Buy or rent? Let your age determine it
For young couples, apart from starting a family, owning a home is also a top priority. But, might renting not be a better option?
For the purposes of this article, owning a property would be until retirement and it is not for investment purposes.
The lifetime is split into three stages – the initial years, the mid-term years and the later years, or retirement.
So, what are the pros and cons of renting versus owning a home?
Pro and cons in the initial years
To purchase a house, there must be a down payment, usually 10% to 20% of the value. A higher down payment means spending less when repaying the loan, which might not be a bad idea.
A 10% down payment for an intermediate landed property in the Klang Valley can be RM55,000 to RM95,000. A 20% down payment is in excess of RM100,000.
The acquisition cost does not end there.
There are the sales and purchase agreement legal fee and stamp duty, valuation fee, housing loan legal fees and stamp duty and so on. Not to mention mortgage insurance and the cost to transfer the land title. Added up, this can be RM30,000 to RM50,000 and up.
Then, there is the cost of renovations and home furnishings, such as wardrobes, lights, kitchen cabinets and so on to consider, which can also be in excess of RM30,000.
Renting would cost two months’ rent in advance plus the utilities deposit.
So, in the initial years, renting has more pros than cons.
Pros and cons in the mid-term years
So, the family has lived in the home for 10 years. Homeowners would have paid the annual costs of quit rent and assessment as well as home insurance. This would come to RM20,000 or more. Then there would be repairs and maintenance, worth maybe a few hundred to tens of thousands of ringgit.
But a point to note for homeowners is that the mortgage payments would have stayed the same (or changed marginally depending on interest rates) while rental rates could have risen over this period.
Renters are at the mercy of homeowners, who generally increase the rent when the tenancy agreement is up for renewal. It becomes a question of stomaching the additional cost or moving out, which would also cost a few thousand ringgit.
Then there is the maintenance. For renters, even though maintenance is undertaken by the owner, owners can be slow to respond to complaints, or the water pipes have not been replaced, affecting the quality of water.
On the other hand, life can throw curve balls. Negative financial circumstances can favour renters.
Homeowners must make their payments every month no matter what, the financially troubled renter can move to a cheaper home.
Even if an owner decides to rent out the house for a while, there are still the relocation costs to consider and tenants may not pay the rent on time.
In the mid-term, the pros and cons seem to even on both sides.
Pros and cons in the retirement years
For homeowners who are getting ready to retire, the house would by now need some expensive repairs that can run to as much as RM100,000. If no provision has been made, this will make a huge dent in the retirement nest egg.
But the mortgage would be paid off and the homeowner would be living in the house for free. Renters would continue to pay rent and at much higher rates.
For older renters, it may be difficult to move out to avoid paying higher rent. Unless provision has been made, renters would find the rising rental costs a burden. A home for the aged or a retirement village might be a cheaper option.
On the flip side, even though this discussion centres on buying a home not for investment purposes, owning a home can be a tool to build wealth.
Usually, the value of the home appreciates and the property can be sold to move to a smaller, less expensive home in a cheaper neighbourhood or town.
This might not be a bad thing, but there would be a lot of adjusting and the distance from children, siblings and close friends must be considered.
Alternatively, there are reverse mortgage plans that allow homeowners to unlock the value of their home in old age. However, the owner may have to bear legal fees and Real Property Gains Tax.
The homeowner can continue to live in the property until they die, continuing to pay utility bills, quit rent, assessment, home insurance and for minor repairs. When they die, the property reverts to the bank.
Finally, homeowners who have not opted for a reverse mortgage would have a legacy to leave their children.
So, for the long term, ownership stacks up better against renting for the elderly.
Overall, for those planning to live somewhere for the short term, renting makes more sense. But for the long haul, homeownership is advantageous.
Buying a house offers the option of unlocking equity when it is most needed (during old age), through selling or opting into a reverse mortgage plan.
The decision on whether to buy or rent can be emotional rather than financial. Ownership creates a sense of pride and achievement, as well as security and a feeling of belonging in a community. Ownership confers the freedom to personalise the property.
In the end, whether to rent or buy depends on the financial situation and how long one plans to live in that residence.
This article first appeared in MyPF
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