It’s easy to get caught up in the news headlines and neighbourhood chatter about what’s happening in the property market. Everyone you know will have an opinion on whether you’re better off buying your first home or continuing to rent, and it can be hard to sort fact from fiction. Your uncle might tell you that renting is like throwing your money away, while your neighbour claims a mortgage is a one-way ticket to financial ruin.
Who should you believe?
There’s no single ‘right’ answer to the rent or buy question, because every situation is different, and not everyone has the same goals. What feels like the best choice for you won’t necessarily apply to your friends or family. You might like the flexibility of renting without the ball and chain; they might put more value on owning their home. Always remember: buying a first home to live in is about playing the long game - your house or apartment won’t automatically rise in value overnight and make you rich.
So, is it better to take that first step on to the property ladder, or to keep rolling with renting? Let’s look at the pros and cons of each.
What do you want (and need) from a home?
This is a really important question to ask yourself and talk about with your partner (if you plan on buying a home with someone else) before you launch into the rent vs buy debate.
Having a place to live comes with a whole lot of emotional baggage that goes beyond walls and a roof (and some people are more affected by that than others). If you’re trying to figure out whether to buy your first home or carry on renting, make a list of the things you want and need. Our advisers often have these conversations with our customers, so we put together some tips when considering whether you buy or not.
Here are some useful questions to get you started before you crunch the numbers. If you’re thinking about buying a place to live with a partner, friends or family, make sure you discuss these with them :
- Where do you want to live? Why? Is that likely to change in the next five years?
- What are your must-haves? Do you need extra bedrooms for a growing family, or plenty of outside space for pets?
- How do you feel about commuting? Could you still get to work and school easily if you moved to a new area?
- What sort of property are you looking for? Something you can live in comfortably, or you can improve over time?
- What are your other life goals? Do you want to save up to study, travel overseas or take time off to have a family? How will you pay a mortgage (or rent) if you do these things?
Buying a home
Let’s see how it stacks up in reality and look at the basic pros and cons
The benefits of buying a home
If you’ve spent years renting while putting up with your landlord’s choice of hideous green curtains or fluffy beige carpet, having your own home that you can do what you like with can be the ultimate freedom.
Home ownership also puts you in the driver’s seat. You can put down roots without being at the mercy of landlords deciding to kick you out because they want to move in, or sell the property. You can plant a veggie patch, confident that you’ll be the one to reap the benefits, your kids can go to school down the road and you’ll be able to settle into a community with your neighbours.
Taking on a mortgage is a big step and it might feel scary, but when you’re paying back principal (the amount you borrowed) as well as the interest, each repayment is essentially money in your future pocket.
It’s a bit like saving.
You could look at the interest portion of each repayment like ‘relative rent’, while the principal is your investment or equity gain. This remains the same if the housing market is flat, but when the market booms and house values go up, your investment or equity gain is worth more.
The cost of rent generally goes up over time, whereas the cost of a mortgage goes down. Something to ponder.
The downsides of buying a home
Buying a home is likely the biggest financial commitment you’ll ever make. Fun fact: the term ‘mortgage’ comes from the Latin language and when translated literally, means ‘death pledge’. What a lovely thought. You also can’t wake up one morning and decide that you’re over it and don’t feel like paying large sums of money to the bank anymore. It’s about as adulty as you can get.
It’s a long-term commitment too. The most common term for a home loan is 30 years to pay off your mortgage - and the interest you’ve accrued in that time. If you’re only paying enough to cover the interest payments each fortnight, it will take even longer.
The mortgage isn’t the only cost involved. Home ownership comes with a bundle of other financial commitments, including insurance, council rates, water charges and body corporate fees for apartment or unit dwellers. You’ll need to factor all these into your budget when you’re looking at what you can afford. Have a read of our blog on the ‘hidden’ costs when buying your first home to get a better idea.
Maintaining a property costs money too, whether you’re doing a major reno job or just making sure it’s in a livable condition. Plumbing, electrical issues and structural problems can put serious dents in your bank account.
Renting instead of buying
Think you might be better off renting? Let’s take a look at the pros and cons.
The benefits of renting
If you enjoy flexibility and the thought of committing to hundreds of thousands of debt gives you the sweats, renting could be the right option. Maybe you’re a gypsy at heart, or your job or life circumstances mean you move around a lot.
As a tenant, you don’t have to worry about maintaining the property. For example, if the roof is leaking, it’s usually the landlord’s job to fix (and pay) for it. No skin off your nose.
You’ll have to pay a bond and some rent in advance when you sign a rental property agreement, but these costs will be much less than what you’d need for a bank deposit if you were signing up for a mortgage.
Downsides of renting
When you rent a property, you often sign up to a fixed term agreement that sets out how long you can live there (usually 12 months). In some cases, the landlord only has to give you 42 days’ notice if they want you to move out. This can be stressful, especially if there’s a lot of competition for rentals and you want to stay in a specific area.
Landlords can decide who rents their properties and set conditions on how they are used. You will be expected to look after the place, but you can’t change the decor or make any other improvements unless the landlord agrees. Even if they do agree to let you paint over the hideous 70’s wallpaper, you’ll be doing it at your cost (and their benefit).
Landlords aren’t known to be great pet lovers - if your family includes animals, you might find it difficult to find a home.
Your rent is likely to be paying off your landlord’s mortgage - there’s no long-term financial benefit waiting at the end for you.
Squirrel’s take on renting or buying
Well, we wouldn’t be in this business if we didn’t believe in getting on the property ladder. As long as property ownership aligns with your situation and goals, we believe the benefits outweigh the costs.
Right now, interest rates are at an all-time low in New Zealand, so the cost of borrowing is the cheapest it’s ever been. When you compare rent plus savings with what you’d pay in mortgage repayments there’s often very little difference (the mortgage can sometimes even be cheaper). As we’ve mentioned above, rather than paying someone else’s rent, you could be paying your own mortgage where every payment is helping to reduce your loan amount. Over time this will give you equity in your home, freeing you up to be mortgage free in the future. We see this trend continuing for the foreseeable future.
Property is one of the most common ways New Zealanders invest their money, and we see more investors getting into the market with expectations of high rental returns in the coming years.
In the past, people have been able to get a relatively good return by keeping their money in the bank. But as mortgage rates reduce, the savings and term deposit rates are also reducing which means there’s very little incentive to keep investments in there, earning a pittance. People are looking to invest their funds elsewhere and for many, property makes sense. There is still a housing shortage and more and more people are needing to find a property to live in. Because of this, landlords can almost dictate what rent they receive. We’ve even heard of examples where prospective tenants have offered higher than advertised rent to secure a property. There’s no real end in sight for the housing shortage so the rental market will continue to be a tough one which would mean more of an incentive to get onto the property market.
Now you're clued up on the pros and cons, the next step should be to weigh up the relative costs and benefits of renting vs buying, taking into consideration how you want to live. Start by taking our mortgage calculator for a spin to work out how much you can afford.
Let’s talk
We know that every individual’s situation is different, so there isn’t one right answer for everyone. Our team of helpful advisers are here to chat if you’d like some more advice — get in touch with the team or download our First Home Buyers Guide for some more tips!