Renting vs. buying, what should you choose?

Renting vs. buying, what should you choose?

Choosing between renting or buying property can be a daunting process.

The debate between renting and buying has been a hot topic as of late, with a rising housing market in Australia making an entire generation of buyers feel as if they’ll never be able to access it. But for many, rent money is ‘dead money’ and the appeal of owning their own home is unquestionable.

No matter what your situation, it’s important to examine all the options available to make the most informed decision.

Renting:

There are several positives to renting property in Australia. You will spend less in the short term as the costs of taking out a home loan and saving for a deposit on a house are far higher than the price you’ll pay for a bond.

For those who prefer to spread their wings rather than plant roots, you can also enjoy the flexibility of moving from place to place when your lease expires. Your wings can also take you to areas you couldn’t otherwise afford, which is great news for someone looking to live close to their inner-city office where property prices are far greater than rental prices.

Renting also allows tenants certain advantages, such as avoiding costly maintenance, repairs, rates and insurance that should be covered by your landlord.

Is this always the case? 

Australia’s first survey of renters – produced by CHOICE, National Shelter and the National Association of Tenant Organisations – has revealed that many tenants are too “scared” to request property maintenance.

While tenants are entitled to request maintenance, the survey revealed 50 per cent of renters were concerned about being “black-listed”, and 14 per cent said they had not made a complaint or requested a repair for fear of adverse consequences. There is less security with renting, as reflected in this survey, with landlords having the ability to increase your rent or evict you.

If you’re planning on renting you will also have less flexibility to make the home ‘yours’, as home renovations require approval from your landlord. Renting is also more expensive long term, as buyers should eventually pay off their mortgage in 20-30 years whereas tenants never stop paying rent.

Pros
  • Cheaper short term
  • Live in areas you couldn’t afford to buy
  • Flexibility (moving from place to place when lease expires)
  • Avoid  costly maintenance, repairs, rates and insurance
Cons
  • Less security
  • Less flexibility to make the home ‘yours’
  • Rising cost of renting
  • More expensive long term

istock_79305201_small5

Buying:

A mortgage is one of the biggest obligations you will undertake in your life, and can be with you for 30 years or more. Choosing a mortgage is not a decision to be taken lightly, but there are many positives to making the decision to buy. 

Buying your home should work out to be cheaper long term as you will eventually pay the mortgage off. Your property should also gain in value over the lifetime of your mortgage, meaning you ultimately make a profit on your investment. And unlike the horror stories of renters as expressed earlier, you have the flexibility and freedom to renovate and make your house truly ‘yours’.

However, you will need to save a decent nest-egg if you’re planning on buying a house. The minimum amount for a deposit you will need to save is usually 5 per cent, although if you borrow more than 80 per cent or more of the homes’ value (less than 20 per cent deposit) you will be asked to pay lenders mortgage insurance (LMI).

On top of your deposit, there are upfront and ongoing charges you will incur, and you will need to cover the cost of ongoing maintenance on the property.

Pros
  • Cheaper long term
  • More security and flexibility
  • Property should increase in value
Cons
  • More initial costs (deposit, upfront and ongoing fees)
  • Ongoing maintenance costs

istock_79305201_small5

Verdict:

There is no correct answer when it comes to whether you should rent or buy a home. Your choice will always depend on individual circumstances and preferences.

Explore first home buyer mortgages now

Did you find this helpful? Why not share this article?

Advertisement

RateCity

Money Health Newsletter

Subscribe for news, tips and expert opinions to help you make smarter financial decisions

By signing up, you agree to the ratecity.com.au Privacy & Cookies Policy and Terms of Use, Disclaimer & Privacy Policy

Advertisement

Learn more about home loans

Remaining loan term

The length of time it will take to pay off your current home loan, based on the currently-entered mortgage balance, monthly repayment and interest rate.

Interest Rate

Your current home loan interest rate. To accurately calculate how much you could save, an accurate interest figure is required. If you are not certain, check your bank statement or log into your mortgage account.

Monthly Repayment

Your current monthly home loan repayment. To accurately calculate how much you could save, an accurate payment figure is required. If you are not certain, check your bank statement.

Savings over

Select a number of years to see how much money you can save with different home loans over time.

e.g. To see how much you could save in two years by switching mortgages,  set the slider to 2.

How can I get ANZ home loan pre-approval?

Shopping for a new home is an exciting experience and getting a pre-approval on the loan may give you the peace of mind that you are looking at properties within your budget. 

At the time of applying for the ANZ Bank home loan pre-approval, you will be required to provide proof of employment and income, along with records of your savings and debts.

An ANZ home loan pre-approval time frame is usually up to three months. However, being pre-approved doesn’t necessarily mean you will get your home loan. Other factors could lead to your home loan application being rejected, even with a prior pre-approval. Some factors include the property evaluation not meeting the bank’s criteria or a change in your financial circumstances.

You can make an application for ANZ home loan pre-approval online or call on 1800100641 Mon-Fri 8.00 am to 8.00 pm (AEST).

What are the pros and cons of no-deposit home loans?

It’s no longer possible to get a no-deposit home loan in Australia. In some circumstances, you might be able to take out a mortgage with a 5 per cent deposit – but before you do so, it’s important to weigh up the pros and cons.

