THE PROS AND CONS OF BUYING AND RENTING A HOME

Whether to buy or rent a home is a question many couples ask themselves when they start their life together. So what are the pros and cons – especially in a Covid-19-rocked economy?

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Like many newlyweds, Durban hairdresser Slindile, 25, and her businessman husband Sbu, 33, had been looking forward to setting up home together. ‘I lived with my parents and Sbu was renting a place,’ says Slindile. ‘It’s comfortable, but it will be small when children arrive. I keep telling him that paying rent is throwing money away – we should invest in buying a house, to grow old in and to leave for the kids one day. But he says it’s a big commitment that will strain our finances. So who is right?’

DOING THE NUMBERS
Buying and renting each have their pros and cons, and your decision will depend on your financial situation and your values, as well as the property market and the economy in general. Some, like Slindile, see rent as lost money. But what you pay on a bond usually adds up over the years to much more than the original value of a home – the longer your loan period, the more you pay the bank. And Moneyweb research found that since the 1960s the average annual house price growth after inflation has been about 0.9%.

Other investments can be lucrative, however, The JSE All Share Index has produced a return (that’s calculated for inflation) of 11% a year, and up to 15% over the last 10 years. So in the long term, investing in a unit trust, for example, might give better returns than investing in property.

CREDIT SCORE AND INTEREST RATES
Owning a home and paying it off, however, can boost your credit rating, which could allow you to borrow more money if you need it – and if you use it to renovate cleverly, you could increase the value of your property by more than the amount of the loan. Also, the cost of your monthly repayments decreases with interest rate cuts, while fixed rent stays the same.

If you’re a potential first-time buyer, the current low interest rates and high supply make it a great time to go for it, says Rhys Dyer, chief executive at ooba home loans. Carl Coetzee, chief executive of BetterBond mortgage originator, calculates that the average homeowner saved as much as 28,00000 on bond repayments in 2020 due to the lower interest rates.



RENTAL VERSUS BOND REPAYMENT
The average rental in the formal market is around 7,800,00 a month, according to BetterBond. But the cost of a bond for a property priced at 875,000,00 (current average bond size for a first-time buyer) is around 6,900,00 a month (based on a rate of 7.25% over 20 years).

Related article: How to get your home loan approved

COVID-19 AND RENTAL
At the same time, the pandemic has forced many cash-strapped tenants to move in with family or friends, so the oversupply of rental properties has caused the asking price for rentals to fall for the first time in years. So if you opt to rent, you can choose from a bigger pool and might be able to negotiate a rental discount. To buy, the general guideline is that your monthly bond repayments should be about 30% of your gross monthly income.

Whether to rent or buy is an important choice. Before making it, sit down and discuss these pros and cons, as Slindile and Sbu are now doing. Also talk to a financial adviser, who can help you calculate the relative costs, and what you can best afford.

BUYING
PROS:

• When you buy a house, it’s yours to live in for as long as you wish.
• You can do anything you like to it, décor-wise.
• The property is likely to grow in value over the years (if you buy right).
• If the value rises, you can make a profit if you sell.
• When there are interest rate cuts, as there are now, you save on repayments.

CONS:

• You need to budget for building/ property maintenance and repairs, as well as rates and insurance.
• Loan repayments can fluctuate with changes in interest rates, if you opt for a variable interest rate.

Related article: Help for first-time home buyers

RENTING
PROS:

• The only insurance you have to pay is to cover your own possessions.
• Repairs and maintenance are your landlord’s problem.
• Rent is fixed for your lease term.

CONS:

• Renting doesn’t give you guaranteed security of tenure, so you might find your lease expires when you were hoping for an extension, and you have to move earlier than hoped.
• If the value of the property goes up, your rent could too.
• Cuts in the interest rate benefit your landlord, not you, as owners are not obliged to reduce your rent when the interest rate drops.

Related article: How to protect your rental deposit

USEFUL SITES
Better Bond: betterbond.co.za
ooba Home Loans: ooba.co.za