It’s a hot topic. The rent-versus-buy debate has been pulled every which way in the media and laid bare in the recent Reserve Bank of Australia report.
But when all’s said and done, the possibilities are surprising. In fact, when it comes to where you live, you’re likely to have more options than you’ve considered.
An impossible dream?
The thought of buying a home can be exciting and daunting. The deposit amount and ongoing interest charges can really add up, making home ownership seem out-of-reach—especially in today’s housing market.
It’s no wonder many potential home buyers are asking whether they’d be better off renting. The good news is renting and buying don’t have to be mutually exclusive. There are ways to use the benefits of short-term renting as a strategy to buy your own place—but you may find out it’s better for you to rent long term, and not buy.
Isn’t renting just throwing money away?
The answer is yes, and no. Yes, rent money can be dead money. Because if you just rent and don’t invest, your money can’t grow and you’re simply paying off someone else’s home loan or providing rental income for them.
But the non-deductible interest on a home loan can also been seen as a waste. And because renting is sometimes cheaper than paying off a home loan you may be able to make renting work for you.
The fact is renting (combined with investing) may work out better financially than buying your own home. Who’d have thought?
Here’s how it could work: say you pay rent and at the same time invest in shares or super. If you invest the difference between the rent you pay and what you’d pay on a home loan—depending on the performance of your investments—there’s a chance you’ll be better off than if you bought a home. You’d need to look into whether this would suit you though.
Renting and investing in property
If you don’t want to live in an area that’s currently affordable for you to buy in, you could consider renting in an area that better suits your lifestyle and aim to buy in an affordable area that may be a good investment.
You could end up with the best of both worlds: your loan interest payments and various expenses for your investment property may be tax-deductible and you can enjoy living in an area of your choice.
It’s one way to enter the property market and aim to build capital growth, rather than having to save a larger deposit for a property in a more expensive area. But you’d need to work out the costs involved and whether it’s an option you could afford.
What if I choose not to buy at all?
Some recent media reports suggest an investment in shares or super could work out better financially than buying a home. Because an investment in shares or managed funds could provide better returns than the capital growth of your own home.
And with super providing tax concessions, it can be a very cost-effective way to build long-term wealth for your retirement.
The real value of buying
But aside from the potential financial benefits of renting and investing, owning a home is still part of the Australian dream. And as hard as it can be to get started, when you put your money into a home loan you’re effectively forcing yourself to save, build wealth and become better off.
And more than that, owning your own home means having the security of a home to live in, and control over decisions about it—you can renovate or maybe rent out a room to help you in the early days of your home loan.
Deciding on the best option
There’s a lot to think about when weighing up rent versus buy and what’s right for you—make sure you consider:
- The purchase price of property and the on-going costs associated with home ownership compared with the cost of renting
- Your lifestyle and flexibility needs
And remember that whatever you decide, you can be better off by planning ahead – you’ll also develop good financial habits along the way to help you build wealth.
What you need to know
Any advice on this page is general in nature and is provided by AMP Life Limited ABN 84 079 300 379 (AMP Life). The advice does not take into account your personal objectives, financial situation or needs. Therefore, before acting on this advice, you should consider the appropriateness of this advice having regard to those matters and consider the Product Disclosure Statement before making a decision about the product. AMP Life is part of the AMP group and can be contacted on 131 267. If you decide to purchase or vary a financial product, AMP Life and/or other companies within the AMP group will receive fees and other benefits, which will be a dollar amount or a percentage of either the premium you pay or the value of your investments. You can ask us for more details.
 Reserve Bank of Australia, Is Housing Overvalued? July 2014