Is home ownership a sound strategy?

[Fleeta]

People like me.

Yep, but people like you are old and will die soon, i'm talking about in 30+ years time.

The future may be very different to the past...

 

[Temjin]

I think massive error is the culprit. And, approx. 60% on interest only (80% if I were paying principal and interest). Plus, massive salary cut was the reduction in income we had when my wife finished work to have our first child.

To run the numbers if you wish, mortgage 580K, net income monthly approx 7K. Factor in insurance, maintenance etc on the household, and use 'normal' interest rates (not the unsustainably low levels they are now)

Wish I were pulling your leg mate...

You are certainly in a difficult situation jpldavis.

I think the point on home ownership is more of an emotional need than a financial need is very well covered in this thread. (I hope so) A home cannot simply be seen as an asset since it is not really generating an income for you except for putting a roof over your head. (and let's put investment properties aside for now!)

You are already aware of the mistakes you have made back then, that is, over-committing your family income into it. 50-60% of your income on an interest only loan is a serious expense in maintaining financial security for your family.

I'm not trying to be gloom and doom or permisstic here, but how well are you prepared when one of these situations occur?

- You lose your job.
- Your wife lose her job.
- Interest rate goes up to fight inflation.
- You are injured and unable to work for 6 months
- You are permanently disabled and unable to work full time ever again.
- You are dead.

Ok, I sincerely hope the latter 3 scenarios wouldn't happen to you, but the fact remains that ALOT of people don't think about these especially on the part about losing your job or being unable to work for a significant period of time.

Do you have enough saving to live for 6 months without your job? Do you have any other debt such as car loan / credit card debt?

Personally, I value financial security over anything else. And having to stress about not producing enough income to feed your family (debt servicing and food on the table) is something you should try to avoid or minimise.

So here are two options you could do.

If you wish to keep your home, then reduce your expenses immediately. Cut all your credit cards, pay off all your non-mortgage debt and start a saving budget to build a buffer. Tell your wife to find a full time job whenever possible and make sure you get appropriate insurances covering especially INCOME PROTECTION. Forget about putting your children to private school because it's too expensive and not necessary give them a better education. It's better to teach them to be street smart than academic start.

Yes, you are making a lot of sacrifice, but this is the reality. You are already in this and if you want to keep your home, then you better start building up your financial strength to better position your family in case your nightmare happens. You may say the chance of losing your job or getting injured is ridiciously low, but that's what everybody say as well and anything can happen. Why put yourself and your family at such a risk?

The second option would be to simply sell your house right now (certainly at a reduced price and hope you aren't in negative equity already), eliminate all your debt and either rent for a while or move to a less expensive area that is more "affordable". If you and your wife is logical, then this may be the best thing to do. If you are still bound by the emotional aspect of home ownership, then this may not be the best option for you. If so, go back to my first list of recommendations.

And you certainly can't have your cake and eat it too. There is no free lunch in this world despite what people tells you.

Whatever happens, be realistic about this. Think about it logically and don't just "hope" things will be fine and no further actions are needed. But after all these permisstic talking, maintain a positive attitude and you will be ok. Good luck.

 

[robots]

hello,

i hope those things dont happen if you rent either

rent=mortgage, sure early days (first 6-7yrs) it favors renting but after that it typically evens out and finally gets to a position whereby you pay no "rent"

how many renters have 6mths of payments in reserve? none

but hey, just not as much hysteria or doom & gloom associated when you talk about rent payments

jpldavis, just put in for a few years, go hard man and before you know it you and family in paradise man

have a great day

thankyou
robots

 

[Tysonboss1]

1. You pay a fortune in interest (for which there is no tax benefit)

Put it in context, yes over a 30 year loan you do pay a fortune in interest, But you will pay a fortune in rent over 30 years as well, many people seemed shocked when they find out they will pay $250,000 in interest on a loan, but they fail to see that they will probally pay closer to $1,000,000 in rent over 30 years once they yearly increases are factored in,

do a test now, find out how much your current rent is X 52 weeks X 30 years, and thats without rent increases, and your going to pay all that money without even owning the house in the end, and probally have to move every 2 years,

You see Interest payments start high but get smaller every week as you pay of the loan till eventually you have no interest payments.

Rent on the other hand may start 40% cheaper than interest, but will increase with inflation forever,till the day you die.

