Is it Better to Rent or Own in Retirement?

Retirement

As you get closer to retirement, you may ask yourself, “is it better to rent or own my house?”

The perfect retirement looks different for everyone. Your circumstances, values and goals are different from Bob across the road! However, one thing we all have in common: we all need a place to live. Housing is a key part of planning your retirement, but how do you work out the best financial decision for you? With inflation, soaring mortgage rates and skyrocketing house prices, it can feel intimidating.

More and more retirees are still paying off their mortgage (up to 54% of 55-64 year olds, and 13% for those older than 65), thanks in part to rising house costs. These retirees are often paying off their mortgages with superannuation, which isn’t always a good idea. But is renting better?

Many Australians approaching retirement face the question: is it better to own my own home or live in a rental during retirement?

Is it better to buy a house later in life to have security in retirement and leave a legacy? Or rent, and face potential instability without the debt burden? If you already own a home, do you keep it or sell it? Each option has upsides and downsides to it, based on your personal situation. In this article, we’ll break down these pros and cons to give you a clear understanding of the owning vs renting debate.

What are the benefits of owning a home in retirement?

To many, owning a home is an achievement and a milestone they’ve worked hard towards. The Australian Dream. Owning a house may be a lifetime goal for some people, a status symbol, or a token of hard work. If you’re thinking about buying a home later in life for your retirement years, or if you already own a home, here are some advantages of continuing to live in the home you own.

Freedom to make the changes you need

Homeownership gives you the flexibility and freedom to make updates according to your changing needs and lifestyle, while still enjoying the home you love. For instance, renovating the bathroom or replacing steps with ramps for accessibility.

You can still receive the age pension

Another benefit of owning a home in retirement is that it is an exempt asset under the Age Pension asset test. This means that even if you own a valuable property, such as a $3 million home, you can still qualify for the age pension. This exemption allows retirees to have a valuable asset while still receiving government support if needed. However, if all of your money is tied up in a house, this can be a problem for your day-to-day cash-flow, as the age pension is a very modest income.

You have more stability and housing security

As a homeowner, particularly if you have paid off your mortgage, you have a great deal of housing stability. This can be a great source of peace of mind for retirees, who would otherwise be anxious about their housing options changing over time. You get to choose when you move and why.

You can leave it as a legacy

A big benefit of owning property, especially in the current housing market, is the potential for that property to be passed down to children or grandchildren. Many retirees are willing to make big sacrifices in their own lives in order to help family members get a good start. Passing down a paid-off house, whether as a gift or in the estate, can be priceless. If this is something that is important to you, it’s valuable to seek estate planning advice at the same time as planning for your retirement.

What to consider before buying a home for retirement

Understand Your Timeline

If you are in your 40s or 50s and considering buying a house now, the most important factor is your ability to service the mortgage until it is paid off, potentially up to 20 or 30 years. Have you considered how long you plan to stay in your new home? The shorter your timeframe, the less value you get out of the homeownership, so you should plan to own the home for at least 10 years, whether you are living there yourself or renting it.

If it’s a second property that you’re considering purchasing, or you have significant assets that you can use to fund the purchase, you may be in a better position to continue paying your mortgage in retirement with less financial stress.

Calculate your Cash Flow

Mortgage debt can have a significant impact on your retirement savings. Of course, paying rent can have a similar impact, depending on where you buy and interest rates, so it will depend on how much you can budget for housing costs (including utilities, maintenance, and council rates).

For example, the age pension won’t provide sufficient income to keep up with mortgage repayments. Calculating your housing costs into your retirement budget will help you understand which option is best for you from a financial perspective.

Know what you ultimately want from the house

Knowing what you want from the house can include your goals for buying it, for example as an inheritance to leave behind, as an asset to fund your later years, or simply to live in for as long as possible. This should also include your exit strategy: are you going to ultimately sell the house, or will it be included in your estate planning? Understanding this will help you research and choose what kind of house you purchase, and where.

What if you already own a home?

  • If you already own a home, the options that are available to you can be very different.
  • If you’re still paying your mortgage, you may be able to get specialised advice in your retirement plan that helps you pay it off prior to retirement.
  • If you have no debt on your house, you will enjoy a lot lower housing costs (limited usually to maintenance and council rates)
  • You can use your house, even if you are still paying off your home loan, as a source of income for retirement.

