To Rent or Buy, that is the question!
It's not as simple as it sounds. No two groups of people are the same, each has very different situations, likes and dislikes, incomes, preferences on area and street. The possibilities are endless and I would like to say up front that it is a very personal thing and only you can make that decision.
But lets consider it anyway. We have all heard that buying a house is the only way to get ahead! Renting is just throwing your money away! But I don't believe that it's quite that simple.
For this scenario, let's say this home in Te Atatu Peninsula is the average 3 bedroom home which according to the Barfoot and Thompson website would sell in February 2016 for about $776,000 NZD. Lets also say we have saved a 20% deposit which would be $155,000 (that's a lot of money to have saved). The average rent on a 3 bedroom home in Te Atatu Peninsula is currently $484.
Note: To keep things simple I will be rounding numbers to the closet thousand and making it an interest only mortgage.
The Buying option
- $621,000 (mortgage after deposit paid)
- $43,312 (mortgage payments per annum)
- You still have rates, house insurance, maintenance to pay. These are real cost and need to be factored in. I am going to estimate these at $8000 p.a. (I think this is being conservative)
The Renting option
- $25,168 (rent per annum)
- $3,844 (155,000 invested at 2.48% (after tax rate))
So the outgoings on owning the average 3 bedroom home in Te Atatu Peninsula are – $51,312
So the outgoings on renting the average 3 bedroom home in Te Atatu Peninsula are – $21,324
Ok, I hear you yelling at me about the capital gain. Let us look at two scenarios. For arguments sake we will leave all the interest rates as they are but this is crystal ball gazing and we have no idea what the future has in store for any of us.
Senario One
After 5 years with 3 Bedroom homes continue to appreciate at 13.49%
- You still owe about the same amount.
- Your mortgage payment have not changed much.
- Rates, house insurance, maintenance to pay have all gone up by 2% so its now costing $8800.
- That means that the running costs of ownership are now $52,112.
- So five years ownership have cost you $260,560.
On the plus side your house in now worth a whopping $1,299,000.
- You still have $155,000 in the bank.
- You have no house, no maintenance, rates, or home insurance to worry about.
- With inflation on rent running at 4% you are now paying $22,176 and a total over the five year period of $92,455.
- But the difference between the cost of ownership and renting has meant you had the option to save and invest.
- Saving the difference at 2.48 has given you $231,000.
When all is said and done you have $155,000 in you r back pocket. And saved $231,000 giving you a total of $386,000
Senario Two
After 5 years with 3 Bedroom homes continue to appreciate at 5%
- You still owe about the same amount.
- Your mortgage payment have not changed much.
- Rates, house insurance, maintenance to pay have all gone up by 2% so its now costing $8800.
- That means that the running costs of ownership are now $52,112.
- So five years ownership have cost you $260,560.
On the plus side your house in still worth a whopping $970,000. Your net worth is $709,440.
- You still have $155,000 in the bank.
- You have no house, no maintenance, rates, or home insurance to worry about.
- With inflation on rent running at 4% you are now paying $22,176 and a total over the five year period of $92,455.
- But the difference between the cost of ownership and renting has meant you had the option to save and invest.
- Saving the difference at 2.48 has given you $231,000.
When all is said and done you have $155,000 in your back pocket. And saved $231,000 giving you a total of $386,000.
We can see that it become less attractive to own a home if houses appreciate at slower rates. For some, it may be a way to force some savings but that only works if houses continue to appreciate. There are no guarantees in life and I certainly do not know what the future holds.
If house prices start for fall for any reason, that would change everything. Cash could once again become king. Nothing is as simple as it might seem. For me, I like to live in a house that I own. The downside is I have to maintain this thing and I have set down some roots, so I can't move as easily. These are downsides I can live with but it a personal choice and only you and your family can make it.
For one person it might be better to buy, and for someone else, it might be better to rent. The one big downside to renting is the possibility of being given notice which could be very very inconvenient.
Please do leave a comment below and let me know if you think I have missed something important.