It’s been drummed into us by the real-estate industry, by the media and by family and friends. It’s the catchphrase ‘Rent money is dead money’, meaning that if you’re renting, you’re wasting your money.
Interestingly, you rarely get advised that you’re wasting your money buying food from the supermarket, or by going to the movies for a night out. But when it comes to providing shelter for yourself or your family, you’re apparently throwing your money down the drain.
Of course, the implication is that if you were to buy a place of your own instead, there would be no wasted money. I have to disagree.
In Melbourne, for example, renting will currently cost you about 3 per cent of the property value per year. It’s true this is dead money. But if you keep in mind that home-loan rates are currently around 8 per cent per year, and that this money goes straight to the bank, this is also dead money.
To put it another way, if you want to live in particular house, you can either borrow the money for that house at 8 per cent (interest) or you can borrow the house itself at 3 per cent (rent). So for a house that’s worth say $500,000, with a 20% deposit, interest would cost $32,000 in year one, whereas rent would be $15,000.
To be fair, if you are renting, rents would likely rise with inflation, while if you owned the property, interest would fall as the mortgage is repaid – so there would come a point where rent would be more expensive than interest charges.
However, interest is not the end of the dead-money trail when it comes to owning your home. You’ll also have to fork out more dead money for:
- stamp duty
- conveyancing and legal fees
- valuation fees
- loan application fees
- search and building inspection costs
as well as for ongoing costs such as:
- council rates
- strata fees
- repairs and maintenance
At this point in the conversation, the well-meaning friend, relative or real-estate agent will usually come back with “But at least you’ll own something after 25 years. If you rent, you’ll have nothing.”
Well it’s true you’ll have a house – but this is after paying for it - via principal repayments, on top of the 8 per cent interest and on top of the other extra costs listed above. If you choose to rent, you could put the saving in costs and the lack of principal repayments towards anything you choose – so that after a lot fewer than 25 years, you could have bought investments, a yacht, even a mortgage-free house if you so choose.
Once you realise it will cost you a lot more to own a house than it would to rent the same house (at least in today’s market), you can decide whether that extra cost is worth it to you. But don’t let the misleading line ‘rent money is dead money’ sway you.