Downsizing

Downsizing, and utilising the Downsizer contribution, can be an excellent option when your current home is not going to suit you after retirement or if you would like to top up your retirement funds by selling the house. Downsizing involves selling your current home, and instead purchasing a smaller home that costs less, while putting up to $300,000 of the profits into superannuation. This scheme comes with some pros and cons:

Pros Cons
  • A smaller place can be easier and cheaper to maintain
  • Downsizing can free up money to pay off existing loans, finance your retirement, or to expand your investment portfolio
  • Downsizing to a new house gives you flexibility to choose a layout and fittings that meet your retirement needs, or move to a location closer to family, transport and services
  • Purchasing a smaller house may mean less space for entertaining
  • If you’re in an older stage of life, it can be more difficult to adjust to a new area, find new professional services or facilities that suit you
  • It can be very difficult to leave behind a house full of memories and meaning.
  • There can be additional costs involved, such as real estate agent fees, furniture removal, or stamp duty.

Reverse Mortgage or Home Equity Access

You can also use the equity of your home to finance your expenses by using a reverse mortgage or home equity release. Home Equity Access is a voluntary, non-taxable loan against your home equity that becomes an income stream to supplement your retirement income. This is designed to help those who have equity in their home but have a low retirement income; it is available for those who are eligible for the age pension. The options for accessing equity can have slightly different variations:

  • Home sale proceeds sharing
  • Equity release agreement
  • Home equity access scheme (formerly the pension loans scheme)

These schemes come with considerable terms and conditions, and can be dangerous if not planned appropriately. We personally choose not to use these options for our clients, as we believe better options are usually available.

Disadvantages of owning a home

While a home is a valued asset, it can also be a big responsibility.

You have ongoing maintenance costs

With a home, there are regular maintenance costs that are always going to be needed. Things like repairs, cleaning, replacement of appliances and landscaping are ownership costs that you would need to budget for. This is particularly true if your house is older or unrenovated, which can be far more costly to maintain than a newer house.

As we’ve often seen with our clients, these costs become more apparent and harder to afford as clients age and their medical costs increase. Insurance costs and council rates can add additional pressure which impacts the amount of disposable income available to you in retirement.

A lot of your money is tied up in an illiquid asset

We have often worked with homeowners who receive the age pension, but are not able to make ends meet. A low amount of superannuation and the pension is not enough to cover their costs of living. There are many reasons why retirees in this situation are resistant to selling their home, including emotional ties and the negative impact that realising a profit in a large sum of money would have on their aged pension.

However, with so much value tied up in an illiquid asset, it can be a better option to sell the home as the money can be used to create a much more comfortable quality of life, along with security. This is particularly the case when there are less funds available in superannuation.

Capital outlay is considerable

In order to get into the property market, whether for the first time or as a seasoned investor, there is a considerable amount of capital that needs to be invested upfront. This can be in the form of a deposit, or even the home equity you can access when purchasing a second property. Not only do you need to have a large amount of money on hand in order to complete your initial purchase, you need to have a healthy cash flow on an ongoing basis in order to consider servicing your loan.

What are the benefits of renting a home?

There are still many out there who are considering renting as compared to owning a house. Let’s discuss a few reasons why.

Less responsibilities for maintenance

As retirement approaches, some people would rather not have the upkeep of their home or garden to worry about. This is one of the benefits of renting: fixtures, landscaping, and upkeep are the responsibility of the landlord. Maintenance can be particularly costly if you need to replace or renovate parts of the house to continue living there as you age. You could calculate the cost of renting vs the cost of maintenance to understand the corresponding budget impacts.

Free from debt management

Not only is renting often more affordable than paying off a mortgage, you can also avoid entering into a long-term financial obligation. This can be suitable for some people who:

  1. Don’t have a large amount of capital to outlay
  2. Don’t want to tie up a large amount of cash flow or equity in one asset
  3. Want to save money towards other goals such as travelling

Increased flexibility

There is increased flexibility when renting over buying, primarily due to the fact that you are able to move when you want to or more frequently. You aren’t tied into the home, so you can find somewhere new to live when your lease runs out. You also have more financial flexibility – you can look for a cheaper rental, but paying less on your mortgage is often simply not possible.

Disadvantages of renting

In comparing buying vs renting, you must also consider the disadvantages of renting to make a wise, informed decision and avoid financial stress.

One of the primary disadvantages of renting is that the payments are ongoing and do not eventuate in owning the property. There is no potential for increasing your own wealth or building value in an investment or asset. While your mortgage payments might be higher, you can eventually pay off your debt and own the property.

