Renting vs Buying: The Pros and Cons

In a lowering interest environment, tenants are reconsidering their priorities.

Driven by reduced interest rates and more lenient loan criteria, tenants are starting to have their sights firmly set on owning a home. While many—particularly the ‘millennial generation’—chose to travel and live more ‘freely’ in the past, priorities have since changed.

Travel and event restrictions remain in place, and lockdown has forced many to re-evaluate their priorities. The pressing question right now is: ‘Should I continue renting, or should I buy?’ The simple answer is to do your homework, and to consider the pros and cons.

However, before you even begin to look around, make sure that you request a free home loan prequalification. These can be easily accessed online via bond originators such as Ooba Home Loans.

This gives you an idea of what you can afford, and what your credit rating is. A credit rating of 600-plus is what you need to be considered for a home loan. A prequalification is therefore a good place to start in determining whether you would qualify for a bond.

In addition, start scoping out the property market at least three to six months prior to putting in an Offer to Purchase. Once you know what you can afford, chat to agents in your area, and register on websites such as Property24 and Private Property to receive alerts for property listings. This gives you a better idea of what is available in your price range, what properties go for in areas of your choice, and what the demand is like.

Doing your research will empower you when it comes to making a deal. It gives you bargaining power through knowledge of the area and the market in general.

To Rent, or Not to Rent?

Renting pros:

• Flexibility: If you’re undecided as to where you want to invest, or whether your income will be secure in the longer term, then renting is best for you.
• No ownership costs: Homeowners are sometimes hit with costs that tenants don’t have to factor in. These relate to maintenance, levies, rates and taxes, and home insurance.
• Less responsibility: Renting a small lock-up-and-go is appealing for those who want as little maintenance as possible. In addition, if one were to be retrenched or needed to move quickly, it would be simpler.

Renting cons:

• No return on investment: The obvious downfall is that you are paying for an asset that you don’t own, and will not make returns on.
• Bound by rules: Rental agreements are rigid, and a tenant is bound by these. Failure to comply can result in fines and further legal action (in a worst-case scenario).

To Buy, or Not to Buy

Firstly, if you are considering buying a home, a question often asked is: ‘Is it better to finance your home over 20 or 30 years?’ On a 20-year bond, you pay lower interest rates with higher monthly repayments; whereas on a 30-year bond, you pay higher interest rates with a lower monthly repayment.

A 30-year bond is better suited to an investor who has a tenant to cover their monthly repayments, and there is a higher chance of achieving a positive cashflow. However, paying off your bond sooner is better. Add an extra R500 per month (at minimum), and you will see the difference that it makes. Chat to your bond originator to help you do the maths.

Home Ownership Pros:

• Ownership and equity: Owning an asset, regardless of the economic climate, is a positive. If you look after your home and focus on paying it off quickly, you can still make a return rather than paying off someone else’s bond.
• Freedom to personalise: You now get to decorate, renovate, and call the shots for the most part.
• Rental income as an additional revenue stream: If you’re looking to rent out your place, a tenant can cover your bond and (hopefully) your bills. Although the income is taxable, you can also claim a tax deduction on costs incurred in producing such income (such as bond interest, rates, maintenance, rent collection costs, etc.)
• Benefits your credit score and finances: Your mortgage account is a great place to put your savings—the interest saved is higher than what you can earn on cash deposits, is effectively tax-free, yet is also low enough should you wish to borrow against it in future. In addition, making repayments on your home each month (on time) improves your credit record.

Home Ownership Cons:

• Hidden costs: Be sure to download a home loan calculator prior to putting in an Offer to Purchase. This way, you know what the transfer fees are as well as the attorney fees. Remember that there are transfer duties (for properties over R1.1 million) as well as attorney fees for the transfer and bond registration that you will need to factor in.
• Less mobility: Spur-of-the-moment decisions to backpack the world or relocate for work will require more thinking and admin time.
• Returns not guaranteed: No returns are set in stone. You might over-capitalise, or interest rates could increase, and you may never make your money back, let alone turn a profit. That is why it’s important to do your research prior to purchase—and to pay off your home as quickly as possible.

WRITTEN BY GRANT SMEE

Grant Smee is a property investor.

While every reasonable effort is taken to ensure the accuracy and soundness of the contents of this publication, neither writers of articles nor the publisher will bear any responsibility for the consequences of any actions based on information or recommendations contained herein. Our material is for informational purposes.