Should I buy my home? Part 3 – The Maths

Should I buy my home? Part 3 – The Maths

So if you’re reading this post I take it that you’ve read part 1(debunking myths) and part 2 (factors to consider), and you’re ready to look at the maths. At this point, you’re either excited or feeling slightly queasy, depending on how you feel about numbers. There are lots of numerical aspects we can look at when buying a home, but we are going to take a simple approach. Ready?

The basic rule

All things being equal, it may make more mathematical sense to buy your home when the cost of a mortgage, or at least the interest portion of a mortgage, is equal to the amount of rent you would otherwise pay in the same area. Your costs will be roughly the same, but over the long run you will eventually have the benefit of owning your home.

On the other hand, it may make more sense to rent where a property in the area you want to live in has a far higher mortgage repayment cost, especially if the interest portion alone is higher than the rent you would otherwise pay. If you take the amount of money you save by not paying a high mortgage and invest it, you will likely come out ahead even though you do not own property.

Here are the key aspects:

  • costs of renting versus buying – if they are the same it makes more financial sense to buy; and
  • crucially, if renting works out cheaper, invest the difference in a diversified portfolio to get ahead.

Let’s break it down further.

    Simple Examples*

Axelf wants to live in the beautiful town of Twiianontw. He is deciding whether to buy or rent, and decides he wants to live in a three bedroom house with his family.

Scenario 1 Buying wins

Rent is $500 per week = $26,000 per year

House cost is $375,000. Average mortgage rate is 7%. Mortgage is for 25 years. We’ll assume Axelf saved a 20% deposit ($75,000). This means he borrows $300,000 for 25 years at a rate of 7%.

Mortgage cost is $489 per week = $25,428 per year

Here, buying is the winner. Axelf will save himself a small amount of money buying rather than renting each year, but the real benefit is that for the same amount of money he will eventually own his home.

Scenario 2 Renting Wins

Rent is $500 per week = $26,000 per year

House cost is $500,000. Average mortgage rate is 7%. Mortgage is for 25 years. We’ll assume Axelf saved a 20% deposit ($100,000). This means he borrows $400,000 for 25 years at a rate of 7%.

Mortgage cost is $652 per week = $33,904 per year.

Here, renting is the winner. Axelf will save himself $7,904 per year by renting instead of buying. If he invests that amount for 30 years at a conservative rate of 7%, he will have $746,618**.

Costs of a home

This is a good rule of thumb to determine if it will be more beneficial for you to rent or buy in the same area, all other things being equal. However, there are a lot of other numerical factors to also consider.

These include:

  • if you are renting – rental increases and changes to any invested money (e.g. market crashes)
  • if you are buying – changes in mortgage rates, the cost of maintaining a house, and whether you pay the mortgage off faster than required
  • inflation – costs go up. It’s very unlikely you will be paying the same amount of rent or mortgage in the future.
  • taxes – do you get a deduction of the interest you pay for a mortgage – if yes, this will need to be factored in

    Mars is in Saturn…

Unfortunately, my crystal ball is very cloudy and my chakras are not aligned. I don’t know the future, and neither do you. It is impossible to fathom or work out every eventual possibility on whether it’s better to buy or rent. It depends on lots of different factors, not least how you feel about it. Some people love the sense of security they get in owning their own home, others prefer money in the bank (or better yet, the stock market). None of this constitutes financial advice, which I can’t give anyway. It is, fortunately or unfortunately, your choice what you decide to do.

I hope what you take from this is a sense of freedom. Buying a home is not a milestone or a necessity. It’s a decision. It comes with opportunity cost – your own roof instead of other things you may want to do. Renting is not dead money. In fact renting cheaply in an expensive area often makes much more financial sense, especially if you invest the difference.

Whatever you decide, I hope you decide it for yourself. Don’t let anyone pressure you into buying your home for a false sense of financial security. Buy because you want to, not because someone else said you should.

*I used this mortgage calculator to work this out!

**I used this compound interest calculator to work this out!

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