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Brokers are faced with a number of scenarios each day. Here’s one solution that helps address the affordability gap.
The thought of buying a home can be both exciting and daunting. The deposit amount and ongoing interest charges of a loan can really add up, making home ownership for children seem out of reach – especially in today’s increasing housing market.
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It’s no wonder many potential younger home buyers are asking whether they’d be better off renting. That said, many of them ask “isn’t renting just throwing money away?”
In one regard we say "Yes, absolutely – rent money can be dead money". When you just rent, you are not investing your rent payments and it can never grow. You are simply paying off someone else’s home loan by providing them with rental income.
Make your clients’ dream come true sooner
At La Trobe Financial, we have designed our parent-to-child (P2C) product to specifically address the affordability gap between current house prices and median income multiples – now at a staggering five times income.
The P2C product seeks to protect parents’ wealth in cases when they want to assist their children, and at the same time enable children to enter the housing market without the need for asking mum and dad to put their wealth at risk through bank guarantees, or additional mortgages against the parents’ primary residence or other property.
How can I work out if it’s better to rent or buy?
SCENARIO ONE
As an example, let’s look at our first scenario: a purchaser is looking to buy a home at the purchase price of $550,000. They arrange a loan for $440,000 at the interest rate of 5.60 per cent with a loan term of 30 years.
If we were to compare buying against renting a property over a three-year period (and also consider all the costs incurred) and the house was sold, you would be better off renting the property, as you would save $8,757.
In other words:
- Renting: $1,800 per month (rent) for three years equals $66,744 (yearly rent increase is three per cent).
- Owning: $440,000 (loan) at 5.60 per cent for three years (plus incurred costs) amounts to $125,001 (in mortgage repayments over the year), minus $49,500 (property appreciation), which equals $75,501.
Therefore, $75,501 minus $66,744 equals $8,757, so you’d be better off renting as you would save $8,757.
SCENARIO TWO
However, let’s look at our second scenario: a purchaser is looking to buy a home at the purchase price of $550,000. They arrange a loan for $440,000 at an interest rate of 5.60 per cent with a loan term of 30 years.
If we were to compare buying against renting a property over a seven-year period (and also consider all the costs incurred) and the house was sold, you would be better off owning the home, as it will cost you $48,387 less than renting over the seven-year period.
In other words:
- Renting: $1,800 per month (rent) for seven years equals $155,736 (yearly rent increase is three per cent).
- Owning: $440,000 (loan) at 5.60 per cent for seven years (plus incurred costs) amounts to $222,849 (in mortgage repayments over the year) minus $115,500 (property appreciation), which equals $107,349.
Therefore, $155,736 minus $107,349 equals $48,387, so you’d be better off owning as you would save $48,387.
Cory Bannister is vice president and chief lending officer at La Trobe Financial.
