Rent or mortgage? The eternal dilemma of people who do not have the opportunity to pay 100% cash to buy a home. If you are also in this situation, then surely the information below will help you understand the advantages and disadvantages of a mortgage in relation to renting a property.
The contradictory opinions on rent or mortgage created two different camps. The first side claims that the rent is cheaper and can be obtained quickly and without any hassles, while the other side claims that buying a home through a mortgage loan gives you the opportunity to become an owner and far greater safety in the future.
Advantages and disadvantages of RENTING
- the tenant pays only the cost of the rent, he is exempt from other additional payments such as taxes for related land to the building or the house, maintenance and repair of the house, home insurance, etc.;
- to take a rent you don’t need to have a lot of money set aside, usually you need the equivalent of the monthly payment in advance for 1-2 months, or 3-6 months in the worst case;
- reduced bureaucracy, no need for a lot of documents, just a contract between the tenant and the owner;
- the tenant can change his house quickly in case he gets bored of the current house, changes his job or if he finds a much better offer at an affordable price, etc.;
- if the tenant agrees well with the owner, he can postpone the payment of a monthly payment in case he doesn’t have money, which is practically impossible in case of non-payment of a monthly payment to the bank;
- the impossibility to make changes inside the house as you like.
Advantages and disadvantages of MORTGAGE
- the purchase of a home by mortgage implies a greater financial responsibility because in addition to the monthly installments paid to the bank appears unforeseen expenses, maintenance and current repairs, taxes, etc.;
- it needs to pay the first installment of at least 10% if you use the First Home Program and at least 20-30% by using a simple mortgage loan;
- in order to obtain a mortgage loan, it is necessary to prepare several documents such as an official employment contract, salary certificates, real estate appraisal report, earnest money contract, etc.;
- in the case of paying a higher first installment at the purchasing a real estate by mortgage loan, the monthly rate paid to the bank could be lower compared to the monthly rent for the same type of real estate;
- one of the disadvantages is that bank rates are often variable depending on the exchange rate and can generate additional expenses;
- being an owner you can make changes inside your home as you wish and you do not need to ask permission from anyone;
- the purchasing of a home by mortgage loan, offers you the safety of the property right upon full payment;
- the value of the apartment or house can increase or decrease over time, respectively the area in which the house is purchased must be analyzed very well, as well as the market trends. It can be both a profitable and less financially profitable investment;
- the real estate can be legacy for children.
Mortgage or renting – the analysis of figures
Let's analyze what the figures show us if we calculate how much the rent will cost us or if we purchase a property through a mortgage loan for a period of 20 years. We will take into account the average price for a 2-rooms apartment in Chisinau, in a new building, with qualitative repair.
The average of the 3 apartments in rent above is about 265 Euros per month. That would mean that such apartment for rent for a period of 20 years will cost us 63,600 Euros.
20 years x 12 months x 265 Euros = 63,600 Euros
A similar 2-rooms apartment in Chisinau with qualitative repair costs about 56,500 Euros to pay it in full with 100% cash.
Appealing to a mortgage loan, where the first installment initially paid would be 20%, the cost of the apartment for a period of 20 years with an annual interest rate of 9% would be 107,300 Euros.
The first installment 11,300 Euros (20% of the total cost of the apartment of 56,500 Euros) + 20 years x 12 months x 400 Euros (monthly rate) = 107,300 Euros.
CONCLUSION
At first glance (sight), it would seem that the mortgage loan is very expensive, resulting from the rather large final amount paid to the bank. If we take into account the cost of rent for a period of 20 years of 63,600 Euros + the cost of the apartment of 56,500 Euros (imagine that the person who rented saved money to buy an apartment during this period) the total cost of it would be 120,100 Euros. A much higher figure than that paid by a mortgage loan. Respectively, it would seem that the mortgage is a much better solution.
Here we must take into account the evolution of the market which will be over 20 years, if the price of apartments will increase, those who will purchase by mortgage will benefit, because the value of the apartment will offset the costs of the loan while those with rent unfortunately not will be able to buy a similar apartment, they will have to save even more to accumulate a budget much higher than the amount of 56,500 Euros that is needed at the moment.
If we look at apartment prices in Chisinau 20 years ago and how they have evolved until the present, accessing a mortgage seems to be a much more rational decision.
What do you choose? Rent or Mortgage?
