Buying vs renting: what's best?

Although it’s not always easy to get into the property market, it may be more expensive to stay out of it. If you are smart and choose a good suburb, with growth potential and good amenities nearby, you should see growth in the value of your property and your investment. Your first home may not be that huge family house you’ve always wanted – and that’s okay. It is simply your first step onto the property ladder!

Benefits of buying a property include:

• Building up equity in a home is one of the best ways for many people to save money over time.
• Money spent to pay a mortgage goes directly towards owning your own valuable asset.
• Home ownership is usually a safe way of investing money over a long period, and depending on location and other factors, the value of the asset is likely appreciate over time.
• Owning your own home may make things easier when you retire.

Benefits of renting a home

According to the 2006 Census, 27.2 per cent of Australians rent their homes – that is more than two million households. While for some people renting is the preferred option (as it is or they think it is cheaper), for others it is a lifestyle choice.

Benefits include:

• Costs – renting maybe cheaper than a mortgage.
• Flexibility – renting may be a good short-term and fairly uncomplicated commitment. You usually only need give your landlord a month’s notice, and then you can move out.
• Landlords are responsible for underlying problems with the property, not tenants.
• Lifestyle – you may be able to afford a better house to rent than you can afford to buy.

Disadvantages include:

• Over time rents tend to rise.
• There is the possibility of being evicted.
• Landlords could decide not to renew a lease
• Lack of control over making alterations to a property.
• If the housing market goes up you’re not part of it, but your rent may still be increased.
• Rent paid to a landlord will never be seen again.

Monthly home loan budget

Before you apply for a home loan you need to work out a budget. Once you determine the difference between what you earn and what you spend, you’ll soon have a clear picture of the home you can afford.

Try our easy-to-use online budget planner and loan calculators.

Your home deposits and savings history

Generally, the deposit required to secure a property is 10 per cent of the purchase price. if you want to avoid lender’s mortgage insurance, which can cost thousands of dollars, you will need 20 per cent of the purchase price.

Australian house prices have risen significantly over the past decade and many people feel they are always playing catch-up, trying to save for a deposit to purchase a home.

If you are experiencing difficulty, don’t panic – RAMS has a range of home loans to suit different needs.

Home deposit bonds

Home buyers who don’t have a cash deposit at the time of exchange may be able to obtain and use a home deposit bond. A home deposit bond is essentially a guarantee that acts as an interim substitute for a cash deposit meaning the payment of the deposit, together with the balance of the purchase price, is made at the time of settlement .
Deposit bonds provide a low-cost (in most instances) flexible option if your money is tied up at the time the deposit is payable and are particularly useful if you are looking to buy a property at auction. However, you will need to pay the full purchase price at settlement. The deposit bond is legal, but it is up to the vendor whether or not to accept one as ‘payment’ for the deposit.

 Deposit bonds are usually issued for 10 per cent of the purchase price and cost about 1.2 per cent of the deposit. For example, if a 10 per cent deposit on a $500,000 property is $50,000, a deposit bond will cost you about $600.

Most banks and lenders can arrange a deposit bond for you, including RAMS Home Loans (see: RAMS Deposit Bond.)

How much can I borrow?

Whether you choose to buy a home or an investment property to rent, your ability to do so will largely depend on affordability.

Your income needs to cover your home loan repayment (and costs) PLUS funds to allow you to live comfortably. A useful guide is to ask yourself if your debts will total more than 40 per cent of your income. If they do, consider a smaller home loan or saving a larger deposit. Check out our How much can I afford to borrow calculator.

Affordability is key

One way to work out if you are ready to borrow a certain amount of money is to put into your current budget the amount needed for your proposed mortgage repayments plus anticipated expenses such as rates and other bills.

If you can pay these proposed payments as well as feed, educate and entertain yourself, you may be ready to take on a mortgage. However if you struggling, review your current budget to determine whether there are expenses you can cut out and factor in a more reasonable repayment amount that you can afford – you might have to look for a cheaper property.

Check out the budget planner to work out your budget.

Buying a property with family or friends

With Australian property prices increasing, more and more first home buyers are looking at purchasing properties with a partner, friends or relatives. However, keep in mind the old adage ‘Never mix business with pleasure’....

Some benefits to purchasing a property with another person:

• Share the deposit and initial costs, so you don’t need to save as much money.
• Share the mortgage repayments.
• Share rates and household bills.
• Share renovation and maintenance responsibilities.

Some potential risks of purchasing with another person:

• You are depending on others to honour part of the mortgage agreement over a long period of time.
• If one person defaults on the mortgage, the other person has to cover the repayments (unless otherwise expressly agreed and stated in the mortgage/loan documentation).
• The other party may not keep to their promises about maintenance, renovation, etc.
• Mortgage payment protection and life insurance will probably be needed.

How much can I afford to borrow for my first home?

Buying a house may be the most expensive purchase you will ever make. Exactly how expensive should your new home be?

Knowing your financial limits is vital.

For some, the traditional approach is that mortgage repayments should not exceed 40 per cent of one’s gross income. However that may be a simple view, as the amount you can borrow for your first home purchase is mostly on your net disposable income.

 Some other factors come into play such as:

• Liabilities – debts you need to service (eg car loan, credit cards etc).
• Standard living allowances.
• The current home loan interest rate.
• The term of the home loan.
• Whether you have any dependants.

Lender’s mortgage insurance

Lender’s mortgage insurance is sometimes payable when you have less than 20 per cent of the purchase price as a deposit. It’s an upfront fee that insures the lender against any default on your home loan. It does not insure you against default on your loan. If the lender makes a claim under the lender’s mortgage insurance policy, the insurer will require you to repay them.

Help from a RAMS Home Loan Specialist

There are many home loan products available to suit an array of needs. Our Home Loan Specialists can discuss your options and, if need be and you are eligible, assist you apply for a first home owner grant (if applicable).

Choose a legal representative

How to choose a legal representative by Patrick Bright, a buyers’ agent and author of several property books including; "The Insider’s Guide to Buying Real Estate".

The role of a solicitor or licensed conveyancer is to take responsibility for the conveyancing process, as well as advising you along the way. Getting the right advice before and during the conveyancing process will minimise the risk of problems arising.

It’s best to prevent problems arising – however, if they do be sure your solicitor is experienced enough to sort them out.

I would recommend that if a significant part of your solicitor’s business is property conveyancing, that they are experienced in conveyancing and that they will be available to assist you. I would look for a solicitor who works close to your home or place of work, as you may need to visit their office.

If you are buying the property in a different state or territory to the one in which you live, you should engage a solicitor who practises in that state – different laws apply in each state and you want a solicitor who is across the laws of the state in which you are purchasing your property.

Questions to ask a prospective legal representative include:

• Do you have experience in conveyancing? If so, how much?
• Do you have current professional indemnity insurance cover? (All should have this, but it is good to ask)
• What are your fees and what does that cover?
• Who will be my point of contact?
• Who can I speak with if you are unavailable?

Finding a property lawyer

There are several ways to locate a solicitor who does property conveyancing. word of mouth from friends, family, bank managers or co-workers.

Check out the website of your local law society:

The Law Society of New South Wales

Queensland Law Society

The Law Society of Western Australia

Law Institute Victoria

The Law Society of South Australia

ACT Law Society  

Law Society Northern Territory

You can search for property law specialists online e.g. Google or submit a form on LawMatch and they will find you a lawyer to suit your needs.