On the surface, buying a house might seem like the best possible idea, but although it has its advantages, it also has its drawbacks. In the end, renting may be the best decision. Ultimately, this is a personal choice that depends very much on your personal circumstances and plans for the future. To help you think this through, we look at the pros and cons of each choice, and we investigate when renting might be better than buying.
In this guide...
Advantages of Buying a House
1. Building equity and your credit rating
A house is a substantial asset, and although we always recommend staying out of debt as far as possible, there are times when you really do need an extra line of credit or a bigger one than you currently have.
A house gives lenders confidence. If you default on your loan, they know you have an asset that can help them to get their money back. Of course, that’s also one of the disadvantages of home ownership, but we’ll get into those later.
If you’re good with your payments, you also build your credit rating. “Here’s a responsible lender,” is the message you’re getting across.
2. Tax deductibles
Property tax and interest on mortgages are often income tax deductible. That’s particularly true if you’re self-employed. But don’t overrate the advantage of interest-based deductibles. You are still paying money (your interest). Consult an accountant about what you can deduct. If you work from home, you may even be able to deduct something for that.
3. Rental income
Many people choose to keep their homes, even after moving to another city. After all, rental can cover the mortgage, helping you to build an asset for the future when your rental income becomes money in your pocket because the mortgage has been paid.
However, you will need reliable tenants – if they don’t pay their rent, you could end up in hot water after having to cover the cost of your new accommodation plus the mortgage on your house. There’s also the problem of vacancy. If there’s no tenant, there’s no income.
Lastly, the upkeep of the house is still your responsibility, so it will cost you in electricians fees, plumbers fees and occasional renovations and repairs.
4. Income from lodgers
If you have extra space to spare, you can rent out rooms to students, Airbnb lodgers or other tenants. Ideally, you should be able to maintain your privacy, but some people don’t mind hosting a lodger in their homes – it just depends on the lodger, so screen carefully.
5. Make your mark on house and garden
When you’re renting, you must ask permission for any changes you want to make, and if you subsequently move out, your improvements don’t profit you at all. You can decorate and improve your own home and garden when you own a home, and if you do it well, you could even get your money back (or more) thanks to the improved value of your property.
6. Make yourself at home in your neighborhood
When you buy your own house, you have the social and political clout of being a homeowner in your neighborhood. People are more likely to see you as a fixture, and you have negotiating power with municipalities through local homeowners’ associations.
7. An investment towards your retirement
Saving money can be very tough, and surprise misfortunes can eat up your savings in a flash. But your house is still there, and if you take good care of it, you can sell or rent it when you retire, improving your income considerably.
The Downside of Home Ownership
1. Mortgage interest
If you can’t afford a significant deposit, you will end up paying a total value that’s much greater than your house is worth. And if you sell up before your home is paid off, you could end up making a substantial loss on the deal. If you’re buying with a high margin of credit and aren’t in it for the long run, think twice about buying!
2. Property upkeep costs
If you haven’t owned a home before, you may be surprised to discover just how much keeping a property in good shape can cost. You’re responsible for everything from the paintwork to the carpeting, and then there are repairs, the cost of keeping your garden looking good, and so forth.
Experts say you should expect your annual home upkeep costs to be around 1% of the property value.
3. Property tax and insurances
Whatever you do, remember to factor property tax into your financial deliberations before buying a home. You’ll have a few other costs too. Your home must be insured, and you might want to look into extra disability insurance in case something happens to you, and you find yourself unable to pay your mortgage.
4. Property value isn’t entirely under your control
Even if you keep your home in tip-top condition and make lots of improvements, there’s no guarantee that the value of properties in your neighborhood will keep on rising. Property values can fall too.
5. You may have to buy new furniture
Even if you already own furniture, it mightn’t be suitable for the rooms in your new house. That means buying new furniture and selling off old furniture – and if you don’t have furniture to begin with, you’ll be buying every stick of furniture that’s needed for your own home.
6. Your home loan deposit will cost a lot of money
Expect to pay a bare minimum of 5.5% of your potential home’s value before you can call it your own, and even then, it really belongs to the bank. The lower your down payment, the more interest you pay and the higher your installments will be.
7. Commission and transfer costs
Don’t forget these two very expensive little additions to the cost of your home. They’re another reason to buy only if you are likely to settle down in one place for a considerable time.
8. Foreclosure could leave you heavily indebted
In a worst case scenario, your financial woes can lead to foreclosure. If your property doesn’t fetch enough to cover the loan in question, you might end up with a situation in which you are still in debt but have nothing to show for it. Even when lenders forgive the balance, you have to pay all the taxes related to the sale, and even tax on debt that has been forgiven.
Advantages of Renting
A lot of the disadvantages of buying become the advantages of renting:
- You don’t have to pay interest because renting doesn’t (usually) result in debt.
- Your deposit is recoverable, even if only in part.
- Financial risks and taxes remain the homeowner’s problem.
- You can get a place with appliances or even a fully furnished one.
- When upkeep costs arise, it’s the homeowner’s responsibility to pay them.
- Your initial cost is primarily the rental deposit and your rental itself – no huge cash outlay to get started
- You don’t have to find tenants or sell up if you decide to relocate.
- Some of your utility costs could be included in the rent, making them predictable.
- Amenities and services such as swimming pools and garden upkeep are often included in rental costs.
And there’s a final benefit, too. A good rental reference makes you a desirable tenant when you choose to move on.
Disadvantages of Renting
Once again, we can look at the advantages of buying. These are the benefits that won’t accrue to you when you rent:
- You don’t build equity.
- There are no tax breaks.
- Unless your lease says you may, or you get approval from your landlord, you can’t sublet or have longer term lodgers.
- You can’t make alterations without permission.
- You’re seen as a transient member of the community you live in.
In addition, renting has its own set of unique disadvantages:
- When your lease ends, you may be expected to move.
- Rents can increase unexpectedly, forcing you to move.
Who Should Rent and Who Should Buy?
There are exceptions to every “rule”, but in most cases, the following would hold true:
- Buy if you’re likely to stay in the same place for the next 20 years or so. Rent if you expect to do some career and city hopping.
- Buy if you’re relatively confident the property will be a good investment in the longer term.
- Buy if you have substantial savings to use towards a deposit – the more the better!
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