But is this the right decision for you? Every first home buyer should ask this fundamental question, because there are both advantages and disadvantages to owning your home.
And the first way to tackle the issue is to understand the true differences between owning and renting.
Owning your home
The clearest case for buying is that you are investing in an asset that one day you should entirely own. There are also tax benefits: any capital gain made on a family home (at the moment) may be tax-free, even if you decide to rent out the property for a while.
And, provided you don’t rent out the property for more than six years and have no other property as your main residence, your home remains capital gains tax-free when you sell.
According to RPData, capital city property values have increased at an average annual rate of 4.3% over the ten years to September 2013. This equates to more than 1.5 times increase of the median house price over the last decade. Adding weight to these figures is Macquarie Bank analyst Rory Robertson, who in February 2007 estimated that house prices have risen 75 per cent faster than wages over the past two decades.
Although it’s not cheap to get into the property market, it can be more expensive to stay out of it – ie, if you want to own a home in the future, the best thing you can do is to get into the market now.
Some commentators say we should continue to expect capital gains in property in excess of 5-10 per cent over the next two to three years.
If you are smart and choose a good suburb, with growth potential and good amenities nearby, you could see growth in your property and your investment.
Of course, your first home may not be that huge family house you’ve always wanted – and that’s okay. It’s not called your first home for nothing; it is simply your first move onto the property market.
According to the Real Estate Institute of Australia, the benefits of buying a property include:
- Building up equity in a home by making regular mortgage payments is one of the best ways for many people to save a large amount of money over time.
- Unlike rent, the money you spend each month to pay the mortgage goes directly towards purchasing your own valuable asset.
- Home ownership is usually a safe way of investing money over a long period and, depending on location and other factors, the value of the asset is likely to appreciate over time.
- When you own your own home, you no longer face problems associated with renting – no visits from the landlord, no need to renew a lease every 12 months or so, no need to ask permission to make improvements.
- Many people anticipate that owning their own home will make things easier when they retire.
According to the 2011 Census, 29.6 per cent of Australians rent their homes – that is more than 2.3 million households. While for some people renting is the preferred option as it’s cheaper, for others renting is a lifestyle choice.
In most cases, to start off with, renting is cheaper than a mortgage. Renting is also flexible, a good short-term commitment and fairly uncomplicated.
If you want to change jobs or careers you only need give your landlord a month’s notice, and then you can move out. Also, landlords are responsible for problems with the property, not tenants. Finally, renting is often about lifestyle – you may be able to afford a better house to rent than you could afford to buy.
Problems with renting, however, include the fact that over time rents tend to rise. There is the possibility of being evicted, landlords could decide not to renew a lease, and there is also a lack of control over making alterations to a property. Another disadvantage of renting is that if the housing market goes up you’re not part of it, but your rent may still be increased.
It is also, in one sense, ‘money down the drain’: rent paid to a landlord will never be seen again.
A mortgage, despite including interest, is a step towards owning a home that you could one day choose to rent out – or live in with your own family. It is an appreciating asset with a potential tax-free capital gain.
Alternatively some may prefer to continue to rent, whilst buying an investment property to rent out to others. This strategy may give them the lifestyle options that renting provides, whilst also giving them a stake in the property market. Allowing them to have their cake and eat it too.
Affordability is key
Whether you choose to buy a home, buy an investment property or rent, try to remember one word: affordability.
Your monthly income needs to cover not only your mortgage and ownership costs but also allow you to live comfortably. You still have to pay for food, clothes, transport, entertainment, education and other living expenses on top of your mortgage payments.
Do your mortgage, rates, and other debts total more than 40 per cent of your monthly income? If they do, consider taking out a smaller loan or continuing to rent while you save a larger deposit.
One way to work out if you are ready to rent or buy is to open a new savings account. Each week, fortnight or month – however you will pay your mortgage – put into the account the amount needed for your mortgage, plus what you anticipate for extra expenses such as rates and renovations. If you can save this amount for a good period of time, as well as feed, educate and entertain yourself, it looks like you’ve calculated the right mortgage amount.
And if you’re struggling? Look for a cheaper property to invest in, and therefore a smaller mortgage.
The results shown in this article are for guidance only and may not reflect the actual amount payable by, or the tax details applicable, to a client. This article is an information service only, without taking into account the investment objectives, financial situation or particular needs of any particular person or party. No account has been taken of the rise and fall of interest rates, exit penalties, fees, or other investment strategies.
This article may not take into account changes to a client’s current circumstances in the future or the impact of specific future events. The article is not, nor can it be interpreted in any way as, a detailed financial plan tailored to the client’s individual requirements, but is of general application only with the result that information/assumptions in it may change pending completion of a detailed financial plan.
TURMERIC FINANCIAL does not accept any responsibility for the manner in which the article (or a client’s personal details) are used by the adviser (in providing clients with advice or otherwise). Reliance should not be placed by anyone on this article as the basis for making any financial, investment or other decision.
You should not make an investment decision based on this article. You must obtain professional advice on any investment decisions or outputs from this article to determine whether they are appropriate for your particular needs, investment objectives and financial situation.