To rent or to buy? It’s a huge decision and making it will have a significant impact on your future wealth. Before making the decision there are some important matters to consider.
The first issue is affordability. Make no mistake, in almost all cases it costs more to own a property than to rent one, initially. For the first few years your bond instalment, property insurance, rates and taxes, and maintenance costs will cost you more than renting a similar property. The extra initial costs will vary, depending on the price range and the area you want to live in – but as a rough guide renting a home may cost between 15% and 50% more than owning a property.
However, there are some significant differences between paying rent and paying off your bond.
When you pay rent, the monthly cost is an expense, not an investment. Aside from the benefit of occupation for that month, there is no other benefit you will derive from your rental payment.
When you pay off your mortgage bond, whilst initially a large portion of your instalment is interest, you are paying off your capital debt. In other words, it’s an investment.
Another key point to consider is that fact that, as time goes on, your rental cost will escalate. Even at a conservative average of 5-8% annual escalation, it won’t take long before your monthly rental expense exceeds your mortgage bond instalment. Your bond instalment will usually only fluctuate as interest rates change. Insurance, maintenance costs, and rates will escalate annually.
When you purchase a property, after 20 – 25 years you will have a property fully paid for. When you rent, after 20-25 years you have nothing to show for it. Property ownership is a means of forced savings – and in my experience, provided you purchase within your budget and allow for increases in interest rates, you won’t regret the investment.
For many property owners, the first 5 years of ownership are more challenging than renting. You either have to purchase a property smaller or less expensive than the one you would have rented – or you have to manage your expenses very carefully to cope with the additional costs of ownership.
However, as the cost of rentals increase it won’t be long before your ownership costs are on a par with the rental costs or less – and you will have a valuable asset to show for it.
If finances or credit-worthiness don’t allow you to purchase at the moment, I would suggest renting below your means, paying off your debt, and saving so that you have funds for a deposit and transfer costs when you are in a position to invest in property.
Not only do you create your future wealth, but there is something different about living in your own home. It’s just so much more fulfilling than renting. You can put down your roots, take pride in your property, and enjoy the benefits of a property you can really call “home”.
Principal of Harcourts Platinum
Director of Harcourts South Africa