By Hairil Jaslan Jaafar
Renting or buying a house can be a dilemma especially for first time property owner. Learn the pros and cons of both choices.
For many young couples, aside from starting a family, owning a home is also a top priority in their to-do list. But, to buy or to rent?
For comparisons sake, let’s just say owning a property is until retirement, that it’s not for investment purposes. For discussion purposes also, we’ll split the time periods into three, that is the initial years, the mid-term years and lastly the later years, which is the retirement years. So, what are the pros and cons of renting versus owning a home?
Pro and Cons in the Initial Years
If you were to purchase a house, then you’d have to get ready the down payment, usually between 10% to 20%. A higher down payment means you’ll be spending less when making the monthly loan payments later, which might not be a bad idea. A 10% down payment for an intermediate landed property in Klang Valley can cost you between RM55,00 to RM95,000 these days. A 20% down payment will cost you in excess of RM100,000.
For buying a house, the cost to acquire doesn’t just stop there. There are other costs that you’ll have to fork out, such as the Sale & Purchase legal fee and stamp duty, valuation fee, housing loan legal fees and stamp duty etc. Not to mention the loan’s mortgage insurance and the cost to transfer the land title. Add up, these cost can run from RM30,000 to RM50,000 onwards.
Then, there’s the cost of renovations and home furnishings to consider, such as bathroom furniture, lamps, ceiling fans, door and window grills, etc. These costs can well add up in excess of RM30,000.
As a comparison to all the home ownership cost above, it would probably just cost you two months rental in advance, plus the utilities deposit, if you were to rent.
From the above, renting has more pros than cons in the short term.
Pros and Cons in the Mid-term Years
Let’s say you have stayed in your purchased or rented home for a number of years. 10 years, perhaps?
For home owners, you’d have paid the annual costs of quit rent and assessment payments. Also home insurance. Over ten years, this cost would have run in excess of twenty thousand.
Then there’s also some repairs and maintenance that need to be made occasionally on the house. This cost would have depended on how severe the damage has been. It can run from a few hundreds of Ringgit to tens of thousands of Ringgit.
Despite the above, a point to note for homeowners is that whilst the loan installments would have stayed the same (or change marginally depending on prevailing interest rates), rental rates could have gone higher over this period.
Renters are at the mercy of homeowners who wish to increase the rental upon the expiry of a given number of years. If the renter is not successful in deferring the increase, then it’s either stomaching the additional cost or moving out, which would also cost in excess of a few thousand Ringgit.
Then there’s the issue on maintenance. For renters, even though maintenance of the home is undertaken by the owner, there are times when the owner is slow in responding to the renter’s complains. Then there are also instances where age old water pipes have not been replaced, thus affecting the quality of water.
Despite the above, here’s a plus point for renters: life can become unexpected.
Negative financial circumstances can favour renters instead of owners. Homeowners still have a mortgage hanging over their heads. For the financially troubled renter, he can just move somewhere else where the rental is cheaper. For the financially troubled homeowner, he cannot escape the high mortgage commitments. Even if he were to decide to temporarily rent out his house whilst he seek to rent somewhere else cheaper, do remember that relocating also cost money, and his new tenants might not necessarily be prompt in payment, compounding his problems.
From the above, it looks like the pros and cons are even on both sides.
Pros and Cons in the Retirement Years
By now, you would have stayed in your purchased or rented home for many, many years. And, you would be facing retirement.
For homeowners, the house would by now usually need some form of major repairs that could cost the owner dearly. Let’s say the cost of major repairs is RM100,000. If you did not make some provision for this during your younger days, then this amount certainly would be making a dent in your retirement nest egg.
However, during this stage, the loan tenure would have ended. The homeowner would be living in his home for free. What about renters? They would continue to pay rent and at much higher rates.
Another point to consider is at old age, the ability to move out is low. When renters are old, they are not physically able to move out to avoid paying higher rent. Unless renters have included this provision in their retirement plans earlier, they would find the appreciating rental costs very burdensome. Otherwise renters might want to consider old folks’ homes or retirement villages which might be a cheaper option.
On the flip side, even though our discussion centered on buying a home not for investment purposes, owning a home can be a tool to build wealth. Over time the value of your home in most instances will appreciate. This gives you the option to take opportunity and sell the house at a high profit. However, you must be willing to downsize into a smaller and less expensive home in a new neighborhood. Locating to a town with a lower standard of living to retire in might not be a bad thing, as your finances will become healthier in retirement. However, the flip side is adjusting and making new friends at an old age. Not to mention being far away from your support base (children, siblings and close friends).
Alternatively, reverse mortgage plans are making their presence known in Malaysia. This means that the homeowner can unlock the equity value of their homes during old age. You can say this is how the homeowner can get back a big portion of the amount that was spent in acquiring, maintaining, and repairing the house. However, do note that legal fees and Real Property Gains Tax might be borne by the homeowner upon opting for reverse mortgage plans. The homeowner may continue to live in the property until they pass on. Do also note that the homeowner still has to continue to pay utility bills, quit rents, assessment charges, home insurance, and make minor repairs to the house.
Lastly, home owners have the indulgence of leaving property legacies to their beneficiaries. Their children might find this inheritance useful to resuscitate their own children’s education funding, or kick-start a business venture, for example. However, do note that for homeowners that have opted for the reverse mortgage, passing on legacies is no longer possible.
From the above discussion, for longer tenures, it seems home ownership has more pros than cons.
Overall, if you’re planning to reside in an area for a short term, say for a few years, then renting makes better sense.
However, if you’re planning to reside for the long haul, home ownership makes better sense. This is because buying homes can give you the option of unlocking equity when you most need it (during old age), either through selling or opting into a reverse mortgage plan.
In addition, the decision on whether to buy or rent can be emotional, not financial. For homeowners, owning and staying in your own home gives you a sense of pride and achievement as well as a sense of security. You truly have a place to call your own and build a life with your family. Generally, home buyers would also feel a sense of belonging in a community.
Not to mention owning a home gives you the freedom to do anything you like to the property, provided it doesn’t affect neighbors’ rights. You can convert your garden into a mini farm, do some renovations, change the gate lamps. All these may not necessarily be allowed when renting.