We are witnessing the lowest interest rates in the last 50 years. In fact, in many parts of Australia, buying a home is getting easier and cheaper than renting a home. The question is: Is this the right time for tenants to consider buying a home?
The answer will depend on each person’s circumstances, and of course there will be many factors that influence your decision. From a broker’s viewpoint, Trusted Finance would like to discuss a few important factors that impact this decision, especially at this time:
A. BUY A HOUSE: Why should you buy a house?
- Low interest rates: With the lowest interest rate for over 50 years, your monthly payments will be extremely low!
For example, if you rent a house worth $ 550K, you will pay between $ 1,400 and $ 1,600 each month for the rent. However, if you could prepare around $150K and borrow $400K from the bank, with the current interest rates, you would only pay around $1,600/month for both principal and interest.
If you continue to rent, after 30 years, nothing will change (let alone the possibility of the rent going up), it is still not your house. However, if you decide to buy now, 30 years later, that 3-bedroom house will be yours!
- Grants from the Government: Currently, the Australian Government has many grants to support home buyers, especially first-time homebuyers. For example, if you are living in NSW and you are buying a property under $850K, you can be eligible for stamp duty exemption; Likewise, in Victoria, stamp duty relief is applicable for property under $600K. Moreover, there are other grants, such as: $10,000 First Home Owner Grant, $25,000 HomeBuilder Grant, FOGD scheme – allowing first home owner to purchase with 5% deposit without paying LMI, etc.
- Buying house is having an investment: Over the past decades, Australian house prices have been increasing unceasingly. Indeed, regardless the impact of COVID-19, the house prices in Australia has not been through any major degradations – only 0.6% decrease in July and 1.6% drop over the last quarter. Moreover, with the number of immigrants entering Australia remains on the rise, the demand for housing will never stop. While the housing demand keeps increasing, new home construction decreases, real estate becomes an investment asset with increasing value over time.
- Home loan can actually saves you money? This might sound contradictory, but it’s actually true. When you borrow money from the bank, you will have a “bigger picture” of your financial situation. Knowing how to distribute your money every month to pay for things such as living expenses, bills, interests for the bank, etc. give you the ability to balance your income and expenditures more easily. In addition, there is an “implicit truth” among people that when you have a “debt”, you tend to live more economically to pay it off faster. Eventually, buying a house will make you have more money without you even acknowledging it!
- The freedom is yours: This is so obvious! Living in your own house will definitely make you feel more comfortable. You can do whatever you want, such as re-designing your house’s interior, decorate your bedroom, etc., without having to worry about “losing your bond” even with a small task like hanging a picture on the wall !?!
B. RENT A HOUSE: Why should you rent a house?
- You can live wherever you want! When you rent a house, you can change your location when your priorities has changed. For example, when you are studying, you would prefer to rent a house nearby your school. Later on when you are married and have children, you can choose the area that surrounds with kindergartens, parks, etc.
- No stress of preparing a huge budget: When you rent a house, you only need to prepare enough money to pay for the bond, which is normally a one-month rental fee (or 2 months, depending on the landlord), and pay the rent each month. Meanwhile, to buy a house, you need to prepare a deposit money of at least 5% of the value of the house (i.e. In order to buy a $500K house, you need to prepare at least $25K).
- No stress of repair or maintenance fee: As long as you are not causing any damages for your renting house, you won’t have to worry about any extra costs, except for the rental fee. The landlord will be responsible for maintaining and repairing the house.
- Not being subjected to lots of constraints: When you rent a house, you can move out at any time (of course you still have to comply with certain termination terms in your tenancy agreement). However, once you own a house, selling it and moving elsewhere could be a bigger problem, since property is a low-liquidity asset, and selling it will take a lot of time. Therefore, if you plan to move to a different area in the near future, it would be best to rent.
C. RENVESTING: What is it?
Either buying or renting house, there are pros and cons. But is it possible to buy and rent at the same time? The answer is yes! In fact, many people are now following this new trend Rentvesting – which is also known as “Buying a house to invest, and renting a house to live”. Let Trusted Finance analyze the advantages and disadvantages of this type:
- Optimize your tax return: When you own an investment property, you will be able to depreciate some items and this will save tax payable a month if there is “negative gearing”. It also means you can have an investment property, but at a lower cost.
- Increase your borrowing capacity: When buying a investment property, your expected rental income will be considered as a source of income, which contributes to your serviceability by your bank. Especially in the case that your rental fee at where you live is smaller than your expected rental income from your investment property. (i.e. You are single and your rental fee is $ 1,000/ month, while you could earn $ 1,600/ month with your potential investment property. Thus, the total amount of your income will increase by $600/ month, which means you can borrow another $100K – $150K from the bank. This can help you to enter the real estate market earlier, without having to wait until the salary increases enough to be able to borrow.)
- Live in an area that benefits your current situation, and invest in a potential area: For some of you, investing in your children is more important, and you will prioritize those areas with better schools for them. Later on, when your children are grown up, you can move to more remote areas, or closer to your community. In this case, you can rent a house in a good area, and buy a house in another area at an affordable price to stay in the future.
- Must find a tenant: with Rentvesting, you need to ensure that your investment property is always occupied. With the current COVID-19 situation when most of international students have gone back to their home country, it is a clear testament to a potential problem as the demand for rent could be decreased at anytime unexpectedly.
- Higher interests rate: Despite being deductible, the interest rate on a rental home loan will usually be higher than the interest rate for housing (For example, at NAB, the interest rate for investment loan is 3.09% while it is 2.69 % for owner occupied). Moreover, if you are not working or have little income, then your taxable income will be zero or very low, which means you will not be able to optimize the tax deduction.
If you are still wondering between renting or buying a house, and you need advice on borrowing money to buy a house … All your problems can be solved with the Trusted Finance team. Call us now, it’s FREE!
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