To buy or rent? The key issues

To buy or rent a home is one of those timeless debates. There are two main considerations in making a decision: the financial aspect and personal and emotional factors. In Nigeria though, there is a strong desire by most families to own their homes. This article will consider the financial factors only.

Assess your finances

The first step is to assess your finances to determine whether you can afford to buy the house of your choice. Buying requires a large upfront payment whether to purchase the house outright or as a down payment. Mortgages are not readily available in Nigeria and where they are the down payment and interest rate are high.

You should take the following into account when assessing your finances.

The amount of deposit you can afford. Where available most mortgages in Nigeria require you to contribute a down payment of 20%-40% of the cost of the property. In general, the higher the contribution you can make, the lower the interest rate. This is because the risk to the lender declines as the down payment increases.

Other costs associated with buying a house such as agency and legal fees and government charges.

Interest payment. Interest rates are high ranging from 15-20%. You might get a lower rate from mortgage banks but these are typically tied to buying a property they developed or are marketing. Another option is to borrow from the government backed National Housing Fund (NHF) if you are a contributor. The interest rate is capped at 6% and the maximum amount that can be borrowed is N15 million. However, due to a combination of low balance in the fund and low interest rate, there is a long waiting list.

Other periodic costs associated with home ownership such as insurance, estate management fees, maintenance and property taxes.

Add up all the costs above to determine if you can actually afford to buy the house or not. You also need to ensure your current income can accommodate interest payment and repayment of the principal without creating significant financial stress. Remember, a house is illiquid and costly to sell; therefore, it is important to manage your monthly cash outgoings to avoid defaulting on the mortgage payment. Having determined whether you can afford the house or not, the next step is to assess whether buying is more financially beneficial compared to renting.

Benefits of buying

The arguments in favor of buying and counter include:

Building equity. If you buy with a mortgage, the monthly repayment goes towards increasing your equity (capital) stake in the house. This serves as savings. However, if you are renting, the money is gone. Furthermore, in the future when you own it outright, the house can serve as collateral for another loan.

The counter argument is that it takes many years to build equity and if you have to sell the house early, you might end up losing money after deducting all costs associated with selling.

Serves as an investment. Your home could be the single biggest asset you own. In the long term, especially in a high inflation environment like ours, price appreciation could be significant. When you retire, with the children gone, you could sell the house and buy a smaller and cheaper one. The profit could then be used for other things or converted into a stream of income.

There is, of course, no guarantee the house will increase in value. This is especially true if you buy at what turned out to be historically high prices. For example, in 2008, property prices in Nigeria, especially in Lagos, Abuja and Port Harcourt were at a peak.

Tax efficient. Another advantage of buying a house with a mortgage rather than renting is that the interest cost is tax deductible. This means you deduct the interest from your income before you calculate the tax due to the government.

The result of the above evaluation, taking into account your own personal circumstances, can help you decide objectively whether buying with cash or mortgage is better financially rather than renting.

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