Should you buy, or rent a home?

If you’re currently renting an apartment or house, you may have wondered whether you can save money in the long run if you buy your own property.

We present a financial comparison between the two options for the first year of living in a property, and we consider the pros and cons of each.

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The cost of renting versus buying

When you weigh up the cost of renting versus buying a property, it’s useful to refer to a practical example that illustrates and highlights the differences.

Andrea Tucker, director at MortgageMe, compares costs by referring to real-world figures. When it comes to renting, she points out the following.

• A rental fee is a fixed amount that’s agreed with your landlord. For this example, let’s assume your rent is R10,000 per month.
• A rental deposit is an upfront cost that’s usually required before you move in. Generally, this is set between one- and three months’ rent. In our example, this will be between R10,000 and R30,000.  
• An agreement will be reached between you and the landlord about the utilities, such as water and electricity. Some rental agreements require that you pay rates and taxes, levies (if you’re in a complex), security fees, and compulsory garden services. These costs are usually variable. For our example, let’s assume you will pay an average of R2,000 per month towards these costs.

“This means that, throughout your 12-month lease agreement, you will pay your fixed rental costs (R120,000) and ongoing utilities (R24,000), plus a deposit (R10,000 - R30,000). This will equal R154,000 to R174,000 within the first year of renting,” says Tucker.

On the other hand, if you’re buying a home, Tucker points out the following costs that will apply during the same period.

• Once you’ve found the home you want to buy, you’ll likely need to take out a home loan. An offer of finance from a financial institution applies for a fixed period, such as 20 years, and it’s offered at an interest rate linked to the prime lending rate, which fluctuates based on Reserve Bank figures.
  Your bond payment will vary depending on this rate. If you’re paying off a R1 million bond at 7.75% interest, your monthly payment would be R8,209. A 0.25% increase in the interest rate would raise your payment to R8,364 monthly.
• Realistically, the administration costs of buying a home, such as registering the bond and paying the attorneys, will amount to around 8% of the value of the bond. On a bond of R1 million, that would be R80,000, and you will part with this money over the three months it takes to register and transfer the property into your name.
• Banks will require you to protect your bonded property with building insurance. This figure is negotiable while you’re taking up the bond. For ease of calculation, let’s make this R800 per month.
• You’ll need to pay the same utilities you would have paid if you were renting a property, such as water and electricity, rates and taxes, levies if in a complex, security, and garden services. To simplify this comparison, let’s make this R2,000.

“During the first year of owning your property, you will pay R212,108, based on the lower interest figure. However, the difference between this figure and the amount you would pay if you rent is largely due to the upfront costs of buying a property,” notes Tucker.

She explains that the calculation doesn’t take into account the inclusion of a deposit, which banks regard favourably.

“It’s always a good idea to start saving for the deposit and upfront costs so that you’re funding a smaller amount than the value of the property, and therefore reducing your monthly instalment,” she says.

Tucker adds that the above calculation also doesn’t take into account the monthly costs of maintaining a home yourself (as opposed to calling your landlord to fix a broken geyser) or any of the renovations you might like to do.

What are the pros and cons of each?

Based on the above calculations, it’s clear that buying a home is more expensive during the first year. However, these costs may even out over time, and there are more factors to consider.

Tucker says that, if you’re renting, you should be aware of the following pros and cons.

• Renting is a good idea if you’re not willing to stay in one place for an extended period, or if you are moving into a different life stage with different property requirements.
• Renting is favourable if you’re keen to control the costs of living in a property. This is because the monthly costs are stable.
• Renting is optimal if you don’t want to deal with property maintenance, or if you aren’t interested in DIY projects and renovations.
• If you’re new to a city or province, renting is a good way to get a true sense of a suburb or area before committing to a longer investment.
• You are, however, at the mercy of your landlord, and they may not care about you or their property. Some landlords do their best to remain as uninvolved as they can.
• Rent will always go up annually (by the same amount as inflation, or more), whereas interest rates on a bond can fluctuate up or down depending on the state of the economy.
• If you’re doubtful of your long-term employment status or the quantum of your income, renting is probably a better idea than committing to long-term debt.

With that in mind, Tucker puts forward the pros and cons of owning a property.

• Owning a house is a long-term investment that works well when the value of your property increases over an extended period.
• There is a significant upfront cost to owning a property for which you need to save, to reduce the ongoing financial burden.
• For the first few years of owning a bonded property, you’re servicing the interest on this property as opposed to chipping away at the capital. The latter only starts to happen during the sixth year of paying off your home loan. 
• You are your own landlord, which means that you will need to factor in property maintenance and other costs. However, your insurance will cover some emergency costs, such as a burst geyser.  

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