Whether to Rent or Buy a Home
Are you still renting but would like to own your property? At times it’s necessary or practical to rent when moving around a lot. And with hot property markets and changing inflation rates it is reasonable to be concerned about mortgage risk. Buying a home is a big financial commitment but planned properly, will grow into one of your key financial assets. Let’s take a look together.

Whether to buy or not to buy?

Even with rising home prices it is still possible to use your income to buy. Every dollar paid in rent could possibly be used to pay off a mortgage. Before property hunting, consider how much you can afford to pay back and what you really need for a first home.

Don’t over extend your finances for your first home. But remember if you can afford to rent you are likely able to purchase a property instead. This is the beginning. From here you can go onto owning more than one home and have an investment property. But first, the basics!

Let’s use an example to help you to understand how you can use your finances more efficiently and achieve the goal of home ownership.

For example, if at the moment you are renting a 1 bed room apartment in Rhodes for $540 a week. But would rather purchase a similar property, let’s consider the maths.

If you would like to purchase it, it would cost you $620K including stamp duty and other expenses. Let’s assume that the strata is $650 per quarter and council rates are $250.

These are the main expenses to factor in when purchasing. As a model we will use an example of an individual who is able to borrow 100% of the property cost, with a loan interest is 4.8%.

The following is a comparison of the cash flow outgoings between buying and renting:

Yearly cash flow on rental: $540 X 52 weeks= $28,050

Yearly cash flow on buying: $38,576(1oan payment) + $2600 (strata) + $1000 (council rates) = $42,175

When you only look at the cash flow, you are not saving money on purchasing the property.

However one thing we need to remember is that while you are renting, 100% of the rental cost is paid out. However when you are paying back your home loan, a part of it is paying back the principle. Therefore the actual expenses you are paying are more like following:

One of the most financially efficient aspects of buying is that as the years grow your net outgoing expenses begin to decrease. While you continue rent your outgoing expense will stay the same or possibly increase with climbing rental. As you can see, if your rental stays the same, from year 10 you are paying less expense than renting

If the loan term is 30 years, you would be paying about $537K as interest to the bank. However if you are renting, total cost for the 30 year would be $842K if the rental remains the same. Buying the property would save you $305k over the 30 years.

Note: You can use the mortgage calculator in our website www.impacttfs.com.au to find out how much interest and principle you are paying for your home loan. Take into account the possibilities of property price movement. If the price moves up, and you have purchased the property, then any price increase will become a future profit for you as capital gain. However if you are still renting, then the renting price could be pushed up by the higher property prices.

On the other hand, if the property prices come down, you will have a future capital loss for a purchased property, while renting could be cheaper due to reduced property prices. There will always be pros and cons. However the end result of purchasing a property is for you to use your income to pay for your own home, not someone else’s.