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Renting, buying, or investing in property. Understanding your options.

Financial Planning  |  10/10/2016  |   2 min read

Owning your own home has been the Australian dream for decades. But with housing affordability a rising concern, people are beginning to weigh up their options, and look at the benefits of buying, renting, or investing in residential property. 

Despite record low interest rates, getting a foot on the property ladder has become increasingly difficult. In the previous financial year, average house prices across major capital cities grew by 8.3%, more than four times faster than wage growth of 2%

Against this backdrop, it’s hardly surprising that the proportion of first home buyers has fallen to less than 14% of all home buyers, the lowest level in more than a decade.ii 

As the numbers of first home buyers fall, many younger Australians are focusing on buying an investment property instead. A recent survey by Mortgage Choice found 50.8% of investors who purchased a first investment property were 34 or younger, up from just 33.8% three years ago. 

But which option is right for you? 

Home sweet home

One of the best arguments for buying a home is that it forces you to save. Most of us find it difficult to save money for long-term goals, but that is what paying the mortgage forces us to do. The pay-off is eventual ownership of an asset that enjoys favourable tax treatment when you sell or when seeking eligibility for the age pension and other means-tested benefits in retirement. 

Unlike rents, which rise along with the cost of living, mortgage payments are fixed to the initial cost of the property and principle payments tend to fall relative to rents for similar properties over time. 

Buying also provides the security of being your own landlord and the flexibility to renovate. After building up equity in your home you may choose to borrow against it to kick-start an investment portfolio. 

On the downside, saving for a home deposit and transaction costs is a major hurdle for first timers. Ongoing costs for rates, maintenance and insurance can also be significant. While mortgage interest rates are currently at record lows, buyers also need to factor in the possibility of higher rates over the term of the loan. 

When renting makes sense

Renting can potentially free up money, which can be invested in assets with a higher return than residential property. For this strategy to work, your rent must be less than you would otherwise spend on mortgage repayments. You also need the discipline to invest the savings if you want to get ahead. 

Renting rather than buying can be a profitable strategy when other asset classes provide higher returns. Yet over the past 10 years residential investment property has been the best-performing asset class with an average annual return of 8% a year compared with 5.5% for Australian shares for the 10 years ending December 20015. 

A middle ground

First time buyers often find they can’t afford to buy in an area where they want to live. So to get a foot on the property ladder they continue living in rental accommodation - or at home with Mum and Dad - and purchase an investment property. 

The advantage of this strategy is that your tenants help pay off the mortgage. And unlike a home you live in, costs such as interest, repairs, rates and insurance are tax deductible. 

At the end of the day, the decision to buy, rent or invest will depend on your personal financial situation, the state of the housing and rental markets, the returns available on other investments and your lifestyle. The important thing is to have a long-term housing strategy that won’t disadvantage you in later life. 

 


This information is provided for general information only. It does not take into account your personal objectives, financial situation or needs and should therefore not be taken as personal advice. You should consider whether it is appropriate for you before acting on it and, if necessary, you should seek professional financial advice. Before making a decision to invest in the Equipsuper Superannuation Fund, you should read the relevant Equip Product Disclosure Statement (PDS). Past performance is not an indication of future performance. Issued by Equipsuper Pty Ltd ABN 64 006 964 049 AFSL 246383.  

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