How Many Years Until Buying a Home Beats Renting?

At the start, renting is often cheaper than buying. You do not need to find a deposit, pay stamp duty or cover the ongoing costs that come with owning a home. Your weekly rent may also be well below the repayments on a similar property.

But that is only the starting point.

A mortgage balance normally reduces over time and, if you keep making the required repayments, eventually ends. Rent usually keeps going for as long as you rent and may rise along the way. That is why the answer can change when you compare five years, 15 years and 30 years.

The useful question is not simply, “Which costs less this month?” It is: “At what point could buying leave me in a stronger position than continuing to rent?”

What does “buying beats renting” actually mean?

It does not mean the owner has spent less cash in every year. Buying can cost considerably more month to month, especially early on.

The comparison looks at what each person has built after paying for somewhere to live. The buyer has the value of the home, less the remaining loan. The renter keeps the money that would otherwise have gone into the deposit and buying costs, and can also invest any ongoing amount saved by renting.

The crossover year is the first year the buyer’s estimated net position moves ahead of the renter’s estimated investment balance.

That makes it a more useful comparison than adding up rent and mortgage repayments alone. A mortgage repayment is partly interest, but it also normally reduces the amount owed. Rent provides somewhere to live, but it does not build ownership in the property.

Why renting often looks better at the beginning

Buying has a head start to make up. Depending on the property and the buyer, the upfront amount may include stamp duty, transfer and settlement fees, inspections and lenders mortgage insurance. Then there are ongoing costs such as council rates, water charges, building insurance, strata levies and maintenance.

A renter generally avoids most of those property costs. If renting saves $1,000 or $2,000 a month compared with owning the same home, that difference matters. If it is invested consistently rather than spent, renting can remain financially competitive for much longer.

Renting can also make practical sense. It may let you live in a suburb where buying would stretch the budget too far, or give you flexibility while your work, family plans or preferred location are still changing.

So buying is not automatically the better short-term choice. If you may move again in a few years, the buying and selling costs can be difficult to recover.

Why buying often becomes stronger over time

The longer you own the home, the more opportunity there is for three things to work in your favour.

• Your loan balance generally falls as repayments reduce the principal.
• Rent may increase over time, while a principal-and-interest home loan has an end date.
• Any increase in the property’s value belongs to the owner, although property growth is never guaranteed.

Even if the property does not grow in value, an owner who pays off the loan still finishes with a home they own. They will continue to have rates, insurance, maintenance and possibly strata costs, but no rent or scheduled home-loan repayment. A long-term renter still needs to pay for somewhere to live.

That does not guarantee buying will produce the higher financial result in every calculation. A renter who invests the deposit, buying costs and monthly savings successfully may build substantial wealth. Interest rates, investment returns, property growth, tax and transaction costs can all change the answer.

The bigger long-term difference is that buying can eventually remove the largest regular housing payment. That can be particularly valuable later in life, when income may reduce.

What can move the crossover year?

Rather than treating one result as the answer, it helps to understand which numbers are doing the work.

• The gap between rent and ownership costs. If buying only costs a little more each month, it may catch up sooner. If the gap is large and the renter invests it, the crossover may take much longer.
• Your deposit and buying costs. A larger deposit reduces the loan and the interest charged. Stamp duty concessions may also improve the starting position for an eligible first home buyer.
• The home-loan rate. A higher rate means more of each repayment goes to interest, particularly in the earlier years.
• Rent increases. Faster rent growth can narrow the monthly gap over time, although no one knows exactly how rents will move.
• Property growth. Even modest growth can materially affect a long comparison. It is worth testing a low-growth and zero-growth result rather than relying on a strong forecast.
• The return on the renter’s savings. Renting looks stronger when the deposit and monthly savings are invested consistently and earn a solid return. It looks weaker if those savings are not invested.
• How long you stay. Buying and selling costs are spread over more years when you keep the property for longer.

A worked example: the assumptions make a big difference

Take a $750,000 established home in Western Australia, $120,000 in available savings and comparable rent of $605 a week. Assume a 30-year loan at 5.94%, with council rates, water, insurance and maintenance included.

Using 4% annual property growth, 4% rent growth and a 3.94% return on the renter’s invested savings, our calculator estimates the buyer’s net position moves ahead in year five.

Change property growth to 2% and rent growth to 3%, while leaving the other starting figures the same, and the estimated crossover moves to year 21.

With zero property growth, the buyer does not move ahead within the 30-year comparison on those particular assumptions. The buyer still finishes with a fully owned $750,000 home, but the renter’s estimated invested balance is higher because the monthly savings have been invested.

These are examples, not forecasts. They show why a result can shift dramatically when one or two assumptions change. The best test is to use the price and rent you are genuinely considering, then try a conservative version as well.

Find the crossover year using your numbers

Start with the home you might buy and what a comparable property would rent for. Add the savings you have available, your likely buying costs and realistic allowances for rates, insurance and maintenance.

Run the calculation more than once. Try the current rate, then a higher rate. Reduce the property-growth assumption. Test a slower and faster rent increase. If the result only works under the most optimistic settings, that is useful to know before you commit.

It is also worth comparing the same home with the same monthly outlay. The first shows whether renting that particular property is cheaper than owning it. The second shows roughly what home the same housing budget may support.

What if buying is not ahead yet?

A later crossover year does not necessarily mean you should never buy. It may mean the particular property is expensive relative to its rent, the deposit is still too small, or the extra monthly cost would put too much pressure on the household budget.

You may decide to keep renting while building a larger deposit. Another option could be renting where you want to live and buying an investment property somewhere more affordable, although that brings different lending, tax and landlord considerations and professional advice may be appropriate.

If you do buy, the original loan term does not have to be the final repayment date. Depending on the loan and your circumstances, keeping savings in an offset account or making extra repayments may reduce interest and bring the loan-free point forward.

The long-term view

Over a short period, renting can easily be cheaper and more flexible. Over a long enough period, buying will often become stronger because the debt reduces and can eventually disappear, while rent continues.

The timing is the important part. For one household it may be five years. For another it may be 15 or 20 years, or buying may not lead within the period tested. The result needs to fit your actual price, rent, deposit, cash flow and plans rather than a national average.

This is general information only and does not take your personal circumstances into account. Calculator results are estimates based on the assumptions entered, and future rates, rents, property values and investment returns are not known. Any borrowing is subject to a lender’s assessment.