To rent or buy?

4 min read

Rising property prices are making it harder for first home buyers to get a foothold in today’s property market. As a result, more Australians are deciding that long-term renting makes more financial sense for them.

Renting vs buying

On the face of it, long-term renting can be very appealing. However keep in mind that every dollar you pay in rent goes to the landlord’s bank account.

On the flipside, paying a mortgage can be more expensive than paying a weekly rent. But over time, as you pay the capital off, the mortgage starts to decrease. 

For a home owner, there are one-off costs involved with buying a property such as stamp duty and legal fees. You’ll also face ongoing expenses like building insurance, rates and repairs and maintenance. As a tenant, you don’t generally pay these charges.

But here’s the thing. Paying off a loan is like forced savings. A quality, well-located property could continue to rise in value long-term. And, provided you meet each repayment, the time will come when you own the place debt-free.

As a long-term renter, you may wish to consider in taking active steps to ensure you build up a decent financial nest egg. It means being committed to saving hard – and saving consistently – to achieve the same long-term financial security as a home owner.

Things to consider before buying your first property

Buying a first home is a thrilling time, but the process may feel overwhelming. There are a number of interlinked factors that need to be considered before you make a final decision.

The old saying 'location, location, location' continues to rings true. However, it will come down to your finances and for this reason, first time property buyers need to be flexible about the location they choose. Either way, most want to look for a property that is well-served with public transport and is close to shops, cafes and shops.

Once you have determined the location, you'll need to consider the kind of property that suits you – and this can involve taking into account your longer-term situation. For example, if you’re a young couple, you may have plans to start a family sooner rather than later. In this instance, a larger property close to schools might be one of the appropriate options.

Alternatively, if you are purchasing an investment property, you should do your research accordingly. For example, executives who work long hours might prefer a modern apartment with a gym or pool, close to their workplace.

Once you've settled on the style of property and the location, you need to get your finances sorted and this is where a discussion with a BT Adviser could be worth your while to help you with managing your budget and cash flow. 

Funding your property

There is a smorgasbord of home loans to choose from but one of the key decisions to make is between a fixed and variable rate.

A variable rate loan is generally more flexible and there are likely to be no limits on the amount of extra repayments you can make – an important factor if one is considering to pay off a loan sooner than the original loan term.

A fixed rate loan may be more restrictive as it generally does not offer loan features such as fee-free extra repayments and a redraw facility. A variable rate loan generally offers a redraw facility which lets the borrower access extra repayments that have been made on the loan over and above the required minimum repayments.

Opting for a fixed rate loan, however, could protect you from rises in market interest rates. The downside is that if rates fall, you could end up paying more than necessary on your loan.

It is possible to enjoy the best of both worlds with a ‘split loan’ that comprises fixed and variable rate portions.

The key is to shop around for the loan best suited to your needs. Remember to take into account not only the interest rate when shopping around, but also any loan features that are or are not included as well as the fees that might apply.

Protecting yourself and your property

It always pays to be prepared for the unexpected. For your home, this may mean to have up-to-date building and contents insurance in place. In fact your lender is likely to stipulate that your home building be insured as part of your loan.

Insuring against natural disaster

To protect your home against natural disaster, be selective about where you build and follow the latest building standards and council codes. 

Buying a property in a flood zone for instance can mean picking up a low cost place but the property could be uninsurable – either that or you could find yourself paying a small fortune in insurance premiums.

Many councils now have building guidelines that address natural hazards, with design criteria that will give your home some level of resilience against natural disasters.

Do check the fine print of your home building policy. It will state exclusions, and if you live in a bushfire prone area, it could be worth looking for an insurer that accommodates your type of region.

It’s important to insure yourself too

Your ability to earn a regular income is a key aspect of being able to afford a home or investment property. Once you have a major commitment like a home loan, you may consider having an income protection insurance in place. An income protection will generally cover you for around 75-80% of your regular wage or salary if you can’t work due to illness or injury.

In addition to income protection, you may consider having a life insurance in place. Having adequate life insurance in place means your family could be spared financial hardship if you pass away. Something to think about is how much life cover might be needed to give you a piece of mind so that your family can continue to live in their home and maintain their lifestyle if you were not around.

Need help understanding your financial options to rent or save for a first property? Contact us to arrange to speak to a BT Adviser
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This information is current as at 15/08/2016.

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs.

This information provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

Westpac Banking Corporation ABN 33 007 457 141, AFSL number 233714, Australian Credit Licence number 233714