After you graduate from college, you have worked a few years and you always get this nagging from your parents or your friends, asking you to buy a house. It is a major milestone before you get married. Or so they say. Is it always better to buy the house you stay in? Or is it always better to rent?
Assuming you are 25 years old, making RM4,000 per month. Let’s look at a reasonably priced apartment in Penang Island that you can afford. Taman Jade View is selling at RM300,000 unfurnished but you can also rent one at RM800 per month fully furnished.
|Taman Jade View||RM300,000 (unfurnished)||RM800/month (furnished)|
Buying a house incurs a lot of additional expenses, other than the 10% down payment, you would need to prepare some money for legal expenses and some furnishing for the apartment. However, if you are renting, you will also need to prepare some security deposits and legal fee for tenancy agreement as well.
|Downpayment / Deposit||30,000||2,400|
Since you are young, you can borrow RM270,000 for 35 years at 4.3%. Based on the home loan calculator on LoanStreet, the monthly instalment would be RM1245. On top of that, you will need to pay all the relevant property taxes as well.
For rental, it is easy, RM800 per month and normally you do not need to pay any of the property taxes.
|Instalment vs Rental||1,245 per month||800 per month|
|14,940 per year||9,600 per year|
|Property Taxes||1,200 per year||0|
|Total Per year||16,140||9,600|
From the two tables above, you can see that if you are renting, you can save RM58,540 from the up-front payments, and RM6,540 from annual expenses.
|Savings||Cash Up-Front||Annual Expenses|
|Buy||61,240||16,140 per year|
|Rent||2,700||9,600 per year|
|Savings||58,540||6,540 per year|
Let's say that you put those savings into an investment, nothing too fancy, just Fixed Deposit in the bank. Based on Ringgit Plus calculator, your initial savings of RM58,540 can get 4% p.a. interest rate for a 5 years term. After 5 years, your savings will grow to RM70,248.
Let's keep all the annual savings in Fixed Deposits as well for 3.7% on 1 year term. Your savings will grow to RM35,211.00
|Initial Balance||Additional Deposit||Ending Balance|
Together, the money you saved will become RM105,459. This is just putting the money into Fixed Deposit, and not some fancy mutual funds or super star company shares.
I know you will say that the house will also appreciate over the 5 years, let’s see how much we can get there. Assuming your house appreciate 4% year-on-year.
If your house appreciate 4% year-on-year, your house would worth RM350,957.60 after 5 years. At month 60, you still owes the bank RM251,490.92. So, if you sell the house after 5 years, you will gain RM50,957.60 but you can only get back RM99,466.68 after paying off your debt.
After 5 years, the house renter will have RM105,459 in the bank, vs the house buyer with RM99,466.68.
So, is it better to rent or to buy? There is no right or wrong answer. But for current situation where rental is low and property appreciation for the near term is not looking bright, maybe it is good to rent and keep the money for other investments.