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Can renting make you wealthy?

Laine Gordon avatar
Laine Gordon
- 3 min read
Can renting make you wealthy?

Australia is a nation of home buyers; around 70 percent of households own their own home, the Bureau of Statistics says. But on the road to financial freedom, is the ball-and-chain mortgage really the best strategy or can renting make you wealthy?

Financial planner Arran Curll said Australians who rent and cleverly invest disposable income could be better off than some mortgage holders, given the accumulated costs of owning a home over time.

“I think people might be surprised to see that buying your own home isn’t the great financial decision or investment decision that they think it might be,” he said.

“The reality is people don’t think about what they could be doing with the amount of money they could have been saving from the interest costs.”

For the average borrower with a $300,000 home loan repaid at a rate of, say 7.32 percent (the average of the big four banks’ standard variable rates at the time of writing), the total interest cost over 30 years is a whopping $441,878 (assuming the rate remains steady). In the first year alone, this borrower will repay around $24,700, of which less than $3000 will go towards paying down the loan principle – the remaining $21,000 is eaten up by interest. And that’s not accounting for other costs to own a home, such as rates, levies, home maintenance costs, insurance, agent fees and stamp duties, to name a few.

By investing any disposable income – even a small portion of the money otherwise spent on home loan interest – renters could potentially build a second income stream. Where you choose to start your second income stream all comes down to your level of appetite for risk, what you want to achieve and your personal tax situation, according to Curll.

“Shares, cash, property; the main asset classes are there on the table as being [investment] possibilities for those savings but the main thing is to capture those savings in the first place and always do things within your means,” he said.

Buying a home “isn’t necessarily the wrong thing to do”, according to Curll. However buyers should do the maths to determine what they can comfortably afford, before taking on too much debt, he said.

For homebuyers, there are ways to significantly reduce the total amount of interest paid on a home loan.

Damian Smith, chief executive of RateCity said, where possible, borrowers should pay more than the minimum repayment.

“You may only need to find a couple hundred dollars extra each month to put a dent in your home loan,” he said.

Second, compare at least three home loan options before signing on the dotted line, he said.

“Shopping around and comparing home loans is not just a way to get ready to move to a new lender, it’s also a way of negotiating with your current lender. We consistently hear from contacts in the industry that within the big four banks, managers often have discretion to substantially reduce the rate you’re paying if it’s clear you’re ready to walk as a customer.”

Disclaimer

This article is over two years old, last updated on May 6, 2012. While RateCity makes best efforts to update every important article regularly, the information in this piece may not be as relevant as it once was. Alternatively, please consider checking recent home loans articles.

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