This is a question I have heard many ask time and time again. With current real estate prices, ”Eddie the Expert” might be telling you that you’re better off saving your money, investing it elsewhere and avoiding deposits, stamp duty and legal fees. ”Eddie the Expert” was giving the same advice in 1974, 1989, 1995, 2003 and every other year too.
For most of us, ‘investing elsewhere’ can be high risk and with very, very low long term returns. Especially with the current global meltdown.
So my advice is buy (surprise, surprise, a real estate sales agent is telling you to buy), although rather than writing hundreds of words look at the below example. Please note the very conservative estimate of likely capital growth. History has proven this time and time again.
In 2011 you buy a modest home in Cheltenham for $300,000
10% deposit. Save it, borrow it from Mum and Dad; sell your car, whatever it takes
Stamp Duty $10,070
Incl other charges $450 (ie building/pest inspection)
Less First Home Buyer Benefit $-7,000 (alternatively $20,000 if purchased off-the-plan)
Cost for you to buy $34,520.00 (or $21,520 if purchased off-the-plan)
Plus 10 years of Interest Only mortgage payments at average rate of 7% = $189,000.00
Compared to 10 years rent at say $300 per week = $156,000.00
The additional cost of ownership over 10 years $33,000.00
N.B. The monthly amount will vary in both rental and mortgage monthly payments, so for the purpose of this example that will balance out over the 10 year period. Owning a home will also mean rates are payable.
The rental option means you save $67,520.00 over the 10 year period.
The owner option
(allowing for only 50% capital growth in the period, most areas in the country are considerably higher than that):
Home value in 2021: $450,000
Loan to pay off: $270,000
Capital Gain: $150,000
Deposit value: $30,000
The owner option would leave you with $180,000 cash (excl disposal costs), Even allowing for the extra $67,520 costs to own you are still approximately $112,000 ahead. You are also likely to have made a higher capital gain than 50% (it always pays to be conservative).
One more point to consider when your money is tied up in a home is that you cannot waste it! More people manage to pay mortgages than save! In this example you spend a total in deposit, purchasing costs and mortgage payments of $223,520 and sold for $450,000. An untouched amount of $226,480 will be in your account. Not many tenants will have that after 10 years of renting!
Go on, buy! I did!
Real Estate Advisor
0421 274 996
Specialising in houses for sale in Cheltenham, Mentone and surrounds