Renting Or Buying: Which Makes More Financial Sense?
Pirates or ninjas, Pepsi or Coke, pancakes or waffles…the greatest showdowns often involve fervent debates and strong emotions.
But none of these showdowns impact your life quite as much as the rent or buy conundrum. After all, this is (usually) a six digit financial transaction that could profoundly impact your finances and the way you live.
If you find yourself mulling over whether it is better to buy or rent a home to live in, here’s what you need to know before making a decision.
Is it cheaper to rent or buy?
Wait a minute, you may think – if you can afford it, isn’t buying the better choice? Isn’t renting just throwing money away? When you pay your mortgage, you’re putting money into an asset. When you rent, you’re just giving money to your landlord.
But it’s not as simple as that. You also need to consider the opportunity cost of renting or buying. Think about all the money spent on buying a home – down payment, legal fees, mortgage payments, maintenance fees, etc. – if you could invest this money in high-yield investments instead, renting could actually be more cost-effective in the long term.
On the other hand, if you rent a home, you lose the opportunity of enjoying equity gains if the value of your home increases.
Whether or not renting or buying is more cost effective in the long run depends on a multitude of factors such as: how long you plan to stay in the home, how much it appreciates each year, and how much you could have made by investing the downpayment.
Plugging in the numbers
To illustrate, let’s compare the financial costs of renting versus buying a RM500,000 property. Here are a few assumptions we’ll make:
- Rent: RM1,500 a month, and increases by 3% every year on average
- Any money that is saved from not buying the home is invested, with a return of 7% a year
- Price of home: RM500,000, and appreciates by 4% every year
- Down payment: 10%, or RM50,000
- Monthly instalment: RM2,280.08 (4.5% interest rate, 35-year tenure)
- Upfront costs of buying (legal fees, stamp duty, etc): RM25,000
- Maintenance costs: RM200 a month
We ran these numbers through the EdgeProp Buy Vs Rent Calculator and got the following:
Renting is cheaper than buying, but only for the first six years. After seven years, buying becomes cheaper.
It also depends on these factors
Deciding between renting and buying doesn’t just come down to which is the cheapest, however. You need to take into account your specific life circumstances:
Can you afford it?
This seems like an obvious question, but homeownership comes with a lot of hidden costs. Besides the down payment, your upfront costs will include legal fees and stamp duty charges that can run up to the thousands.
Upfront costs for a RM500,000 home
|Down payment (10%)||SPA legal fees||Stamp duty on MOT||Loan agreement legal fees||Stamp duty on loan agreement||Total|
Even if you can afford the upfront costs, make sure that you will still have savings after buying the property. You don’t want all your savings tied up in your home – this makes it hard to deal with emergencies if they arise.
You’ll also need to consider if you can afford the monthly mortgage. Don’t take on a home loan if it prevents you from meeting your other financial obligations or if you may end up living paycheque-to-paycheque. The rule of thumb is that your mortgage should not exceed 28% of your gross monthly income.
Is mobility important to you?
If you value freedom and mobility – say, you anticipate changing jobs far away or moving to a new area within the next few years – it could be more cost-effective to rent.
Otherwise, you may have to find a tenant or sell off your property. If you choose to sell your property, the selling price will have to cover all the upfront costs you’ve forked out when you bought the property, as well as any costs associated with selling (such as the real property gains tax). Unfortunately, if you sell your home so soon after your purchase, it may not have had time to grow in value.
Can you bear the cost and responsibilities of a homeowner?
Aside from the mortgage, homeowners also have to service the following expenses:
- Quit rent (cukai tanah) for landed properties
- Property assessment tax (cukai pintu) for landed and non-landed properties
- Sinking fund for non-landed properties
- Maintenance fee for non-landed properties
Homeowners also have to deal with any maintenance or repair issues, or pay someone to handle them. However, if you’re renting, major repair works will be handled by your landlord.
Do you want to decorate/renovate your home?
Want to install shelves, paint the walls or expand your kitchen? As a renter, you won’t have a lot of freedom when it comes to making structural changes to your home. If home decoration or renovation is important to you, then buying is the way to go.
No one-size-fits-all solution
When it comes to buying or renting, it all comes down to individual factors. Consider your financial constraints, how long you’ll live there, your investment gains if you were to invest your down payment instead of buying a house, etc. Using a buy or rent calculator is a good way to play with these variables before you make a decision. In short, neither renting nor buying is inherently better than the other.