Repayments are Cheaper than your Rent

The context…

Cotality’s February Monthly Chart Pack confirmed our suspicions that the rental affordability market has reached a new record low, especially when compared against wages.

The report showed that over the past five years, rents are up 43.9% while wages rose just 17.5% over the same period. In other words, national rents have increased nearly three times faster than wages. 

In the past 12 months alone, we’ve seen rents go up 5.4%. 

As a result, renters are now spending an average 33.4% of their pre-tax income on rent. This situation is driven by repeatedly tight vacancy rates and of course the tale as old as time, supply and demand pressures. 

These factors have made rental affordability central to household conversations, especially compared to 2015-2020, when wages were generally growing faster than rents. National rental markets remain extremely tight with vacancy rates at around 1.4% – 1.9% across the nation. And yes, this combination is putting further pressure on rents. 

Then, there’s the fact that renters hoping to become homeowners are facing continued, rising property values. So, it’s understandable that tenants are feeling stuck between a rock and a hard place right now.

Mortgage vs Rental Repayments

Recent rental data shows that Sydney rents are around $792 per week or $3427 per month. Melbourne tenants are paying $611 per week, or $2641 every month, and in Brisbane, weekly rents come in at $683 per week or $2950 when converted to monthly figures. 

Bear in mind, these figures don’t include utilities and bills, because we all know these can just add to the expenses.

Now, to mortgage repayments, and according to Australian Bureau of Statistics data, average monthly home loan repayments across Australia sit at around $3935. This is for a typical 30-year loan for an owner-occupier.

State by state, NSW homeowners are repaying an average of $4696 every month on their loan. In Queensland, monthly repayments are around $ 3897, while Victorians should expect a monthly repayment of $3667. (Should come to no surprise that NSW is winning the race with the higher repayments here given their medium house prices)

If you’re now thinking Melbourne and Brisbane rents are actually lower than an average loan repayment, with Sydney rents closer to mortgage levels, you’d be – almost – right. But there’s more to renting and home loan finances than meets the eye.

Buying vs Renting

In the short term, renting can be an excellent housing solution, offering many financial benefits that home buyers don’t enjoy. That was generally the case before the pandemic, at least. 

In contrast to homeowners, tenants enjoy the flexibility to move to different locations. You also don’t need to pay for ongoing or emergency home maintenance, or renovations, which can add up fast over time. (That’s for the landlords to worry about)

Another financial downside for townhouse and apartment home owners are body corporate, or strata management, fees. While these levies include necessary building insurance, they can nevertheless seem expensive at times, and can easily add up to thousands of dollars every year, even for the not so glamourous properties. 

These fees, or levies, also don’t include council rates or utilities, and while they’re tax-deductible for landlords, that’s not the case for owner-occupiers.

Despite all of the above, I’ll always argue that homeowners enjoy far higher financial advantages over tenants, especially in the long term. Tenants’ current short-term financial challenges actually seem worse than those of homeowners right now, even with this month’s interest rate hike, which may be followed by more. 

The data tells the story. Recent rental stress statistics show a significant share of renters (48% in some surveys) are struggling with rental affordability. 

Making matters even harder for tenants is the fact that their hard-earned rental payments are going nowhere. Rent is pure expense. It keeps a roof over your head, but you’re still helping someone else pay off the landlord’s mortgage. You’re not working towards anything of your own.

You’re also not building equity, whereas your landlord undoubtedly is, thanks in some part to you. Mortgage repayments, while financially painful in the short term, also reduce a home loan’s principal and build a buyer’s equity in their property.

So, while mortgage repayments might be slightly higher than equivalent rent, yield growth, equity gains, and financial flexibility will quickly become the focus of homeowners’ long-term property journey.

Finally, the tempting tenant narrative of renting is cheaper than buying assumes rents won’t continue rising. Sure, they may attenuate in the future, but there’s no expectation they’ll plummet in our major capital anytime in the near future.

Examining basic rent and mortgage repayments in different locations can help open a tenants’ eyes to the possibility of home ownership. But what will help you even more is talking to a mortgage broker. Even if you believe becoming a homeowner isn’t possible, Intuitive Finance’s complimentary strategy sessions can help you understand how your situation compares to the real-life market, without being pressured by high sales. Our brokers will use their financial savvy to help you work towards your goals, not someone else’s!