Is renting a waste money?

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If you have been paying attention to the local property market you’ll know that Melbourne house prices have boomed over recent years. So you might be wondering: is renting a waste of money?

Many people argue that renting is a waste of money because you’re paying the mortgage of the landlord, when you could be paying off your own home.

Imagine buying a home and knowing that in the future, it’s going to be worth more than the original purchase price. Potentially much more.

In five, ten or even twenty years you could enjoy a significant rise in value. People who bought a $500,000 home five years ago are likely to have a home worth $675,000+ nowadays, thanks to a 35% increase in Melbourne house prices.

Then consider the alternative: paying rent for the same period of time. If you rent, you are essentially paying someone else’s mortgage. This is the reason many of our customers decide that renting is a waste of money and decide to get on the property ladder.

So to answer the question: is renting a waste of money?

Often, yes, because you’re better off paying a mortgage than rent (as long as you can afford mortgage repayments and rising interest rates).

Let’s take a deeper look into the reasons many consider renting a waste of money.

Buying vs renting

Many people wonder about buying vs renting and it’s clear: if you can afford to buy, it’s often a wise long-term financial decision.

Taking a look at the pros and cons of buying vs renting will help you decide what’s best for you”

The pros of buying: having your own home that you can build or renovate as you wish, and the chance for that home to increase in value. You also get the security of knowing you’re in control of the property decisions, instead of your landlord.

The cons of buying: housing affordability is a nationwide problem, and there are significant upfront costs. You are at the mercy of fluctuating interest rates.

The pros of renting: you aren’t tied down to a mortgage, you can easily terminate your lease and move elsewhere, and you aren’t burdened with the costs of servicing a mortgage. You aren’t responsible for the upkeep of the home.

The cons of renting: you miss out on the investment potential that property provides, you’re at the whim of the landlord who can increase rent or terminate the lease at any time.

A mortgage forces you to save

One of the reasons people believe renting a waste of money is the fact that paying a mortgage forces you to save money. Essentially, every mortgage payment you make brings you a step closer to owning the home outright.

Whereas when you rent, you make payments but there is no enforced savings. For renters, saving is optional. When you rent, you can be tempted by a new car or a lovely holiday, because you don’t have the mortgage to service. Whereas homeowners will always pay their mortgage first.

Your retirement is coming

It probably feels like decades away, but we all have to face retirement, in the future, we will be retiring from the workforce. At that later stage of life, you want to be living comfortably without the burden of financial worries. While your superannuation helps cover this, it is sometimes not enough for you to live comfortably.

Buying a house instead of renting can help protect your financial future. Whatever your retirement plans, owning your own home gives you options. Hopefully, you’ll be able to live comfortably in your own home for many years to come as you get older. But if you need to move to assisted living, then you have an asset to sell that will cover your lifestyle costs. This can ease the burden on your family, giving them peace of mind that your future costs are covered.

Even though retirement feels distant, it’s important to prepare for it now. No one knows what the future holds, so having an asset in the form of property can give you more options and more financial freedom down the track.

Owning your home gives you equity

The equity is the portion of the home that you own. If you keep paying your mortgage, your equity increases. As property values increase, and you keep paying off your loan, your equity increases. Provided the bank approves your application you may be able to use the equity to make further investments in property or shares. Or you can remortgage and make funds available to renovate or upgrade your home as your family needs change.

It’s YOUR home

As a renter, the landlord can choose to increase the rent when your lease expires, or simply decide to terminate the arrangement, leaving you forced to find a new place to live. Plus, you don’t get a say in the type of dishwasher or hot water system your landlord chooses. But when you own your house, you’re free to add the features and fixtures you prefer. If you want to paint, knock out walls, add an extension or upgrade the air conditioning, you’re free to do so. You can continue investing in the home and keep it up to date with the styles and features that you enjoy, as well as ensuring it has good buyer appeal should you decide to sell down the track.

Even more benefits when you build

If you build a property you have the luxury of choosing everything: floor plan, room size, ceiling height, paint colours, tiles, benchtops—it’s all within your control. If you love the idea of creating a home built to the precise needs of your family, with all the features of modern living, then a house and land package might be a great option instead of renting.

Is it bad to rent?

Not at all. With housing affordability a nationwide problem, if you can only afford to rent, that’s the best solution. Many people rent for a while, saving money to invest in buying a property later.

So to summarise: is renting a waste of money?
● renting means you’re paying someone else's mortgage rather than your own
● with property prices rising over the long term, there’s a good chance a home you buy will increase in value
● be prepared to make mortgage repayments and cope with interest rate rises
● owning a property sets you up well for retirement
● you can grow the equity in your home and use it for future investments
● you’re not at the whim of landlords
● consider the pros and cons of buying vs renting before making a decision

Ready to stop renting?

Check out our first home buyer guide for everything you need to know about buying your first home, including information on grants, buying house & land, buying a house and contract basics.

Have fun with our home design configurator and start building the home of your dreams. Or call 1800 1First (1800 134 778) or fill out our online contact form to arrange a chat with our sales team.

Disclaimer
This advice in this article is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs. It is recommended you seek professional advice from a financial adviser before making any important decisions.
First Place is not a financial adviser. You should consider seeking independent legal, financial or other advice to check how the website information relates to your unique circumstances.

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