Although I own properties overseas, I am a renter here in Singapore. People keep telling me that “renting is just like flushing your money down a toilet”. When I ask these people whether they rent or own, they proudly proclaim “own, of course!” But do they really own their home? Most people who purchase a home, do so with a mortgage, a word that originates from Latin meaning “death pledge” because it often took the entire life of a person to fulfill the pledge. Until recently, a person in Singapore could buy a home with 5% of its value in cash, 15% in CPF funds, while the rest (80%) is lent by a bank. For a BTO, the rules used to allow for 10% down and while the other 90% was financed. The amount financed, of course, comes with interest. So let’s dissect what is actually owned.
When you buy a property with a mortgage, your ownership looks like this:
The down-payment is paid for from your money, but everything else was lent to you. Another way of looking at it is that you are essentially “renting money” from the bank or government.
In order to properly compare renting to owning, we must also include things that an “owner” would have to pay that a “renter” would not. This includes property taxes, home insurance, and any conservancy/maintenance fees. For the sake of simplicity, we’ll assume these expenses are paid monthly. Here’s what that total monthly home payment would then look like:
An Example: Let’s look at these payments spread over time on the purchase of a $1,000,000 condo with a down-payment of $150,000, monthly maintenance fee of $300, annual home insurance of $600, and annual real estate tax (owner occupied) of $1200. Let’s assume the interest rate is fixed at 2% for the entire life (30 years) of the loan, and we will ignore the effects of inflation and appreciation/depreciation. This gives us a total monthly home payment of $3580. This calculation will be explained in the next post.
The sections in green represent the equity (i.e., what a person actually “owns”). The down-payment and whatever goes toward paying off the principal of the loan is the equity. Everything else does not build equity, or as people like to say, is “flushed down a toilet”. This does not mean that the money spent on non-equity items is wasted, but much like renting, this money goes toward “use” and “enjoyment” rather than “ownership”.
When you get a loan, a conventional amortisation schedule for home mortgages makes it so that initially, a larger portion of your monthly payment goes toward paying the interest. As time passes, that interest portion will reduce as your principal amount goes down. The interest portion does not build equity, and neither does the portion allocated to property tax, home insurance, or service/maintenance fees, all of which are not applicable if you’re a renter.
If you plan to stay in your home for a very long time, then home ownership (depending on the home and your budget) may be the better option, even if you have to take on a mortgage so long as you are not buying at the peak of the market and interest rates remain low. But, most people I know end up moving after 7-10 years, especially those who believe they won’t. I cannot tell you just how many times I hear people say “we moved into our dream home and we will live here for life” and then 7 years later, move into another so-called “dream home.” Your life circumstances can and will change, and so may your dwelling place.
In the example above, at the end of 10 years, assuming an initial down-payment of $150,000, you will have paid $429,600 ($3580 * 120 months), which is more than half of the total debt that was financed. Of that amount, you will have $227,419 in equity (i.e., ownership), not counting your initial down-payment. That means you will have built a mere 23% of your home’s purchase price in equity through your monthly payments. If, say, the market value of your home drops by 20%, you will have lost nearly all your equity. Please note again that there are many assumptions in place, including zero inflation and zero increases in interest rates.
Here are some other things to consider when choosing to rent or to buy:
As a renter, I do not have any equity in the home, but I also am not responsible for any variations in the above fees (e.g., if and when interest rates increase). I also have the freedom to easily move if my life situation changes. And although I cannot capture or realize any gains through property appreciation, I also do not have any risks associated with property depreciation. Contrary to popular belief here, the property market does go down. It was just 5 years ago (in 2009) when there was a significant market correction and many experts were shouting gloom and doom. This can and will happen again. The property market is at an all-time high now. The only homes that are still “affordable” are BTOs, which I (as a PR) cannot buy anyway. Another thing to consider is that if you’re a landlord, the rents you received will be taxed as income. And finally, in order to truly compare renting and owning, you will have to take into consideration what your money could have been used for (i.e., the opportunity cost) if you left it in the interest-bearing CPF account or invested it in some other way.
There are tradeoffs, and every person’s situation is different, but it’s definitely not black and white. If you truly own your home (i.e., paid it off completely), that’s another story altogether. But how many people out there who say they are home owners, have actually paid off their homes? For me personally, as a renter in Singapore, the choice was very clear.