Another disadvantage of renting is that you are limited in the customisations or changes you can make to your living space. This can be anything from hanging pictures on the wall to major changes to suit a change in your mobility. You can also be at the mercy of what the owner wants to do, for example, refusing to make necessary repairs that can impact your quality of life. It’s pretty clear that you are also quite limited on your control of things such as owning pets.

The other key disadvantages are a lack of security and permanence. You might be able to keep renewing your lease, but ultimately you might have to move. You also might be subjected to rental increases that stretch your budget: in the last 2 years, rental prices have jumped by up to 33%.

What to consider before renting a home

There are many variables to consider before renting a home, such as rental price, availability, and location.

First, think about your financial goals and your desired retirement lifestyle. Think about what will give you the most peace-of-mind, because retirement is as much about how you feel as it is about what you can afford. You should also consider if your circumstances may change, and if you have any back-up plans if they do. Then, make sure you have a clear understanding of your retirement budget.

If you’re looking for a home for retirement, research information such as rental median price and if it is likely to rise. It’s also valuable to make sure you are close to important facilities that you may need, or hobbies that you enjoy.

What about Retirement Villages?

A retirement village can be an excellent retirement option for retirees.

Keep in mind that the term ‘retirement village’ is used interchangeably across the industry, so it can refer to a variety of different living formats. Retirement villages are governed under the Retirement Village Act and allow retirees to purchase a life interest in a property. Aged Care Facilities are governed under the Residential Aged Act, and allow a retiree to purchase a “bed” within a facility that provides high levels of care. For the purpose of this article we will only be discussing retirement villages.

How do they work?

Retirement villages generally require you to make an ‘ingoing contribution’ to purchase a ‘life interest’ in the property. This allows you to live in the property for the rest of your life but doesn’t allow you to pass it on to your family.

If you want to move out from the retirement village, you’ll need to pay an exit fee. This is capped at 35% of your ingoing contribution and some providers allow the capital growth in this property to make up some of this fee.

You’ll also need to pay an ongoing contribution which is usually far cheaper than renting and includes maintenance, electricity, power bills, etc. These vary for each facility but are typically between $9,000-$15,000 per annum.

The pros & cons of choosing a retirement village

Pros Cons
  • A retirement village can improve your lifestyle by giving you access to a community that you’ll have things in common with.
  • Some retirement villages give you access to on-site care, which can mean you can stay living in your own home for longer.
  • You get to enjoy your own space in the same way that you would as a homeowner.
  • The buy-in can be lower than buying a house, and when you leave the village, you get that back less your exit fees.
  • All retirement villages are “for profit” and have their own cost guides.
  • The ‘ingoing contribution’ is an upfront cost that can be quite significant, typically around $400,000 to $600,000.
  • Retirement villages don’t suit elderly clients who are at risk of requiring an Aged Care Facility in the short term or who have advanced health requirements.
  • In most cases, you can be assessed as a ‘homeowner’ under the age pension test, which means you have a much lower assets allowance.
  • More shared spaces may decrease privacy.

We recommend getting financial advice on retirement villages contracts prior to signing. We see a lot of clients who don’t understand these agreements and recently undertook a case study on 4 different providers, which showed within 5 years, a client would lose anywhere between $109,000 to $210,000 from their ingoing contribution when they leave.

Conclusion

Ultimately, many retirees have an idea of what they want their retirement to look like, however many may not have thought about what will make them feel satisfied and fulfilled during retirement years. It’s important to start from the right place when planning, and where you live can impact your entire lifestyle a lot more than we realise.

Another important consideration that I will leave you with is your estate planning. Whether you prefer to spend your money yourself, or leave an estate to your children as an inheritance, this is something you’ll need to build into your retirement planning early.

Our priority when planning a comfortable retirement for clients is to remove stress and relieve financial pressure. Our financial planners are able to add clarity and confidence to your retirement planning, so consider reaching out today.

Izzy Tittor

Izzy Tittor - Financial Advisor

Starting his career in Canberra, Izzy graduated from the University of Canberra with a Bachelor of Finance, majoring in Financial Planning, Banking and Financial Services. 

Whilst in Canberra he worked for a boutique financial planning firm where he gained valuable hands-on experience working with high-net wealth and high-net-income individuals, small to medium-sized enterprises and self-funded retirees.

Read more of Izzy Tittor articles

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