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Reproduced with permission.
QUESTION: Are you better off buying or renting a home? We ask the property professor.
ANSWER: It is better to buy a property than to rent for your whole life. There are many reasons for this but I am going to explain just two of the motives behind buying.
Firstly, mortgage repayments are made over a 20 to 30 year period whereas rent is paid for ever. Secondly, buying a home is like forced saving because at the end of it, you will own an asset that you can also live in.
In the table below, I have outlined the money involved if you own a home as compared to renting a property. Some of the assumptions I have made include:
• You buy/rent at the age 25, retire just after 65 years of age and live until you’re 85.
• Property is worth $350,000 • Property increases at 7 per cent per annum
• You borrow 95 per cent of the value i.e. your loan is $332,500
• In the first year, your gross salary is $50,000. Your salary will increase by CPI plus I’ve made some allowances for career promotions so as to work your way up the salary ladder.
• Your net salary takes into account the tax you’ll need to pay.
• The interest rate on your mortgage over the first 10 years is 6.5 per cent. The final 20 years of your mortgage is based on a 7.5 per cent interest rate. You are making principal and interest repayments.
• Home expenses are the equivalent of 15 per cent of the rent payable. This includes council rates, insurance, repairs, etc.
• Initial rent is $350 per week. This increases at a rate of 7 per cent per annum.
I would like to highlight some important points so far as cash flow is concerned.
• In the first year, your mortgage repayment ($485) is more than 50 per cent of your net income ($800 pw). The first few years will be tough so far as cash flow is concerned.
• After 30 years, there is no mortgage repayment as you have paid off the loan.
• In the first year, your mortgage repayments and house expenses are more than your rent. However after 10 years, your rent is greater.
• Your rent will continue to increase to a stage where if you retire just after 65, your rent will be more than your retirement income.
• You will pay far more in rent over your lifetime than you will in loan and property expenses.
The other bonus of buying property is that you own an asset that is increasing in value and once it is paid off, you are in a position to make some life choices as you have access to money/equity. If you bought the property, it would be worth over $22 million.
Obviously due to inflation, $22 million in 60 years time is not worth the same as $22 million today but you will own a freehold property. Even allowing for renovations/upgrading to the property over the 60 years, you’ll still have access to plenty of money.
However, if you rent and don’t invest in any assets over this 60 year period, you will be worth $0!
Read more: https://www.news.com.au/realestate/renting/ask-the-property-professor/story-fndbatbk-1226534460846#ixzz2FXQ8YYfe
