Confused Between Renting And Buying? Here Is How To Decide
Confused between renting and buying? Here is how to decide
Choosing between renting and buying a house can be a tough decision for many, especially for first-time homebuyers. While buying a house may seem like a better option than renting, not every consumer would prefer buying, given their financial setup. Some consumers might find it worthwhile to live on rent instead of taking out a mortgage to fulfil their need of owning a house.
The previous year has been an exceptional journey for the property sector in Australia, with housing prices reaching unprecedented levels. In such precarious circumstances, many Australians had turned to mortgages with near-zero interest rates, even when prices were well beyond their budget. Renting has not been so popular during the pandemic as fear of missing out (FOMO) attitude ruled the first-time buyers, especially among the younger generations.
However, recent statistics suggest that wealthy property investors have crowded out most first-time buyers from the market. Thus, novice buyers have been left with little or no choice but to live in a rented house. At a time when the property market scenario is gradually changing, one must consider multiple factors in deciding whether to buy or rent.
Here are some key points that can help people in making this crucial decision:
Carefully examine your financial situation
Naturally, any decision that weighs heavily on your pockets should be preceded by a thorough examination of your financial setup.
The decision to take out a mortgage loan may not magically alleviate your financial soundness. Homebuyers on the lookout for a quick solution may choose to buy a house with a smaller down payment. However, those willing to hold back on the decision can save more for a down payment to reduce their long-term mortgage payments.
To decide how much of a liability one can take up, people can keep track of their savings and debt-to-income ratio. On the other hand, renting could be an easier option for those with a poor credit score, who will experience hassle in obtaining a loan.
Establish a time for your purchase
The purpose and the planned horizon for your stay in the prospective house plays a crucial role in driving your decision to buy or rent. Renting seems to be a perfect choice for those looking for a stay that can help them manage their daily activities, while allowing them to fulfil a temporary commitment like an interim job posting or a month-long holiday.
Nevertheless, buying a house seems a better option for financially sound individuals who are willing to live at a place for at least 5-7 years. Having said that, individuals may run into significant losses if they indulge in repeated buying and selling.
Weigh the risks
Both renting and buying have their own set of risks associated with them. While making a choice between the two, individuals should decide how much of a risk they are willing to take with their income and bank balance.
Buying a house is easier when you have the cash for it. But most buyers prefer to take a mortgage, which they must pay for dearly in terms of monthly interest payments. However, missing out on an instalment can have consequences on individuals’ credit score and can even prompt the bank to seize their property.
On the flip side, missing out on a rental payment can have similar consequences, potentially urging the landlord to evict the individual from the house. Here, the risk involved is the loss of the security deposit.
Plan out future expenses
It is often said that part of the solution to the problem lies in the problem itself. Homebuyers and tenants often forget to analyse the annual expenses that entail their purchase. Making a detailed list of the upcoming costs is a good way to start determining which cost structure goes best with your income stream.
Individuals can also choose to take advice from experienced professionals who can give them better projections on income and expenses using efficient tools. This information can be used by individuals to effectively plan their future expenses and make the right decision.
Pick your lifestyle preference
Although it is important for individuals to weigh their financial preferences, it is equally imperative for them to consider what they personally want while making such a big decision. For those who like a nomadic style of living and enjoy changing places in a few months’ time, living in rented properties appears to be a perfect solution.
However, buying a property seems a best choice for individuals who want to find a stable home that they can call their own and modify to suit their preferences. Even if individuals are unable to reach a decision based on the financial analysis, lifestyle preference can be a good threshold to decide between renting and buying.
All in all, both renting and buying are viable options, given the financial and lifestyle setup an individual wants. Individuals can weigh in appropriate risks before deciding on to become a homebuyer or a tenant. Interested buyers can also explore exciting options such as rent-to-own property, where monthly rental payments can help reduce the sales price of the house in a way that the tenant has the option to buy it.
Mr. Kunal Sawhney
CEO, Kalkine Group