 

[kincella]

Robots, another good post with sound advice,,as usual from you

now add my 2 cents worth

lets consider ...I started my home ownership before 21st birthday....and expected to live to age 90...so theres 70 odd years of owning a home...thats a long time to be in the market....pay off the loan...keep the bank manager in a job for awhile....and eventually live free in the home.....

now on the other hand...I have an elderly neighbour...95 now...he has rented all his life...had an aversion to buying...he has lived in the unit since it was built in the 60's...probable cost to buy then about $5000....today its only about $500,000....but instead of having years of living here free....he is still subjected to the yearly rent hikes... I figure its cost him at least 700,000 in rent.........
baby boomers like self have another 30-40 years to go....so keeping the home, and investing for the rest of our lives is a high priority.....pretty certain the majority of the boomers are avid fans of property as an investment.....hence our positive approach to same....
of course home ownership is a sound strategy....but it must be affordable, and it does require some self restraint....at least in the early years

 

[Glen48]

Then a 2009 style depression comes along and we have massive deflation so house prices go down and the market is flooded with vacant houses or owners who want to hold on to their house so move in with others and rent their own home out forcing rents down, RV's here in Brisbane are $150K off exotic Sports cars are being auctioned off at 15 per day instead of 15 per week some with out keys, Boats 20% off after a boat yard had to close down a good time to have cash.

 

[Junior]

Put it in context, yes over a 30 year loan you do pay a fortune in interest, But you will pay a fortune in rent over 30 years as well, many people seemed shocked when they find out they will pay $250,000 in interest on a loan, but they fail to see that they will probally pay closer to $1,000,000 in rent over 30 years once they yearly increases are factored in,

do a test now, find out how much your current rent is X 52 weeks X 30 years, and thats without rent increases, and your going to pay all that money without even owning the house in the end, and probally have to move every 2 years,

You see Interest payments start high but get smaller every week as you pay of the loan till eventually you have no interest payments.

Rent on the other hand may start 40% cheaper than interest, but will increase with inflation forever,till the day you die.

You need to factor in the costs of owning a home other than interest, which are impacted by inflation.

 

[fodder-oz]

Yes house ownership has many benefits I believe.

Its hard to tell whether properties will double in value in the typical 10 year range I suspect it will be 20 years or so to see it with the way the economy is and people struggling to pay for a house. It really depends on whether salaries keep going up if inflation is at say 3% for example.

The best advantages of having a house is you don;t have to waste money on dead money i.e rent. A good idea if your young to get ahead is to get an investment property rent it out for several years, live at home as long as your folks will let you and pay the place off as quickly as possible.

That way when you want to move out you can either live in the place you have bought or sell it and buy a house or something more suited to your lifes needs.

I was 24 when i first bought my place as an investment in a sydney surburb and was only earning 32k when i firt bought it 10 years ago for a mere 209k, borrowing 167k. As I got older and my salary increased and the rent increased I managed to completely pay it off in 9 years. Now the value of the place has more then doubled probably worth close to 500k now.

I now live in it, and have no debts, which is very good in these uncertain times where my job is likely to be made redundant in the next few monthes :-(

Now I doubt the stock market would have given me such returns without alot of stress.

The key to buying property is don;t over extend yourself (Start with a unit or something in your price range), have a decent deposit saved like 20% and if you can rent it out for a few years so you can pay the damn thing off. The good thing about investment property is all the tax perks you get.

Don't try and buy a McMansion.

Have a strict budget is needed. Check out sites like simplybudgets.com.au to give you an idea and simplesavings.com.au.


Good luck!

 

[kincella]

glen..with all govts printing money by the trillions 24/7...they are trying to head off deflation....but what about hyperinflation....which wipes out the debt on the homes...and makes housing even more unaffordable

and love the young ones hopes and dreams....but maybe you are forgetting about us oldies....another 30-40 years to fund my income in retirement...so there will be competition for you in buying those deflated houses.....

and news today banks dropping the deposit rates to 1.5%.....expect the guarantee to be wiped on anything above 100k's....
where are the best returns coming from not dividends they are being scrapped...its rentals...
all those kids going home to live with mum and dad....maybe not...mum and dad took off for the tree/ sea change ages ago....too far to work for the kids now...(and its just one way of getting rid of them)
and the former fhb...now into upgrading to a larger prop inner city side....
so dont expect hundreds of cheap rentals available in the inner suburbs...

 

[Sir Osisofliver]

Apologies if this question is off point (this is Aussie Stock Forums after all) but I would find any opinions interesting.

