To rent or buy: No such thing as one-size-fits-all solution

by Mackenzie McCarty29 Jan 2013

Many renters considering switching from a lease agreement to a mortgage can find it difficult to fully assess which path is more beneficial, but the best solution can only be decided on a case-by-case basis, according to aggregator Loan Market.

Loan Market corporate spokesperson, Paul Smith, says that while some public data could be used to justify both sides of the argument, borrowers need to consider their own personal circumstances and financial goals to determine if they’d be better off owning or renting.

“If you’re looking at purchasing a property, you should research similar properties in the area and see what type of rental payments are being asked for. You should then work out exactly what your mortgage repayments would be after establishing your home loan.”

Last week, Australian Broker published comments by Mortgage Choice spokesperson Belinda Williamson, who argued buying is often more financially viable than renting in most capital cities.

“For example, in the December quarter for a house in Darwin, Australia’s most expensive capital city, the median weekly rent was $650 per week. Darwin’s first homebuyers on the other hand paid only $401 per week on a 30-year average loan of $293,200, at a basic variable interest rate of 5.9%.”

However, Smith argues that it’s crucial for first home buyers to consider their options on a case-by-case basis and says that, when comparing rental and mortgage repayments, it’s important to evaluate the property from both a renter and home owner perspective, taking into account the different  calculations and costs that need to be factored in for each.

 Michelle Hutchison, spokesperson for financial comparison website RateCity, agrees and says FHB's also need to keep in mind that interest rates can easily go up.

 “The biggest danger with buying a home for the first time is that you’ve never experienced re-adjusting your budget and fall short when rates rise. Interest rates are currently at record lows – variable home loans are starting at 5.12% by UBank according to RateCity’s database. It’s easy to get used to paying low interest but rates are likely to rise eventually and borrowers should prepare now by adding to your repayments.”

Smith says renters who are considering purchasing their first home should create an educated estimation of rental repayments of the properties they’re interested in, calculate inflation of both rent and property value based on current inflation rates – not targeted ranges – and remember that the interest rate on property won’t stay at its initial rate through the course of the loan.

“There are advantages to being both a renter and a home owner and those benefits should align to your own financial goals. With so many factors influencing buyers’ repayments, it takes some investigation to determine if you’re better off renting or buying.”

COMMENTS

  • by PeterT 29/01/2013 11:59:34 AM

    When potential buyers have assessed how much it costs to rent vs buying, they should then look at what the future cost of a mortgage will be (assume a long term average of 7%) and compare that to what renting will continue to cost if rents increase by 5% per year. Also factor in what a fully owned house will be worth at retirement, compared to being forced to rent when you can't work.
    Renting is usually cheaper in the short term, but unless you're investing the savings, buying is almost certainly more cost effective in the long run.