Record-low rates mean it’s now cheaper to buy than rent

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September 08 2020
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Record-low interest rates have created a unique environment where it is cheaper to pay off a mortgage instead of renting, according to new findings.

Record-low rates mean it’s now cheaper to buy than rent

Research released by online buyers marketplace Buyer Buyers co-founder Pete Wargent has found that renters who are living in a capital city besides Sydney and Melbourne would be better off buying instead of renting.

“There are some uncertainties in the economy, but for those with access to a deposit, a reasonable level of employment security and a sensible buffer, then it has become a compelling equation in many locations” Mr Wargent said.

In many areas, rent money is dead money, said RiskWise CEO Doron Peleg, stating renters with secure jobs are better off buying a house than continue paying someone else’s mortgage.

“When it comes to houses, the preferred dwelling option in most areas of the country, in many cases it is cheaper to buy than rent, and rent money is dead money. Whereas if you buy a house, you can start building equity straightaway, particularly when you take a long-term strategic view, and if you are in a good position to negotiate well and buy a ‘Grade A’ property that will serve your family for many years to come,” Mr Peleg said.

Over the medium and the long term, he said solid price growth was highly likely for houses, particularly due to a systematic undersupply in the inner- and middle-ring suburbs, and also in the more affordable outer areas with good access to the CBD, such as in the western suburbs of Sydney.

“What this all means is now is the time to buy if you are a first home buyer or an owner-occupier, as this current slowdown in the property market is only temporary, with houses in popular areas likely to experience solid capital growth in the medium to long term,” Mr Peleg explained.

“Once the COVID-19 issue fades, most likely in 2021, the traditional connection between low interest rates and an increase in dwelling prices is likely to reassert itself.”

In Sydney, annual rent on a median house price costs nearly $30,000. That is $4,466 more than it costs for an interest-only loan.

However, it costs $12,514 more to service a principal and interest loan.

In Sydney, for example, Ryde is the only area (at the SA4 level) where rental payments are less than interest-only loan repayments. Mr Peleg said, on average, if there was an additional payment for principal and interest in some SA4 regions, it would only be “very small” and areas such as the city’s western suburbs and the Central Coast had offered exceptional capital growth over the past 10 years, with further positive projections in the medium to long term.

Moving away from Sydney in Brisbane, for example, a renter pays $23,995 in rent. That is more than $10,000 more than on an interest-only loan and $1,500 for a principal and interest loan.

The maths is also in buyers favourite for Adelaide, Perth, Hobart, Darwin and Canberra.

Mr Peleg said the ACT offered excellent opportunities, thanks to a combination of properties that held their value well, with healthy price growth of 4 per cent for houses, and lower mortgage repayments compared with renting.

Mr Peleg said investors with a long-term view could also benefit despite interest repayments for investment properties being slightly higher.

“If the rent covers their monthly interest repayments, they are in a good situation. There is a relationship between low interest rates, low out-of-pocket expenses and stronger demand, and this is attractive to investors,” he concluded.

About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

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