In my last column, The dream of home ownership, we looked at the advantages and disadvantages of buying your home as opposed to renting. Renting obviously also has its pros and cons and may be the best course for you at the moment.
Renting is best suited to those who are not yet able to afford to buy a home or require the freedom and flexibility to move about for the foreseeable future. Like buying, renting has a number of advantages and disadvantages, which include:
Advantages of renting a home
- You don't have any home loan debt;
- It is usually cheaper to rent than buy. Renting involves much lower initial costs (you normally have to pay a security deposit of around four weeks rent) and the monthly rent is usually lower than having to pay a mortgage;
- You have more flexibility. You can enter into short term (e.g. six months) or longer term leases whereas when you buy, you're locked in for the next 25 years - unless you sell or rent out your property. You have considerably more mobility as a renter;
- Your financial risk is lower. You run the risk of losing your security deposit or having to pay higher rental costs whereas your potential loss through ownership is considerably higher;
- Your monthly outgoings are fixed for the period of the lease whereas your loan repayments could go up if interest rates go up;
- With less of your disposable income being taken up in housing costs, you can invest or spend any savings as you see fit. This could include investing in assets other than property;
- Normal repairs and maintenance costs are your landlord's responsibility - you are only liable for rent and utility costs like gas, electricity and telephone. Your landlord is also responsible for rates and taxes.
Disadvantages of renting your home
- You won't get any equity gains in the property you're renting. Even though you're paying for a service (i.e. somewhere to live), your rent money is basically dead money. The real beneficiary is the landlord who earns an income and has his or her debt paid off by you.
- Not all landlords are nice people. You may come across someone who is difficult to deal with or unwilling to, say, make repairs in a timely manner;
- You may not be able to renew your lease on the same or similar terms and conditions. This may result in an unplanned rent increase or having to vacate the property;
- You'll be unable to renovate or make changes to the property to suit your needs, and there may be restrictions on things like pets;
- There is no incentive to improve or decorate the property from a financial perspective as any gains go straight to the landlord;
- Each time you relocate (either through choice or need) there will be a cost - moving, security deposit, mail redirection etc.
Deciding what is right for you
As you can see there is a lot to think about when deciding whether to buy or rent. To help decide what is right for you, you need to weigh up the pros and cons discussed above and add your own. While affordability plays a big part in determining your options, you also need to think about what's right for you now and in the near term, before deciding whether you're ready for the long-term financial commitment of home ownership, or whether you'd be better off keeping your options open by renting for the time being.
Are you a first home buyer? Click here for all the info you'll need to make this important purchase.