Buying your first home is one of the biggest financial decisions you’ll make. That’s why it’s a good idea to do your homework and weigh up the pros and cons of home ownership based on your own financial position. Many young Australians dream of owning their own home and the long-term security it will provide them, however for some the hefty mortgage repayments may make you feel like you would rather stay renting.
Home ownership is a long-term investment strategy. Having an asset that has the potential to increase significantly over time is a big appeal for buyers and although there can be times of weak growth, the median house prices over the last decade have consistently grown. On top of that, if the value of your property is increasing, your equity will also be increasing. This is the proportion of the home you have paid back your lender for and own. You can use this equity to fund other investments such as shares.
When you rent, you’re living by someone else’s rules and one of those rules is they can end the lease and ask you to leave. Owning your home not only means you make the rules, it also gives you the long-term financial security that comes from owning such a valuable asset.
When you borrow money for your home loan, you’ll need to pay interest on the amount you borrowed. For many, the average mortgage repayments are a decent chunk of their income gone just in interest and on a variable-rate loan, that figure has the potential to keep climbing.
Another potential deterrent to buying are the costs you need to factor in before, during and after you purchase. To get enough borrowing power for a loan, you’ll need at least a 5% deposit saved up in genuine savings but then you’ll have to factor in the unexpected costs first home owners don’t always factor into their budget.
Running a house can be expensive but renting gives you the luxury of avoiding bigger maintenance tasks and the sometimes-hefty associated costs. Instead these are handballed over to your landlord who is then responsible for any repairs that need doing around the home you’re renting. Leaking roofs, broken heaters and clogged sinks are all up to your landlord to fix, not you. So you can sit back and relax knowing you won’t have any unexpected repair costs damaging your bank balance.
Renting doesn’t mean you can’t have assets. Instead of property, you can instead invest your savings in other avenues such as shares or bonds that could give you a higher return in a shorter time. This also gives you the opportunity to spread your investments across a wider range of asset classes, so your portfolio can be more diversified. There are many renters though who have purchased property as an investment for the capital growth potential and utilise the tax benefits, such as negative gearing.
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Unlike owning your own place, renting won’t give you any long-term gain. This is why renting is sometimes referred to as ‘dead money’ because instead of your money going towards an investment, you’re instead putting your money towards someone else’s.
The cost of renting is gradually increasing, along with all the other costs of living. According to The Real Estate Institute of Victoria, the average rent in Melbourne is $450 per week. Outside the city in rural areas however, weekly rent prices have grown to $330 which roughly equates to the amount you would be expected to pay in weekly home loan interest repayments. This suggests that it is worth doing your sums to see if paying off a mortgage is more affordable for you than renting.
Getting into the property market is a little easier with the exemptions and concessions available to first home buyers. In Victoria, you are eligible to receive a $10K First Home Owner Grant (FHOG) if you’re buying or building your first home. There are also other benefits such as not needing to pay stamp duty on homes under $600K as well as other concessions if you are buying off-the-plan or are buying in rural areas. You can find all the details and what you’re eligible for on the Victorian State Revenue Office First Home Owner website.
Like every financial decision, there are pros and cons that come with both buying and renting. Owning a home can lead to long-term benefits but you may find you’re in a better position to continue renting at least for the time being. If you’d like to know more, talk to one of our advisors at First Things First. We can help you go through the numbers and see what decision is right for you.