There are many advantages to renting a home. No massive debt, maintenance being someone else's problem and the flexibility of set payments each month for the term of your tenancy. Conversely, homeownership delivers an asset that can increase in value, give you equity in the future as well as giving you a permanent place to live and call home, without the threat of eviction if the landlord decides to sell unexpectedly !
Many people see renting a property as you paying for someone else's mortgage. However a mortgage is a lot of money going out with most of it going towards paying off the interest (in the early stages) and not actually paying much off the principal outstanding on your loan to buy the home.
Whether you're considering the 'rental trap' or a 'death contract' (in old French 'mort' is death and 'gage' was pledge) there are a few things to consider.
Is buying cheaper than renting?
Whilst this is another one of those 'it depends' answers, in most cases it's usually more expensive to own a home than rent a house.
Many people simply look at the weekly outgoing of Mortgage vs Rent and after considering potential capital gains, form a view that home ownership offers long-term benefits that make renting a worse financial prospect.
In reality there are many additional costs to home ownership that tips the balance towards renting being the cheaper monthly prospect.
These additional costs include:
- Mortgage insurance
- Income protection insurance
- House insurance
- Maintenance and repair
- Rates and Water charges
These are all things that a renter doesn't need to worry about. A mortgage may be at a similar level to rent but these costs can add up to the point where a home owner has more property-related outgoings than the average renter.
Another thing to consider is that rent will generally only increase when it comes to signing a new contract, or at specified rental review intervals. Interest rates on a variable mortgage can change from month-to-month. In low interest periods this is great news, as it may mean your mortgage becomes cheaper. Conversely if interest rates go up, this can mean a significant jump in your monthly repayments.
In the motor vehicle industry many self-employed people choose to lease their car instead of buying one. This means they never actually own the vehicle but pay a monthly 'rent' to use it. At the end of the period they give the car back having only paid the lease amount. Sound pretty easy, right?
What are the benefits to buying a home?
Like buying a car, rather than leasing, one of the major benefits of buying a home is that you get to own it once all the payments are made.
Unlike a car, which generally loses value the older it gets, houses typically appreciate (grow in value). We're currently in a period of house value appreciation in most areas of NZ. So we can look at some real-world examples of what this looks like.
The average house price in New Zealand in October 2014 was $484,307. Fast forward to October 2018 and the average house value in New Zealand is $676,427!
Some regions have grown more than others. So here are a few locations where someone buying a home in 2014 will be quietly thankful if they put their house on the market this year. All values here are taken from QV data:
- MacKenzie District - 83.9% increase in house values
- Waikato - 82.8% - 73.2% increase in house values
- Central Hawkes Bay District - 72.5% increase in house values
- Queenstown Lakes District - 68.9% increase in house values
In MacKenzie District this would mean a $552,000 house back in 2014 would now be worth just over a million dollars. The good news for these home owners is that their mortgage would be for the original amount plus interest, but selling the house would release cash (equity) worth so much more than the borrowed amount.
Equity can be a very useful thing if you ever plan to borrow more money in the future. Lots of lenders will enable you to secure the amount borrowed against the equity in the home you own. You could use this to buy more property, start-up a business, fund a holiday or education.
Renters, on the other hand, have to rely on their savings alone to fund the above. That's because they are unlikely to have major assets to their name to leverage for future lending.
There's also the end goal to consider, even if you never plan on borrowing against your home. The aim for most home owners is to pay off the mortgage at some stage. When that happens you have the full value of the home as a releasable cash payout. You may be of an age where you want to downsize, and selling your home will enable you to buy your smaller home outright, and free-up some extra cash.
In many cases owning a home is a long-term investment.
How to know if you will be taken seriously by the bank or mortgage broker?
If you're a renter and looking to buy a home then all is not lost!
You may have been finding it tricky to save a lot for a deposit whilst paying rent but quite a lot of people have been in the same situation and managed it.
One of the best things you can do is save as much as you can. This may sound like rubbish advice, because it's so obvious but it does more than fill your account with a potential deposit. Saving shows any potential lender that you have financial self-control and can budget and plan. These are incredibly important factors because the lender will want to see that you've got the discipline to be able to pay them back, and perhaps make some sacrifices if something unexpected comes along.
If you're visiting a mortgage broker they're going to need to see evidence of your financial situation to help get the best mortgage for you. This will need to be a mix of savings you have for a deposit, and your monthly outgoings. Don't worry if your rent makes up a large percentage of your outgoing - a bank can see that this will be replaced by mortgage repayments if you are successful in buying a home.
No matter whether you're in the market to buy right now, or simply looking into your options it's a great idea to chat to a mortgage broker early. They will let you know how realistic your prospects of getting a mortgage are and will give you tips on how to improve your situation.