Mortgage serviceability cheaper than renting on over a third of Australian properties

CoreLogic analysis suggests servicing a mortgage is now cheaper than paying rent on 36.3% of Australian properties, which is higher than the pre-COVID proportion of 33.9% reported in February last year

The analysis was undertaken at the individual property level, using a set of mortgage assumptions and valuation estimates, to approximate mortgage repayments. These were then compared with rental estimates at the individual property level. Using these estimates of mortgage and rent, the data reveals striking differences in housing costs across different parts of Australia.

The proportions of properties cheaper to rent or buy by region are outlined in Figure 1. The data is also broken down by SA4 sub-regions in figure 2. The highest proportion of properties where mortgage serviceability is cheaper than rent is across Regional NT (96.4%) followed by Darwin (86.5%). 

Figure 1. Portion of properties cheaper to rent or buy
Greater Capital city or rest of state regionPortion of Cheaper to BuyPortion of Cheaper to Rent 
Combined Capital Cities26.2%73.8%
Combined Regionals60.1%39.9%
Regional NT96.4%3.6%
Regional SA79.4%20.6%
Regional WA79.4%20.6%
Regional Qld73.1%26.9%
Regional Tas.71.4%28.6%
Regional NSW48.2%51.8%
Regional Vic.43.6%56.4%
Source: CoreLogic. Mortgage assumptions used were an 80% loan to valuation ratio (i.e, it assumed the buyer had a 20% deposit saved), an interest rate of 2.4% (based on the average new lending rate for owner occupiers reported by the RBA at May 2021), and a 25 year loan term. No mortgage fees or transaction fees are assumed. The Loan value is derived based on the individual property value estimate. Rental repayments are based on the CoreLogic rental estimate of the individual property.

Aside from Darwin, regional Australia generally has a larger proportion of suburbs where it’s cheaper to service a mortgage than pay rent. Property values and rents across the combined regional areas of Australia suggest 60.1% of properties are currently cheaper to service a mortgage than rent, while across the capital cities, this is only true of around one quarter of properties.

The increase in areas where it is cheaper to service a mortgage than to pay rent across Australia, when compared with pre-COVID analysis, is a reflection of much lower interest costs on mortgage debt since the onset of COVID-19. Average new mortgage rates for owner occupiers have fallen from 3.21% in February 2020, to 2.40% as of May 2021, according to RBA data. 

This is one of the factors that may have boosted sales activity coming out of COVID-19 restrictions in 2020; if it makes more financial sense to pay for a mortgage than rent, renting households may have been triggered to look for something to buy as interest rates have fallen. 

However, reduced interest costs have not led to cheaper mortgage serviceability relative to rents in every instance. This is especially the case in Sydney, where property values have increased markedly against low interest rates, pushing up loan principals (the amount borrowed) and outpacing growth in rents. 

Since February 2020, Sydney dwelling values have increased 15.2%. Sydney rents only increased 2.1% city wide in the same period. The relatively subdued rental growth may be largely due to a loss of rental demand from stalled overseas migration, where Sydney and Melbourne have traditionally been the most popular destination for international arrivals in the country. The combination of lower rent growth and very strong dwelling value growth has meant that even fewer properties across Sydney are cheaper to pay down a mortgage than rent, at just 4.9%. This is down from 7.1% when the analysis was done with the same assumptions in February 2020.

This kind of analysis historically has also shown that just because an area sees cheaper mortgage costs than rents, does not mean people would necessarily want to buy there. Regional Northern Territory and Outback Western Australia are prime examples. Rental costs tend to be higher in these regions, because accommodation that suits a more transitory lifestyle would likely be in higher demand – for example, in proximity to FIFO mine sites.

This dynamic is echoed to a small extent across larger, east coast cities. The regions where rent payments are more likely to outstrip mortgage repayments generally reflect lower socio-economic areas within a city, where property is not as expensive, but there is demand pressure on rental markets. This could be because of affordability constraints on barriers to entry around home ownership (such as a deposit hurdle, professional services or stamp duty payments). 

However, the low interest rate environment is still conducive to better serviceability in many parts of the country. The analysis is a good reminder for renters to weigh up housing costs and savings, to see if it is time for a change in tenure.