Is it possible to have your smashed avocado and eat it too?
There is nothing more relevant to young Australians these days than the decision to rent or buy. However with rising house prices in most Australian cities, and a lack of deposit, many are left with no choice but to rent.
Despite its current weaknesses, the great Australian dream is certainly not dead. In fact, according to the Household, Income and Labour Dynamics Australia survey [1], the current decline in home ownership is driven by affordability, not people’s aspiration to own their own home.
In light of this, we weigh in on the renting versus buying debate, and ways you can keep the lifestyle you want without compromising on your financial goals.
Renting vs. Homeownership
Renting has been slandered as ‘dead money’, however, is owning your own place still a better financial choice?
Australian Economists Dominic Crowley and Shuyun May Li recently conducted research to determine just this, and the results are in. Not surprisingly, they found that buying a home is still a better financial choice than renting [2]; however, this will depend on your specific circumstances.
To evaluate your circumstances, here are some basic questions to ask yourself:
How much can you afford?
To determine how much you could spend on a home, it’s important to take a close look at your budget (or lack thereof). Review your bank statements and have a look at where you spend your pay. You can use our Budget Planner to help you work out where you are spending your money and potential opportunities to save.
Next, it’s important to see how much you could borrow based on your income and expenses. You can use our Borrowing Power Calculator to give you this estimate.
Lastly, take a look at potential repayments for a loan within this borrowing range. For example, if the result from the Borrowing Power Calculator shows you can borrow a maximum of $300,000, use our First Home Loan Calculator to work out what your repayments might look like with a loan of this size.
How does this compare to how much you are paying in rent?
If your potential home loan repayments are more than how much you’re currently paying in rent, why not set the difference aside into savings account?
According to Ratecity, you should allocate no more than 30% of your take-home pay to your mortgage, to ensure that you are not over-extending yourself. So, it pays to be realistic with yourself about how much you can afford to save. There will be times where you may dip into your savings to pay for other things which may arise, however, try to top your savings back up where possible.
Getting yourself in the habit of taking potential home loan repayments out of your pay will mean that you are:
- Preparing your budget for life after a home loan
- Adding to (or starting) your home loan deposit
- Showing your potential home lender that you are already meeting potential repayments (this will work in your favour when you apply for a home loan later down the track).
Most lenders will ask you to save up at least a 5% deposit to purchase your first home, however, there are other options if your parents are willing to go guarantor.
Guarantors use the equity in their property to be used as additional security over your loan. This means that you might not need a 5% deposit, and in most cases means you’ll avoid paying Lender’s Mortgage Insurance.
Being a guarantor carries significant responsibilities, so if you’re lucky enough to have a parent who is willing to go guarantor on your home loan, this could mean you’ll be able to get into your first home sooner.
What’s on the market and how long do you plan to stay there?
Write a list of ‘must-haves’ for your first place and check what’s on the market in the area that you want to buy in. Remember, your first house will mean compromise. You may need to reconsider the location you want to buy into something a little more affordable, or where your dollar will stretch further.
Think about how long you want to stay in your first home. Are you looking to live there for a few years before selling or are you planning on being there long term?
Property is an investment at the end of the day, therefore it’s important to ensure you’re making a good investment whether it is the short or long term. If you can’t find a home that’s suitable, it is a good idea to wait until you find something you’re happy with- don’t rush into it!
What will your life look like in the next 12-24 months?
While we’ve learnt that buying a property is a good financial decision, it is important to consider what your life might look like in the next 12-24 months.
Are you still finishing off an apprenticeship? Are you studying? Planning on travelling?
Purchasing a property is a major financial decision, and you need to ensure you are in the right position to buy before you commit. If you’re unsure of what the next 12-24 months hold for you, renting may be the safe alternative while you continue to grow your home loan deposit.
Regardless of whether you’re planning on buying now or in the years to come, it’s never too early to consider your financial goals and the steps to help you get there.
Despite what the media says, it is possible to enjoy your smashed avocado and save for a home, although it may require compromise on what sort of property you’re after, or how long it may take to save for your deposit.
Looking to begin or grow your home loan deposit?
Our award-winning First Home Saver account is the perfect place to start. It’s got loads of features to help get you into your first home sooner and you can open it online in just minutes or call us on 1300 362 216.
This blog post is for general information purposes only and is not intended as financial or professional advice. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product or other professional advice. You should seek your own independent financial, legal and taxation advice before making any decision about any action in relation to the material in this article. Railways Credit Union Limited trading as MOVE Bank ABN 91 087 651 090. AFSL/ Australian Credit License number 234 536 | ABN 91 087 651
[1] http://www.theaustralian.com.au/news/nation/the-australian-dream-soon-fewer-than-50-per-cent-will-own-home/news-story/3fe46d2b31ccc858cedf66d50af8e336
[2] http://www.smh.com.au/comment/rent-or-buy-the-evidence-is-in-20170107-gtnj2a.html