Essentially, I am struggling to come up with a sound financial reason to own a home. So far as I can tell:

1. You pay a fortune in interest (for which there is no tax benefit)

2. The 'asset' really isn't one... at least until you've realised the value

3. The risks are high... think 18% interest rates in the early 90s... you can very easily lose everything

4. The growth in value of residential property is, over the long term, pretty modest.

5. It appears that the cleverest way to own residential property is to own a rental property

Am I missing something here? It seems I would be much better off financially, over the long run, by living in rented accommodation, and putting my money, tax effectively of course, into a portfolio of assets of different types.

What am I missing? Or is home ownership simply still the Aussie dream, and a strategy born more from sentiment than financial rigor?

Cheers for any comments!

jpldavis

Yadda Yadda insert large disclaimer about not providing advice specific to your circumstances here.

1) Your mortgage is too large for your stated income level. a) increase your income b) reduce your expenses. BUDGETING is your friend.

2) Now is a pretty good time to renegotiate your mortgage. SHOP AROUND. If you read my newbie thread (see link at the bottom of this post) you should negotiate a 30 year mortgage and pay your mortgage fortnightly (NOT AMORTISED) - you'll take 7 years off your mortgage. You should also consider an Offset Account which can further reduce your principle payments. By doing both of these things it's possible to reduce the term of a 30 year mortgage by 12 years, simply because you are paying larger amounts off the principle earlier than would normally occur.

3) If you are having these difficulties now, what happens when interest rates rise in the future? Perhaps you should look to lock in an interest rate that you are comfortable with in the near term for as long a period as possible.



Cheers
Sir O

 

[kincella]

Beej summed it up correctly here....and believe in the original or following post...the poster was using the old 10% rates...in his 50-60% cost example...when in reality the rates are 5%

going forward....I would be more concerned about the stress he is placing on his family, if that really is the scenario.....I would deem it a crisis if I was in that position....I would probably assume the house may not sell to recover the cost, so I would probably get childcare and send the spouse back to work...at least until he recovers sufficient income to support them both....

I currently pay 5.1% interest rate - same rate easily available to majority of people. Monthly interest on $580k @ 5.1% = $2465. That's 35% of your stated net monthly income.

Even at interest rates of say 7.5%, the sums are $3625 interest/month = 51% of net income. Even at this level that leaves you about $3.5k/month = $42k/year income to live off, with housing costs covered. That should be *plenty* of dosh for a typical couple - I spend less than that (including wife + 1 kid) and I indulge in a lot of extra discretionary expenditure (Foxtel, decent car, skiing holidays and some exe hobbies and so on). So you don't exactly have to sacrifice even to live on that

So I too am a little confused about what the dilemma is? At current interest rates, even with your single income, use this time as the opportunity to pay off as much principle as you can - put every spare cent into it. Then in the future when/if interest rates increase, your interest bill will still remain a low proportion of your income.

In addition, your wife will probably go back to work at some point, giving you a second income again, plus over time your income will increase as well - use any future extra $$$ that come in to pay off principle as fast as you can as well. Soon you will have no mortgage and no interest bill (do the sums). You can then put everything into other asset classes, but in the meantime have still been building up your super etc giving you exposure to cash and equities etc while you paid your house off as well!

PS: If you are concerned about future rising interest rates look into locking in a long term low fixed rate for a portion of your loan for the next 5 years - the next few months should see some great opportunities for this.

Cheers,

Beej

 

[Tysonboss1]

You need to factor in the costs of owning a home other than interest, which are impacted by inflation.

the other costs are very small compared to weekly rent and interest. once loan is paid of it would cost less than $75 a week to own a home.

 

[Tysonboss1]

The key to buying property is don;t over extend yourself (Start with a unit or something in your price range), have a decent deposit saved like 20% and if you can rent it out for a few years so you can pay the damn thing off. The good thing about investment property is all the tax perks you get.

Good Advice, To many people try and start from where there parents have finished.

There are still studio apartments located within 10km of sydney for under $200,000 that rent for $225/week.

Now if your are just starting out, you could easily buy one of these and rent it out, the rent is combined with extra repayments from your wage would probally have the loan paid off in 5 - 8 years,

then you can either sell it to fund your own home, or rent it out and use the rent to pay of your own home quicker.

