It Still Worth Buying Your Dream House in Australia?
With high interest rates, significant housing growth in 2022, and rising property values, it might seem like owning your dream home is getting out of reach. Renting could appear to be the more affordable option. But is that really the case? Let’s dive into the numbers and explore which pathway offers greater benefits in the long term.
Let’s consider the following scenario:
In Sydney, Jack and Tom each saved $100,000 after working hard for five years. Now, they both face a big decision: what to do with their savings?
Jack has always dreamed of owning his own home and understands that owning a property can help build significant wealth. He decides to buy a house valued at $1,000,000 in Sydney. He puts down his $100,000 as a deposit and with the help of a professional mortgage broker, secures a loan at a 6% interest rate. Now, his focus is making his repayments on time over the next 30 years.
Tom was unsure if he would be financially better off continuing to rent at $720 a week or invest in a home, so he continued to rent.
In the first month, Tom pays $2,880 in rent, while Jack has already spent his entire $100,000 on the down payment, stamp duty, and other costs, leaving him with little to no savings. Jack begins to second-guess his decision and wonders if he had made the right decision.
Jack decides to seek advice from a professional mortgage broker. After carefully reviewing Jack’s figures—mortgage rates, property growth trends, and ongoing expenses—it becomes clear that over a 20-year period, Jack will likely be around $2 million better off than a renter. But how?
Let’s break down the numbers:
Tom continues renting for the next 20 years, placing his $100,000 savings in a bank account at a 4% interest rate. After accounting for rent payments, Tom accumulates approximately $746,047 in savings over those 20 years.
On the other hand, Jack has been diligently paying down his mortgage, and has benefited from the property market’s appreciation. After 20 years, Jack’s home has increased in value and is now worth around $2.7 million. If Jack were to sell today, he would walk away with the full $2.7 million, leaving him significantly ahead of Tom, who is still renting.
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Big Idea
A seemingly simple decision made 20 years ago has resulted in a huge financial difference in outcome between the two friends. This is why buying a house helps people become wealthier over time and renting leaves people financially worse off in the long run.
So, what are you waiting for? Start saving for your future, look for your dream home, and contact Bellan at Triple M Finance for mortgage advice today!
Reference
Let’s take Sydney as an example. The median price for a house in Sydney is $1,180,463, and the median rent is $720 per week. This rent has already increased by 7.1%, which is significantly higher than the typical growth rate for rent, which is 3%.
Housing price: https://propertyupdate.com.au/the-latest-median-property-prices-in-australias-major-cities/
The standard home loan variable rate is 6.34% according to the Commonwealth Bank. Being realistic, it is variable, and over the long term, interest rate movements in Australia have averaged 3.86% over the past 30 years. Banks typically add around a 2% buffer to mortgage rates. With that being said, we can assume that the average mortgage rate will be around 6%.
Common bank mortgage rate: https://www.commbank.com.au/home-loans/interest-rates.html
Australia historical interest rate: https://tradingeconomics.com/australia/interest-rate#:~:text=Interest%20Rate%20in%20Australia%20averaged,percent%20in%20November%20of%202020.
House values annualised growth rate is 7.6% in Sydney in the past 25 years.
House growth rate: https://www.aussie.com.au/content/dam/aussie/documents/home-loans/aussie_25_years_report.pdf
Rent growth rate 3%
Rent: https://tradingeconomics.com/australia/rent-inflation
- All the upfront costs for purchasing a property (including stamp duty, legal fees, and loan application fees) are $50,000.
- Ongoing costs (council rates, utilities, insurance, and maintenance) are around $6,000 per year.
- Saving 10% for a down payment would be $120,000.
- Council rate: $2000, Utility: $1500, Insurance: $1000, Maintenance: $1500