Previously I wrote about some reasons that it can be a good idea to own the property that you live in. There are also reasons though that it could make more sense to rent.
1. Your income isn’t very certain
There are very few times in financial planning that I can claim 100% certainty, but one exception to this is that your lending institution will want your mortgage payment every month, with interest, without fail.
Once upon a time, the bank that gave you a loan cared about your ability to repay it, but now they are only concerned with whether they can obtain sufficient proceeds from the sale to repay the loan – even if that means sacrificing part or all of the equity that you have contributed from your savings.
So if your income is highly uncertain, and you’re going to need to borrow a fair portion of the purchase price, it might be a bit safer to avoid purchasing a property until your income becomes a bit more stable or you have a greater amount of savings to contribute to the transaction.
2. You’re not sure if you’ll stay for long
One of the hallmarks of buying or selling a property is transaction costs.
Depending on a few factors such as the expected sale price, a real estate agent’s commission will usually range somewhere between 1.5 – 3.0% of the sale price (paid by the seller). On a $400,000 sale that’s between $6,000 and $12,000.
Stamp duty (paid by the buyer) also works on a sliding scale depending on the purchase price, but for a $400,000 purchase works out to be $11,650 (2.9%) and for an $800,000 purchase is $31,550 (3.9%). There are often concessions but to access these you usually need to be a first home buyer, buying under a certain price threshold, and purchasing a property that is new or substantially renovated.
You can throw on a bit extra for services like conveyancing, building reports and energy ratings.
So with such large transaction costs, you don’t want to have to turn around and sell just after you have bought. If you’re not settled somewhere yet, it might make sense to hold off for a little bit as you don’t want these costs to stop you from taking up a good opportunity in work, travel, or study.
3. Waiting will save you money
Sometimes you might be better financially if you delay your purchase. It could be that you’re only 3 months into a 12 month lease on your rental, and would have to run the risk of carrying the rent until the property is re-tenanted (and if the new tenants pay less rent than you were, you could be up for the difference as well).
More commonly though a delay can benefit if it lets you save a bigger deposit, and reduce or avoid having to pay Lender’s Mortgage Insurance (LMI). Lender’s Mortgage Insurance is required if you have less than a 20% deposit for your purchase, and the worst thing of all is that you pay the premium but it’s your lender who is protected!
Genworth is one of the largest providers of LMI in Australia and you can estimate premiums at this website.
For a first home buyer purchasing a $400,000 property with a $40,000 deposit (10%), an extra $6,336 will need to be paid for the LMI premium. This drops down to $3,536 if you can get to a $60,000 deposit.
The higher the purchase price, the higher the LMI premium (even if you have the same percentage deposit), and the rates are even higher if you’re not a first home buyer – so consider whether a little while longer saving a deposit will actually put you better off by saving these costs.
4. The right property for you isn’t on the market
This has a lot to do with the transaction costs covered before. Purchasing a property is a big financial decision, and sometimes we can feel rushed into buying. If there’s something you really want in a property such as a particular feature, or a location that you love, and you can afford these things then you might not want to go with something that isn’t quite right for you. The costs of selling and re-purchasing in a short period of time are going to be significant.
If the right property isn’t on the market you could consider waiting until something that fits comes up, or even finding a buyer’s agent who might just be able to uncover your dream home before it’s listed.
5. You plan to draw on your capital
Of course we’d all love to have so much saved and invested that we could just live off the rent, interest, or dividends – but that’s not always the case. Sometimes we draw on our capital to fund retirement, or a period of time when we’re not working because we’re studying or raising children. In these situations, tying up your capital in a property might not be a good option for you.
There are some options for drawing on capital when it is in a property that you don’t want to sell ranging from reverse mortgages, lines of credit and for retirees a little-known Centrelink program called the Pension Loan Scheme.
If you’re unsure about your own circumstances and whether you should purchase a property, why not book an appointment today? It’s obligation-free and you get the benefit of a third party perspective. You can do so by calling us on (02) 6247 1233 or email firstname.lastname@example.org.
(image credit: flickr user Ken Hodge)