Mortgage Vs Rent: An Australian Experience

Writing about a mortgage compared to paying rent was always going to be fraught with difficulty because it’s such an emotional subject.

There’s something deep within the Aussie psyche about home ownership. As children we hear over and over again about the need to own one’s own home. It’s referred to as our castle. In fact, if you don’t have your own bit of real estate in Australia, people wonder what’s wrong with you. Where have you gone wrong to be such a failure?

However, there’s a fringe movement going on. People are starting to look at home ownership as a purely mathematical equation and are questioning the validity of the great Australian dream.

These may be people priced out of the housing market by rising real estate valuations; workers who need the ability to move easily to follow employment; people with an international lifestyle; or the financial nerds of the world who view mortgages as maths and not emotions.

Disclaimer, I am a home owner.

Our Home Ownership Costs

We own a four bedroom home (note the use of the emotive word home, rather than house) on 1/3 acre in North East Victoria.

Our mortgage is quite small at $138K with a variable interest rate of 2.64%. This interest rate is predicted to stay low for around another three years according to the Reserve Bank of Australia.

The reason I am including this information is to give the article context, as a much higher mortgage borrowing will have much larger repayments. Conversely, a higher interest rate would also increase the repayments.

To come up with the cost of home ownership in our scenario we’ve included the mortgage (principal + interest), rates, home insurance, water service bills, government sewerage loan connection costs (non-negotiable, interest free), plus repairs and maintenance.

We have not included major repairs, renovating, landscaping, scheduled painting or carpet replacement. Nor have we factored in capital gains or losses as we don’t have a crystal ball.

Home ownership costs PER WEEK
Mortgage$244.30 p/w
Rates$ 36.00 p/w
House insurance$ 15.93 p/w
Water service costs & sewerage connection loan$ 51.94 p/w
Repairs and maintenance$ 28.84 p/w
Total cost per week$377.01 p/w

In a city area, or more upmarket housing in a regional area, the cost per week of home ownership would be substantially more.

If you are a home owner, I highly recommend you go through this financial exercise to know what your basic housing costs are.

The Cost Of Renting

To make a fair comparison of the cost of home ownership compared to renting, I’m using rental figures for my town.

Median Property Values and Rental Prices
HouseProperty valueRent paid p/w
2 Bedroom$257,500$280
3 Bedroom$320,000$320
4 Bedroom$425,000$400

Looking at the chart, a house with a similar value to ours (but less bedrooms) costs approximately $280 per week to rent.

A more valuable property (and likely much nicer house) with three bedrooms costs $320 per week to rent.

A far nicer house than ours with the same amount of bedrooms has a weekly rental cost of $400.

Our Mortgage Vs Rent

Based on our conservative home ownership costs of $377 per week compared to renting:

  • We could rent a smaller house and save almost an extra $100 per week
  • Even a nicer property with one less bedroom would save us $57 each week
  • Or the same size house in far better condition would only cost another $23 a week

Based on a purely mathematical equation, we would be better off renting. But when is home ownership just a matter of maths?

Pros & Cons

Renting

  • Can be cheaper than home ownership
  • Moving is easier, particularly to move to better paying employment
  • If something needs repairing, the landlord pays these costs
  • Rent is just one bill, compared to paying a mortgage, rates, insurance, service bills, repairs & maintenance
  • You can take advantage of geoarbitrage as needed (moving to a lower cost of living area, or even a lower cost of living country)
  • Your money isn’t locked up in an asset (house) and can be invested in the share market to create a passive income of dividends (no need to work)
  • On the minus side, you might have to constantly move when you want to stay put
  • You just can’t do what you want to the house, such as pictures on the wall, a new garden, etc.
  • Being subject to regular house inspections are a nuisance
  • You might get a shitty landlord who takes a long time to do essential repairs
  • It might be difficult to find a rental that suits your requirements

Home Ownership

  • You can make any change you want to the house/property (council permitting)
  • The value of your property could increase dramatically (or may not)
  • With home ownership, you decide how long you want to live there
  • One day in the future the mortgage will be paid off and then you only have ongoing rates, insurance, service bills, repairs and maintenance
  • If you end up having to survive on a government pension, it is financially easier living in a paid off house (providing no major repairs are needed)
  • On the negative, stamp duty and solicitor fees are a major cost and makes it expensive to move when having to sell and buy
  • You could end up asset rich, yet cash poor and need to keep working until old age
  • If something breaks you have to organise and pay for repairs
  • Major repairs and renovations could really set you back financially
  • House insurance could become very expensive if your property gets zoned as being in a flood or bushfire area

Conclusion

When I showed Mr Hack this equation he looked decidedly uncomfortable at the outcome.

Our house is our home. We’ve laughed, loved and cried in this house. We’ve brought home two babies to this house (one that wasn’t expected to live). We raised teenagers in this house.

There’s a lot of emotion and memories stored in our home.

However, I’m also acutely aware that home ownership is a culturally endorsed social construct and the only meaning we give to property ownership is an opinion that we assign to it.

Change our mind in favour of renting, and suddenly our belief system around housing changes.

The easy answer to the mortgage vs rent question is that mathematically you could very well be better off renting. Of course, there’s the pros and cons to consider for both.

In saying that, if you have not saved and invested for retirement and end up on a government pension, paying rent at that stage of your life and under that scenario will not be in your favour.

What’s your opinion on housing? Do you believe it’s better to have a mortgage, or to rent? Please scroll down and write in the comments box.

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