Press play to watch “Rent Vs Buy”
Making the decision to rent or buy a home is essential to having a secure financial future. It can come with a lot of confusion about when is the right time to buy and if you should buy at all.
Consider these 4 topics when deciding which is right for you.
01 Cost
If you’re renting it’s pretty straightforward. You know what your rent is and that’s all you pay. However, it likely to go up each year when you have a renewal.
Let’s compare that to your mortgage repayment costs. When you’re paying a mortgage, you have to pay interest, as well as the amount you borrowed, which determines what your mortgage repayment will be.
Mortgage repayment = principal (amount you borrowed) + interest (your cost for using someone else’s money)
In addition, you also have rates and insurance to pay.
Here’s a scenario. With an average mortgage of $400,000 and an interest rate of 4%, you’re going to pay around about $450 per week for your mortgage. And then you’re going to be paying about $50 a week for your rates about $40 per week for insurance.
Calculate weekly cost of buying
Weekly cost of buying = weekly mortgage repayment + weekly rates + weekly insurance
So when you add those three figures together, it’s about $540 a week in this scenario.
Your weekly cost of buying could be about the same as rent.
Compare that to what you’re paying in rent costs and see if it’s in a similar ballpark. If it’s the same, it might be a good idea to own your own house, provided you’ve got the deposit, of course.
Use a good mortgage calculator for your situation.
Do your own calculations to find out what your mortgage repayments might be with a good mortgage calculator.
If you’ve got a 20% deposit, work with an interest rate between 3.5% – 3.9%. With a 10% deposit, use an interest rate between 4% – 4.5%.
02 Opportunity
One of the greatest advantages of homeownership is over time the value of the house will go up, and the mortgage on that house will go down as you pay it off. This creates equity.
Equity creates opportunity.
Once there is enough equity in your house you can use it to buy additional houses as investment properties. Everyday Kiwis can retire as millionaires by investing in properties years before retirement and selling them to take the cash out to live on during retirement.
Now what happens to the money you pay in rent? It goes to paying someone else’s mortgage and creating equity for them. You don’t have the benefits of using the equity that your money is creating – the landlord does.
Renters need a wealth building alternative, because they can’t use their house to make money.
KiwiSaver and government pension is unlikely to be enough. You need to have something on top of that to make your retirement more comfortable.
Homeownership gives you the opportunity to make millions with the equity in your property.
03 Control
Having control over where you live and how long you live there gives you security for you and your family. Many renters are moved on from their accommodation because the landlord wants to sell the house or make renovations.
Being at the mercy of your landlord creates some anxiety and may uproot you from the neighborhood and community you are connected to. Even when you stay in the same place, your rent will increase over time against your will.
If your landlord or the property manager decides to put the rent up, you don’t have a whole lot of control around that.
Most landlords and property management companies are pretty good about maintenance, but that’s not always the case. Many people are left wondering when their leaking tap or roof is going to get fixed, if ever.
When you are your own ‘landlord’, you have the control. If you need something fixed, you can do it. You can also use some mortgage debt reduction strategies to decrease your mortgage repayments over time.
However, you don’t have 100% control. You might not be able to afford to buy in the area that you want to live. If you have strong connections to a certain suburb, like it’s where your children go to school, but you can’t afford to live there, renting in that area may be a good option for you.
Some people choose to buy a home they can afford and live in it for a while. Then they rent it out to someone else and rent in the area they want to live.
04 Responsibility
Owning your house means it’s your responsibility to fix it. When considering buying a house, you’ve need to be prepared to take a step up of responsibility, mentally and financially.
If you’re renting, someone else pays for and coordinates renovations and repairs. Also, it’s easier to pass up sticks and move along if you need to. Many people have a temporary or seasonal job out of town, so it would make sense to rent while they are away, instead of buying a house.
If you’re owning, it’s a longer process to move since you have to sell or rent out your house to do so.
