Before deciding which is the best way to finance buying your dream home, consider first if this is the right thing to do or if you might be better off renting.

There are other factors, none financial, which will affect your decision to rent or buy.

These are

  • Do you need to be mobile?
  • Are you sure you want the responsibility of ownership and all the hassle and the problems that goes with it.

Let’s look first at the purely financial reasons.

If you were to rent an unfurnished, two-bedroom, semi-detached house in a pleasant residential are of a largish city, you would probably have to pay rent of several hundred dollars or up to $1000 per month. Over a 25-year period, that works out at around $300,000. and that’s if the rent doesn’t go up during that period, which it almost certainly would.


If you bought the same house for $165,000 with a deposit of $15,000 and a mortgage of $150,000 at 5.2% per annum you would pay $894 a month in interest and capital repayments. Over 25 years you would repay a total of $268,335, of which $118,335 would be interest. The interest is $61,665 less than the rent paid and you own the house debt free at the end of 25 years. As you know interest rates can easily go up as well as rent, but in this example we assume neither changes.

But of course it is not always as simple as this. Other costs are involved as well as the benefits in buying compared to renting.

Benefits

The interest payments could be less.

You benefit from any increase in the value of the property.

Costs

There are up front costs when buying a house e.g. legal fees, etc.

You have to pay for the building insurance as well as a contents insurance.

You are responsible for repairing the property.

You make a loss if the property falls in value.

If the value of the property falls below the amount of the outstanding loan, then you are in negative equity and the money lender could demand a repayment of some of the loan capital.