Graphs and Stuff

Welcome to the Graphs and Stuff blog. Stay tuned for regular charts as economic data is published. Please also check out the Fixed vs Variable and the Rent vs Buy calculators.

Please note that nothing published here constitutes financial advice.

Australian Rent vs Buy Calculator

Rent vs Buy - a cute house on a hill

The decision to rent your home or buy one involves many factors. Vital among them, for most people, are the financial implications of the decision. Is "rent money" really "dead money"? Do we subscribe to the "5% Rule" and follow that?

This calculator attempts to provide a way to test out multiple possible futures to help in making this important decision. Given information about a property (such as price and current rental) and economic factors (such as inflation and interest rates), it analyses a person's final financial position in two scenarios:

  • they buy the property with a loan and live in it for the duration of the loan term, or
  • they rent it (or an equivalent place) and invest the difference between their rent and total costs of ownership in the "buy" scenario in a different investment vehicle.

For the rest of this post, the "investment vehicle" is going to be a broad market-weighted ETF (exchange traded fund - have a look here if you're note sure what that means), but it can be any portfolio of assets.

Firstly, a few notes about the scenario being evaluated.

As already mentioned, when rent is lower than the owner's outgoings (total mortgage repayments, strata, insurance, water, rates, repairs), the renter is assumed to invest the difference in the ETF. So, if the owner's total outgoings in a particular year are $50k and the renter's are only $30k, the renter is going to be adding $20k to their holdings that year. The initial deposit and any costs of purchase are, likewise, assumed to be invested at the start. All dividends are reinvested.

If, at any stage, the owner's outgoings are lower than the renter's, then the same applies to the owner - they are assumed to invest the difference in their own portfolio. We are not modelling early repayments here, just making sure that the total outgoings are equal in both choices.

All costs except rent are assumed to grow in line with inflation. Rent growth is left flexible and up to the user, firstly, because it tends to track wages rather than inflation, and, secondly, to allow for flexibility for locations that may have local differences leading to higher or lower rates of rent growth.

Hopefully you find this tool useful and interesting. If you have any questions, comments or suggestions, please leave us a message or get in touch on twitter @graphsAndStuff.