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Paying Rent vs. Paying Off A Mortgage

Rachel Horan

Rachel Horan

May 13, 20216 minute read
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The cost of housing is a part of everyday life and plays a huge part in our finances. If you are unsure whether it’s more financially savvy to pay rent on a property or pay off a mortgage, this article dives into the differences between the two. Plus, we include an overall comparison, so that you can make an informed decision on which option might be best for you.

On this page:

    The pros of renting

    While it may seem less appealing than owning your own home, renting does come with some benefits to consider. Renting doesn’t necessarily mean you are just paying off someone else’s mortgage. It can also be financially rewarding for you.

    You can use your savings elsewhere

    Renting doesn’t necessarily mean you don’t have any other assets. When you purchase a home, especially if it’s your first home, the majority of your money is tied into one asset. This can make it difficult to comfortably invest and diversify your portfolio for a period of time.

    Instead of using all of your savings to put down a house deposit, you can invest your money in other things that may yield a higher rate of return. For example, you could consider investing your money in bonds or shares, which have historically returned 6 to 9% over time.

    You’re not tied down to one place

    Buying a property is a much more serious investment than renting. Renting can allow you the freedom to move more freely, as often as you’d like (of course, with consideration of any lease terms). This may be helpful depending on your age and/or line of work. While you can still sell your property, there are a range of costs associated with this that can make it difficult or not worth it after a short period of ownership.

    Maintenance and upkeep is not your problem

    When you rent, anything that needs to be fixed (that isn’t your fault) is not your responsibility. Whether it’s a water leak, pest problem, or electrical problems, it’s the responsibility of your landlord to amend these issues. However, if you accidentally smash a window, you will likely need to bear this cost.

    The cons of renting

    There are also some drawbacks to paying rent instead of a mortgage, as outlined below:

    Renting is still expensive

    While you have more flexibility with what to do with your savings, renting can still be expensive. Depending on where you choose to live, how many bedrooms there are, or any other features that may influence the value of the house, your rent could end up being costly.

    You’re not forced to save money

    When you make your mortgage repayments, you are essentially forced to save as you are putting your money towards an asset. When you rent, you are in full control of whether you choose to invest elsewhere, which can mean that you might end up spending your spare cash rather than saving it.

    The pros of buying

    Buying a property comes with its own set of pros and cons. Of course, a large pro to buying a property is that your money is going towards owning an asset. There are also other benefits and drawbacks of paying a mortgage.

    Appreciation

    The value of a property typically appreciates (or increases in value) over time. For example, the median Sydney property value is predicted to rise 14% by 2023 after experiencing unprecedented growth over the last few years. While there can be dips in the market where the value of your property stagnates or decreases, buying a property is generally a secure investment in the long term. However, it is important to be wary of and prepared for this scenario.

    Stability and freedom over your living situation

    Renting can be difficult if your landlord doesn’t want to extend your lease or chooses to sell. When you buy a property, you are your own landlord, so you can move or sell when and if you choose to. You are also free to modify your home however you want, by decorating or renovating the property, without needing to run it past your landlord.

    Increase your equity

    Home equity is the difference between the value of your property and how much you owe on your mortgage. As you continue to pay off your mortgage, the amount of equity you have will increase (provided the value of your home is increasing). You could then use your equity to invest elsewhere.

    The cons of buying

    While buying a home is often seen as achieving the great Australian dream, there are some cons, particularly in terms of potential costs:

    Interest

    Interest on home loans, as it is typically paid off over a long period of time, can end up being very costly. Depending on the type of interest, your rate can fluctuate throughout your loan term, so the interest you pay may increase or decrease.

    Opportunity costs

    Opportunity cost is the cost of having your money invested in a property, when it could be invested elsewhere. Whether you invest this money into a diversified portfolio yielding greater returns or you invest in your own business, your money that is tied up in property could potentially be used more effectively elsewhere.

    Let’s use a practical example. If you wanted to invest in a property in Brisbane in 2015 that was valued at the median house price at that time – $520,000 – with a 20% deposit to avoid lenders mortgage insurance costs, you would need to have at least $104,000 saved (without consideration of other charges associated with buying).

    Ownership costs

    According to the Reserve Bank of Australia (RBA), the costs of buying a house, including stamp duty, can be up to 4.3%. If you choose to sell, you can end up paying up to 3% in real estate agent commissions and fees. Therefore, the total amount of money spent on the transactions of buying and selling can add up to 7.3%.

    Additionally, it is estimated by the RBA that the running costs of owning a property is at least 2.6% per year. This factors in council rates, repairs, potential body corporate fees, water bills, and insurance.

    Comparison: paying rent vs. paying off a mortgage

    With consideration of all of these factors, there is no simple way to compare buying versus renting. However, to give you a tangible example of the differences between these two options, let’s revisit the example of purchasing a house in 2015.

    Let’s say that instead of using that $104,000 you saved for a house deposit, you invest this same money into an Index Fund. The Vanguard Index Australian Shares Fund has a 58.43% total growth rate over five years. This means that you will make $60,767.20 in five years investing in this Index Fund.

    Alternatively, if you did purchase the $520,000 house in 2015, the median house price in Brisbane is currently $738,000 as of January 2021. This means that the total value of your asset would have increased by $218,000. This is an 8.38% growth rate per annum, or a 41.92% growth rate over five years.

    If you are not ready to be tied down to one place or would prefer investing your money in something other than property, renting may be a better option for you. However, if you wish to invest in a relatively stable asset and see appreciation over time, buying a property may be best suited to your financial situation.

    If you are considering renting a property, but you don’t have your bond money set aside, you might want to consider a rental bond loan from Jacaranda Finance. Jacaranda is an award-winning online lender that specialises in fast and inclusive short term lending.


    Copyright © www.jacarandafinance.com.au Jacaranda Finance Pty Ltd ® ABN 53 162 078 195 Australian Credit Licence 456 404, Pawnbroking License Number 4221738. The information on this web-page is general information and does not take into account your objectives, financial situation or needs. Information provided on this website is general in nature and does not constitute financial advice.


    Rachel Horan
    Rachel Horan

    Written by Rachel Horan

    Rachel Horan is a Content Writer for Jacaranda Finance. Rachel has previously produced content for Brisbane City Council, Black & White Cabs, and Clubs Queensland. She has a Bachelor of Mass Communication with Distinction from the Queensland University of Technology.

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