Why "is it cheaper to rent or buy?" might be the wrong question

18/09/2020
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With interest rates at historical lows (and indications from bank economists that they could drop lower), renters ready to take on a home loan will be taking an even closer look at the property market than usual. Is it time to make the switch? Or is it better to stay renting?

We take a look at what the experts say about whether it’s cheaper to rent or buy a property with a home loan - and why that might be the wrong question to ask.

 

IS IT CHEAPER TO RENT OR BUY?

Renting or buying: which leaves more dollars in your pocket at the end of the month? Alistair Helm, founder of Properazzi, has tried to answer this question before, crunching the numbers on typical rents compared to the interest on a typical loan for a typical property, broken down by region.

He found that whether it’s cheaper to buy or rent depends a great deal on where you live.

For example, in Auckland (one of the most expensive places to buy in New Zealand), it has consistently been cheaper to rent than to buy. Meanwhile, in the more affordable Manawatu / Wanganui region, it’s been cheaper to buy than rent from 2011 to 2019 - at least in terms of rent vs pure interest on a loan.

However, Helm also points out that his findings are based on a very simple method that doesn’t quite cover all the costs associated with homeownership.

 “It depends where you live, if you have a deposit, if you intend to live in the property for any length of time, how much you want to do to maintain the property, if you care about what place you live in, and so on,” Helm explains.

“The provisos are endless and that is partly why there is no simple answer.”

 

WHAT ABOUT THE OTHER COSTS OF HOME OWNERSHIP?

Helm’s calculations don’t include the principal repayment on the loan – only the interest cost.

This could be because only the interest cost is comparable to rent. When you pay interest and principal, the principal payments are going straight into your equity, building your wealth. You are basically paying yourself, so Helm doesn’t include it in his calculations.

This means that his calculations might underemphasise the true costs of homeownership. He also doesn’t consider the cost of insurance and rates. These can be significant additional expenses, depending on where you live.

 

THE BENEFITS OF BUYING A HOME

And yet, people still decide to buy houses, even where they are more expensive - Auckland’s booming property market despite COVID-19 is a testament to that. Why? Because the benefits of home ownership aren't only measured in dollars.

Graeme Fowler, property investor and author of 20 Rental Properties in One Year, summarises the non-financial benefits of homeownership:

  • If you own the home, you are your own landlord. No sudden selling.
  • Owning gives you a sense of satisfaction and freedom that renting will not give you.
  • You can make alterations to your own home, adding rooms, putting in a new kitchen, bathroom, other decorating etc.
  • If you are a keen gardener, you can make a garden to your own likes and as big as you want. You don't have to ask the landlord for permission.
  • Many landlords will not allow pets into their properties. By owning your own home, you do not have this restriction.
  • If you want to move overseas for a year or two, you can rent out your property while you're away and the rent may cover some if not all of your mortgage payment.
  • You may also just want to go away for the odd weekend here and there and decide to Airbnb your property for that time.

 

SUMMARY

The question of whether it’s cheaper to rent or buy is “it depends”.

In some towns, it may be cheaper to pay rent, but then you miss out on the many non-financial benefits of buying. Security, freedom, and the sense of “this is ours” can be just as valuable as a few more dollars in the bank account - not to mention the home equity you could be building along the way.

Ready for the plunge from renting to buying? Discover your options in a home loan from Avanti Finance, including our new low-interest near prime option.

What is a near prime home loan?

If the bank has said no to your home loan application, a more flexible near prime mortgage could offer a solution.

What is home equity and why does it matter?

What’s the deal with home equity? And why do homeowners and lenders think it’s so important? Discover the answers and power of equity in this guide.