To rent or buy, that is the question….

 

One of the most common questions I receive from young adults, is should I buy or rent my home? It is often not an either/or question, but more a now vs. when question. The following are considerations to make when assessing this question:

➢ How much would I need to borrow?
➢ Can I afford it?
➢ Will it limit my options?

The decision will also be impacted by various assumptions such as house price valuations, realistic growth rates and of course interest rates that impact the level of repayments. Generally most people are not good at evaluating these things, so it is important to look at long-term trends in the available information.

Most importantly – Do the numbers – if interest rates went up 2-3%, what impact would that have on your ability to repay the loan and maintain your standard of living?

The common mistake is to borrow the maximum amount that the bank will lend you. Instead borrow on the assumption that rates will rise by a reasonable amount from where they are today and determine the impact that this would have on your household budget.

Living debt free is always the better option for Christians. Debt causes stress, relationship problems, and limits your options in the long run.

It is often said that rent is ‘dead money’, but rent is no more dead money than interest on a loan is dead money. Therefore assess the level of interest over the term of the loan compared to the level of rent. Quite often the level of interest paid over a 30-year loan is far greater than the loan itself.

For example if you purchase a property using borrow funds of $300,000, then over the next thirty years you will pay an additional $400,000 in interest on top of the principal that you need to repay, based on the assumption that interest rates are roughly 7%. In other words your total repayments on a $300,000 loan are over $700,000.

In the western world over the last 25 years real estate prices have generally accelerated substantially, and in many countries well above average incomes. This has been largely due to lower lending standards and record low interest rates in many part of the world. This has helped to perpetuate a myth that house prices double every 7 to 10 years. An examination of history shows that this is not the case and that they generally rise in line with inflation, with some time periods showing anomalies. Furthermore basic mathematics shows that for house prices to increase in the long-term they require incomes to keep up. So if house prices are going up at 7% per annum then wages would also need to rise at the same rate or else it would rapidly get to the point where few people can afford to purchase housing.

It is often said that having a mortgage is a form of forced saving. Whilst that may be true for many, wouldn’t it be far better to develop the discipline of saving? Saving creates greater options in the future, giving you the chance to make adjustments to your life, that a mortgage is likely to prevent.

Lastly, sadly the majority of Christians rarely ask God what he thinks. We are so programmed by society to own a home, that we have stopped seeking God for his view. This needs to change.

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