The big advantage of borrowing 95 per cent (also known as a 95 per cent home loan) is that you get to buy your property sooner. That may be particularly important if you plan to purchase in a rising market, where prices are increasing faster than you can accumulate savings.

But 95 per cent home loans also have disadvantages. First, the 95 per cent home loan market is relatively small, so you’ll have fewer options to choose from. Second, you’ll probably have to pay LMI (lender’s mortgage insurance). Third, you’ll probably be charged a higher interest rate. Fourth, the more you borrow, the more you’ll ultimately have to pay in interest. Fifth, if your property declines in value, your mortgage might end up being worth more than your home.

How much deposit do I need for a home loan from ANZ?

Like other mortgage lenders, ANZ often prefers a home loan deposit of 20 per cent or more of the property value when you’re applying for a home loan. It may be possible to get a home loan with a smaller deposit of 10 per cent or even 5 per cent, but there are a few reasons to consider saving a larger deposit if possible:

  • A larger deposit tells a lender that you’re a great saver, which could help increase the chances of your home loan application getting approved.
  • The more money you pay as a deposit, the less you’ll have to borrow in your home loan. This could mean paying off your loan sooner, and being charged less total interest.
  • If your deposit is less than 20 per cent of the property value, you might incur additional costs, such as Lenders Mortgage Insurance (LMI).

How much deposit do I need for a home loan from NAB?

The right deposit size to get a home loan with an Australian lender will depend on the lender’s eligibility criteria and the value of your property.

Generally, lenders look favourably on applicants who save up a 20 per cent deposit for their property This also means applicants do not have to pay Lenders Mortgage Insurance (LMI). However, you may still be able to obtain a mortgage with a 10 - 15 per cent deposit.  

Keep in mind that NAB is one of the participating lenders for the First Home Loan Deposit Scheme, which allows eligible borrowers to buy a property with as low as a 5 per cent deposit without paying the LMI. The Federal Government guarantees up to 15 per cent of the deposit to help first-timers to become homeowners.

What is a low-deposit home loan?

A low-deposit home loan is a mortgage where you need to borrow more than 80 per cent of the purchase price – in other words, your deposit is less than 20 per cent of the purchase price.

For example, if you want to buy a $500,000 property, you’ll need a low-deposit home loan if your deposit is less than $100,000 and therefore you need to borrow more than $400,000.

As a general rule, you’ll need to pay LMI (lender’s mortgage insurance) if you take out a low-deposit home loan. You can use this LMI calculator to estimate your LMI payment.

Will I have to pay lenders' mortgage insurance twice if I refinance?

If your deposit was less than 20 per cent of your property’s value when you took out your original loan, you may have paid lenders’ mortgage insurance (LMI) to cover the lender against the risk that you may default on your repayments. 

If you refinance to a new home loan, but still don’t have enough deposit and/or equity to provide 20 per cent security, you’ll need to pay for the lender’s LMI a second time. This could potentially add thousands or tens of thousands of dollars in upfront costs to your mortgage, so it’s important to consider whether the financial benefits of refinancing may be worth these costs.

Does Australia have no-deposit home loans?

Australia no longer has no-deposit home loans – or 100 per cent home loans as they’re also known – because they’re regarded as too risky.

However, some lenders allow some borrowers to take out mortgages with a 5 per cent deposit.

Another option is to source a deposit from elsewhere – either by using a parental guarantee or by drawing out equity from another property.

How do I save for a mortgage when renting?

Saving for a deposit to secure a mortgage when renting is challenging but it can be done with time and patience. If you’re on a single income it can be even more difficult but this shouldn’t discourage you from buying your own home.

To save for a deposit, plan out a monthly budget and put it in a prominent position so it acts as a daily reminder of your ultimate goal. In your budget, set aside an amount of money each week to go into a savings account so you can start building up the ‘0’s’ in your account.  There are a range of online savings accounts that offer reasonable interest, although some will only off you high rates for the first few months so be wary of this.

If you aren’t able to save a large deposit, you can consider ways of entering the market that require small or no deposits. This can include getting a parent to act as guarantor for your home loan or entering the market with an interest only loan.

How much can I borrow with a guaranteed home loan?

Some lenders will allow you to borrow 100 per cent of the value of the property with a guaranteed home loan. For that to happen, the lender would have to feel confident in your ability to pay off the mortgage and in the security provided by your guarantor.

How much deposit will I need to buy a house?

A deposit of 20 per cent or more is ideal as it’s typically the amount a lender sees as ‘safe’. Being a safe borrower is a good position to be in as you’ll have a range of lenders to pick from, with some likely to offer up a lower interest rate as a reward. Additionally, a deposit of over 20 per cent usually eliminates the need for lender’s mortgage insurance (LMI) which can add thousands to the cost of buying your home.

While you can get a loan with as little as 5 per cent deposit, it’s definitely not the most advisable way to enter the home loan market. Banks view people with low deposits as ‘high risk’ and often charge higher interest rates as a precaution. The smaller your deposit, the more you’ll also have to pay in LMI as it works on a sliding scale dependent on your deposit size.