately, the answer isn't clear.
The long-term outcomes of owning and renting depend on many variables, the effects of which are unpredictable. As incomes change over time so do obligations and spending patterns. Taxes and interest rates also change, as do market conditions.
But the good news, which frustrated renters often forget, is both situations have pros as well as cons.
Home ownership: for and against
One of the advantages of buying your own home is long-term property values generally increase, thereby protecting the purchasing power of your money against inflation.
Other advantages of home ownership:
- Any gains you make are usually tax-free if you occupy the home yourself
- As the equity in your house increases, so does your borrowing power
- A paid-off home can also provide rent-free accommodation in retirement, or a tax-free lump sum if you take out a reverse mortgage* or sell and down-size
- May provide a tax-free asset you can pass on to your estate
- Gives you the satisfaction of owning your own home.
Consider the costs
Buying a house will probably be your biggest financial commitment, so you should consider the following:
- Transaction costs such as bank fees, legal fees and stamp duties
- Regular mortgage repayments where the interest is not tax deductible
- Changing interest rates
- You may not be able to offset any capital losses on the sale of your home against other capital gains
- Ownership can tie you down to one place for a long time
- Your home generally does not produce an income
The alternative – to rent and invest
Many people now choose to rent. Careers have become more mobile and some employers offer subsidised accommodation. Some of us value the freedom of renting above paying off a house, or else find we can only afford to live in a preferred location by renting. This being the case, a rent-and-invest strategy may seem particularly attractive.
This strategy, which requires similar financial discipline to home-buying, involves:
- Investing your ‘home deposit’ in a diversified portfolio of financial assets rather than property
- Systematically investing into your diversified portfolio whatever you ‘save’ each month by renting
- You may also consider ‘gearing’, or borrowing to invest. The interest and costs may be tax-deductible, but the net capital gains will be taxable.
Renting can also have its problems
- Leases have a limited duration
- Some landlords can be difficult
- Frequent moves can become costly
- You may doubt you’ve made the right choice if your investment portfolio loses value in the short term.
Seek advice
In the end, the choice between buying and renting can be an emotional rather than financial decision. Regardless of what you choose to do, it’s important to seek advice and ensure you’re aware of all your options.
If you’d like to discuss your options in relation to renting or buying, contact us to make an appointment.
*A loan for home owners whose mortgage is paid in full, but want to use the equity in their home. The amount received from this loan should be free from tax.