 

[matt1987]

another good strategy for young people may be to move into the property which they buy for 6 months within the first 12 months of ownership. this means that you will be eligible for the first home owners grant, which currently is 14k (or 21k if a new property).

once you have satisfied the conditions of the grant, then look to move back home, or rent somewhere else with a few friends. there are quite a few 3-4 bedroom apartments which are pretty close to the cbd where you can rent for approx 150-180 per bedroom.

the end result would be an upfront 14k being taken off your loan balance, and then you would get the tax advantages of an investment property once you move out late down the track.

 

[Julia]

and news today banks dropping the deposit rates to 1.5%.....expect the guarantee to be wiped on anything above 100k's....

kincella, could you please provide a link to this assertion?

 

[kincella]

Banks slashing deposit rates :sheep::sheep:in anticipation of the big rate cut due next week...

***so much for holding cash....then you have to pay tax on the miserable earnings......pity the poor pensioner trying to live on his interest......

extract.........

THE MAJOR banks are aggressively repricing their deposit books ahead of next week's expected rate cut by the Reserve Bank.

With the political pressure mounting on all banks to pass on the full benefit of further easings of monetary policy, two of the major banks have taken drastic steps to protect their funding margins by slashing deposit rates.

From this morning, National Australia Bank will slash the rate it pays on three month fixed term deposits from 4.2 per cent to 2.1 per cent.

The NAB move comes after more aggressive repricing by Commonwealth Bank in recent weeks in which it slashed its three month fixed term deposit rate from 4.2 per cent to 1.5 per cent.
:sheep:
:sheep:

http://www.news.com.au/heraldsun/story/0,21985,25259667-664,00.html

 

[jet328]

You see Interest payments start high but get smaller every week as you pay of the loan till eventually you have no interest payments.

Rent on the other hand may start 40% cheaper than interest, but will increase with inflation forever,till the day you die.

You are making one MASSIVE assumption about the future from the past. Just like all those people who thought property only went up because that's what it has done since they've been alive.

To all the property bulls, at what percentage of debt to GDP do we max out? Are we just going to keep going up forever? Do you know what fractional reserve banking is?

 

[Tysonboss1]

You are making one MASSIVE assumption about the future from the past. Just like all those people who thought property only went up because that's what it has done since they've been alive.

To all the property bulls, at what percentage of debt to GDP do we max out? Are we just going to keep going up forever? Do you know what fractional reserve banking is?

The only assumptions I am making is that the amount of interest you pay each month is reduced over the years as you clear the loan, which is a fact.

And that weekly rents will increase over the next 30years at least with inflation.

If you believe that inflation will freeze over the next 30 years, and weekly rents will not rise over the years, then by all means continue to rent.

However I believe that property prices ( although may stagnate for years at a time) will rise atleast with inflation,

 

[kincella]

property bull responding....no I dont know what (add fancy name here) means,
but I do know what happened for the last 40 odd years...and all the crisis they had manufactured in between.....
even Buffett says..look in your rear vision as a guide to the future...
its worked well for me in the past.....
and that chinese proverb....if its not broke...dont fix it.
:sheep::sheep::sheep::sheep:
ps ; you might like to read up about 'manufactured crisis' and Obama's role in it....years before he became president...

 

[Beej]

To all the property bulls, at what percentage of debt to GDP do we max out? Are we just going to keep going up forever? Do you know what fractional reserve banking is?

Well I'm considered a property bull, although I actually think my views are fairly bearish compared to many (except in this forum! LOL).

To your first question, you are presuming that debt to GDP ratio must grow to support future house price growth. For a start you need to break out private household vs all private sector + public sector debt from the number. Then you need to consider that a decent proportion of that is purely discretionary non housing related borrowing (cars, credit cards etc). Then you need to consider that household debt could quite happily increase forever in line with inflation and population growth and the ratio would remain constant..... Of course if Australia's economy did well in other area's (exports grow relative to imports etc etc), then the ratio could fall still even in this scenario. Additionally it could fall significantly while housing borrowing went up because the discretionary component falls back, or simply because national savings start to crank up (as they are right now!). So it's not all as simple as you are trying to make out...

As for fractional reserve banking, yes I know exactly what that is, and while far from perfect, it's a good system that over the past half century or so has worked better as a money supply/capital allocation system than what came before it in terms of driving global economic growth, innovation, productivity improvements and the resultant increases in living standards for all - so what's your point? Are you going drag out a bunch of fringe economic theories from the Austrian school now?? *yawn*....

Cheers,

Beej