To Rent or Own a Home?

rentorwnahomeIn the last few months, I’ve debated with numerous personal finance gurus who believe that owning a home is overrated and that renting works out to be more cost effective. However, when asked, these individuals confess to not being renters, but home owners. Their main reasoning being that, when retirement nears, they rather minimize the ongoing expenses associated with renting. Even if property taxes or strata fees rise for the home they own, this will still only represent a small amount compared to the ongoing expenses of renting.

In addition, the monetary advantages of owning a home do not cover some intangible aspects. These include such attributes as the inherent human desire for having control of a given piece of territory and the pride of ownership. There are other advantages, such as being able to use your property as a collateral or utilize a reverse mortgage in cases of a looming financial crisis. A home can also be a tax shelter, since no capital gains tax on a main residence is imposed. Additionally, a home is a major and cherished asset to be passed on to family members.

Let’s look at the counter argument. A home owner is likely to require at least a 5% downpayment on a house. If you’re 30 and buying a $400,000 home with a 5.5% interest, you’ll pay $470,367 in mortgage interest alone, which works out to $870,000 total. Compare that to renting a three-bedroom apartment for $1,252 per month. This works out to approximately $800 less than the $2,025 it would cost to for the aforementioned mortgage. Without property taxes, maintenance and utilities you can easily save $1,250 a month by renting. Moreover, investing this saved cash, at a conservative rate of 4%, will grow to $1.1 million when you reach 65.

Essentially, both sides of the argument have their merit, except that owning a house does impart you with a stronger financial security, assuming you can afford the mortgage. If you choose the renting option, you better be committed to a fairly thrifty life and hope you will not need a financial boost for most of your adult life.

A contrarian view, favouring renting, can be found in this Australian blog article. The interesting post looks at how we accept certain age-old notions and socially accepted practices regarding home ownership, and may cause you to rethink where you stand on this issue.

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