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March 2016

Should You Rent or Should You Buy?

For many home ownership is a dream. Admittedly, there are far worse goals to have, but this is not something you should rush into.

The most important thing to consider is affordability, now and into the future. You do not want to move into the home only to find yourselves under financial pressure as time goes by. You do not want to be a slave to your home.

Here are some factors to consider when weighing up Affordability:

1. How much deposit do you have? In the not-too-distant past, banks insisted that home buyers had a 20 percent deposit. This was the minimum you needed if you were to buy a home. Often the bank expected you to prove a savings record, to show that you had saved the money. I wish those days would return – first home buyers (especially) who purchase properties with little or no equity are cannon fodder when interest rates start to climb.

2. Can you afford the repayments now?

3. Can you afford the repayments on one wage? If pregnancy is not a possibility, this is not such a vital consideration.

4. Can you afford the repayments if interest rates rose by 3 percent? If you cannot, do not buy. While this might sound silly to some Generation X and Y buyers, there are many of us who can remember the days when interest rates were 17 percent, so allowing for a 3 percent increase is not as silly as it sounds.

If you can afford to buy, then you should. Don’t wait for the ‘right time’ unless you have a crystal ball. Go buy yourself a home and enjoy these benefits:

• Long term capital gain – pay off as much of your mortgage as quickly as you can and gradually ‘trade up’.

• Feeling of safety and security – it’s your home. You can knock out a wall, paint it any colour you like, and no landlord can stop you.

• You are paying off your asset, not somebody else’s as you do when you rent.

• Path to prosperity. There is nothing like the feeling of owning your own home, and if you are careful, it will become possibly the greatest financial asset you will ever own.

One final point: start out modestly. Don’t make your first home a huge four bedroom palace that you cannot afford. Start out with a modest home and trade up. Always keep your home repayments at a (conservative) affordable level.