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The increased interest rates once again raise the question of whether buying a home is cheaper than renting. It’s not just a matter of throwing as little money as possible through windows and doors. Other aspects also come into play.
Arno and Kyla are in their late twenties and are about to move in together. Like 72 percent of all European people, they are considering buying a house or an apartment, but the rental market also offers opportunities. Each scenario has advantages and disadvantages.
How can they get the money? Breaking their piggy bank, borrowing, or playing at non GamStop casinos. In any case, they have to work day and night, however, is the best option for them from a financial point of view to buy or rent? This is what we will discover in this article.
The Benefits of Buying
Due to the interest rate rise of the past year, a home loan is no longer feasible for some, unless they are forced to opt for a longer term. As a result, certain homes remain for sale longer, which may lead to price falls. That is certainly a good thing for prospective buyers.
In the long term, investing in real estate is generally regarded as a profitable investment. “Historically, the evolution of house prices has always covered inflation in the long term,” says Tim Leysen. “In this way, owners could always safeguard the purchasing power of their real estate investment. However, the past is not always a reference for the future.”
“Inflation Is the Friend of the Homeowner & the Enemy of the Renter”
A home loan ensures that Arno and Kyla can spread the purchase price over several years. They can view each monthly instalment as an investment that remains within their equity, while a monthly rent is rather an expense that they have lost forever. “European people see their own home as part of their pension accrual,” says Tim Leysen.
If Arno and Kyla borrow at a fixed interest rate and with fixed monthly payments, they no longer have to worry about further interest rate rises. They repay a monthly amount that remains the same, or even decreases month after month with fixed capital repayments. This is not the case if they rent a house: the rent is set by the owner and is linked to the evolution of the health index.
“Inflation is the homeowner’s friend and the tenant’s enemy,” says Tim Leysen. “For the owner, the repayment of his credit remains unchanged, but his employee wages rise due to inflation. The tenant will also see his wages increase, but in all probability, his rent will also increase.” The landlord has the legal right to index the rent once a year to keep pace with inflation.
Once their loan has been paid off, Arno and Kyla – unlike a tenant – no longer have to pay an amount every month. There is even a real chance that their home loan will have been paid off when they retire. This is useful if they then fall back on a more limited pension income. A tenant, on the other hand, remains saddled with the rent for life, which also increases year after year due to inflation.
Buying a home also has a psychological advantage: the young couple always has a roof over their heads. A tenant does not have that certainty and peace of mind: within the limitations of the law and of the lease, the landlord can always end the contract. As a result, there is a chance that the tenant – even at a later age – will have to look for a new place to live.
Arno and Kyla can also renovate their purchased home and adapt it to their own wishes. The only rules they have to abide by are those of spatial planning and, possibly, those of co-ownership, if they buy an apartment. A lease, on the other hand, often imposes specific restrictions on alterations to the property. And if the tenant does make certain investments in the home, he usually cannot recover them at the end of his lease.
The Benefits of Renting
Purchasing a home requires a significant investment. According to Statbel, the Belgian median price for a house in a closed or semi-detached building was 255,000 euros in 2022.
A detached house cost 360,000 euros and an apartment on average 230,000 euros. But when Arno and Kyla rent a house or apartment, they don’t have to lose sleep over such a large investment.
In addition, a tenant does not have to take into account the purchase costs, such as notary fees and registration fees. Anyone who buys a new building even pays 14 – 21 percent VAT.
In addition, additional costs are also charged for taking out a home loan: file costs, costs for registering a mortgage, the fees of the mortgage custodian and the civil-law notary involved, deed costs and premiums for the outstanding balance insurance. The total amount can amount to several thousand euros. Tenants are exempt from this.
Anyone who borrows money also pays interest. Suppose Arno and Kyla want to buy an apartment for 230,000 euros. They have 50,000 euros in savings and therefore still have to borrow 180,000 euros. In that case, they pay back more than 68,000 euros in interest at a fixed interest rate of 3.44 percent over twenty years. That is a significant loss to a tenant.
Lenders expect a piece of their own contribution when taking out a home loan. Without savings or support from the parents, borrowing is often impossible for young adults like Arno and Kyla. As tenants, they only have to pay a rental deposit at the start. They can then first build up a piggy bank. That benefit will increase as interest rates continue to rise.
Putting all their savings into a home makes Arno and Kyla vulnerable. Because, for example, a property can drop in value due to poor maintenance. As tenants, they can invest in a more diversified manner. In principle, the chance that their diversified portfolio – including cash, shares and bonds – will fall in value is smaller. What’s more: by investing wisely, they can obtain a good return in the long term.
Homeowners also have to take all kinds of costs into account. The tax authorities come knocking every year for the withholding tax on real estate, and the maintenance and repairs of the home are not free either. All costs together amount to an annual average of 3.5 percent of the value of the property. As tenants, Arno and Kyla are only responsible for the daily maintenance of the rental property. Heavy expenses for, for example, replacing the roof or the boiler are usually borne by the owner.
