Is Rent Money Really Dead Money? The Debate Between Renting versus Buying Rages On
We all need a roof over our heads, and to get it we have but two options: to rent or to buy. Renters have no doubt been confronted with the well-meaning but misinformed loved ones and friends loudly proclaiming to all who will listen that rent money is dead money.
That rent is indeed dead money is not a difficult assumption to make when, at the end of the month, you see thousands of dollars stripped from the budget just for the sake of a roof over your head. Mortgage payers experience the same fate, but at least at the end of a long working life, they will have a house to call their own.
Many renters dream of a day when they can finally sign their name to a mortgage but is renting so bad? Do mortgage owners have it so good – or are they looking at their mortgage through rose coloured glasses? As with most financial arrangements, the only way to tell for sure is to crunch the numbers.
The Advantages of Buying
Numbers keep everyone honest about the purely financial aspect of renting versus buying, but they don’t reveal the intangibles that can’t be measured by real dollar values.
For instance, homeowners have the luxury of being able to modify the house to suit their circumstance physically. If a bigger carport or a nursery for the new baby is needed, then there’s no problem putting one in, finances willing of course. A renter, on the other hand, either has to strike up a deal with the landlord or find a more appropriate property to rent.
Only the individual can determine whether the intangible aspects of owning a home are worth it in the end, but there is one other main reason people choose to take on a mortgage, security.
Buying for Security
Most loans are structured in such a way that people pay off a little of the principal each month, with the rest of the payment covering the interest. The principal is the part of the loan that reduces what is owed, and interest covers the bank’s expenses. For people who can’t save regularly, buying a house may be a form of forced savings that ensure they at least have some security for their retirement.
Renters tend to be at the mercy of the landlord. Landlords can raise the rent, and do so regularly. Property repairs such as leaky pipes and rickety stairways may be left untended for months or even years. Landlords also have an ultimate say over who gets to stay in the house, and often that does not include pets.
Then there is always the chance that the landlord will sell, leaving you to find yet another place to call home. We all know how much fun it is to move house, and it’s not something you like to repeat every 6 or 12 months.
When Not to Buy?
Mortgages are expensive to set up. You have already handed over tens of thousands of dollars before you even get the keys. If you don’t plan on uprooting your life any time soon, then this isn’t a bad thing, and you wouldn’t be signing unless you were sure anyway.
Renters have the luxury of being able to pack up and move their life to the other side of the country, without the stress and hassle of having to sell the home and hope property prices have increased enough to cover the expenses.
Buying also comes with added expenses such as body corp fees, rates, home insurance, water fees, and repairs and maintenance. Renters hand over the rent every week or month and the rest is the responsibility of the landlord.
Crunching the Numbers
So now that we have had a look at the various pros and cons of renting versus buying lets crunch some numbers to see how well renting stacks up against buying, or vice versa in 2019.
In January of 2019, median house prices in New Zealand decreased from $560,000 to $550,000, with growth recorded at 5.8% for 2018. Houses in the lower quartile, a market that is dominated by first-home buyers and landlords, increased around 10.3%. Median rents for three-bedroom homes went up to $440/week, rising from 2018’s price of $380. [source]
As low-interest rates push up prices, it becomes harder to save for the 20% deposit required by most banks.
As of January 2019, homeowners funnel just over 26% of their after-tax income into the mortgage and other costs associated with home ownership. In comparison, a little over 27% of a renter’s household income is used to cover the rent for a 3-bedroom house.
The raw numbers reveal that, in 2019, it takes 1% less to maintain a mortgage than to rent, assuming you have managed to save for the deposit. Saving for a deposit while paying rent is difficult.
The average household will need to put 20% of their take-home aside for about 3.6 years to put enough way for a deposit. When combined with rent this is almost half of the total take-home pay.
Plus, let’s not forget that interest rates are experiencing record lows, but this could change at any moment. Next year’s interest rates could paint a very different financial picture.
The key takeaway is to not get caught up in the stigma that rent money is dead money because, realistically, you can look at interest payments in the same way.
The difference between renting and buying comes down to what you want out of life. If your home is your castle to do with as you see fit, then you would probably be happier going down the mortgage route. However, if you don’t want the hassle and expense of being tied down to one area for decades and can save responsibly for your retirement, then renting may be your thing.