Money matters: House ownership may be the goal you need

Q: I'm looking at buying a house within the next few years. Am I better off buying a house with my 10 per cent deposit, or renting and continuing to invest the balance until I have a larger deposit or can buy the house mortgage-free?


A: Generally it's better to save for an item before buying it, rather than buying with a credit card or loan. That way, interest is your friend, not your enemy.

With accommodation, however, it's much less clear-cut.

When renting, you pay rent but earn a return by investing the rest of your money. In your own home, you pay mortgage interest, rates, insurance and maintenance but accumulate equity in the house.

Which is better financially? Nobody knows in advance. I've seen some analyses that come out one way, some the other.

It all depends on your assumptions about what will happen to house prices, rents, interest rates and so on.

And some people might be swayed by the fact that they can borrow against their home for business or other investments.

In the end, though, most people decide on other grounds.

The non-financial advantages of renting include:

* Lack of hassle and responsibility. Leaky roof? Just call the landlord.

* You can move easily and cheaply.

But, if you own your own home:

* Nobody can kick you out when it suits them.

* You can decorate, renovate or garden as you want to.

Also, saving for a deposit on a home, and then paying off the mortgage as fast as possible, are clear goals.

Given that you plan to buy eventually, it seems that you would prefer the security of owning your home. So you might as well get into it sooner rather than later.

Whether you should go in with a 10 per cent deposit, though, is debatable.

When you go to mortgage lenders, "the greater your deposit, the better your negotiating power," says Loan Plan's Rob Tucker, chairman of the Mortgage Brokers Association.

While some lenders will accept a 5 per cent deposit, you pretty much have to go along with their fees and conditions.

With, say, 20 per cent, you might be able to cut your upfront costs considerably.

Of course, lenders also look at your ability to meet mortgage payments.

As a rule of thumb, says Mr Tucker, people with no credit card or hire purchase debt or other financial commitments can borrow at least 2.8 times their gross income.

If you qualify easily on that basis, a 10 per cent deposit might be good enough to get you the loan you want.

Q: I wonder if you can help with my financial direction.

I am a single person in my late 30s with no debts but also no assets, apart from $2000 in the bank. I am paying a low rent for a small flat.

In the past I have spent all spare money on travel. Now I would like to look to the future and my ability to look after myself, presupposing I do not marry.

I earn around $45,000 a year, but do not know whether I should commit myself to a small townhouse with a large mortgage or save and invest any savings.

If so, what is the best place to put such money so that I cannot touch it and it will accumulate? I am worried if I buy property it will depreciate and will end up worth less than my mortgage.


A: What's all this about "presupposing I do not marry"?

Do you really think that if you marry you won't have to look after yourself?

Nice dream. But - even if the marriage lasts - there might be times when you have to look after not only yourself but also your husband.

Regardless, then, of your matrimonial prospects, by your late 30s it's high time you had more than $2000 to show for yourself. Good on you for realising that!

So what's it to be, a townhouse or other investments?

As I said above, that question is best answered by weighing up non-financial issues. In your case, setting a goal of home ownership might be a big factor.

I don't think you should worry too much about negative equity - finding your property is worth less than your mortgage.

That has, of course, happened in recent years. But generally it's only a big worry if you are renting out the property and have to sell in a down market, perhaps because the rent doesn't cover mortgage payments.

As an owner-occupier with negative equity, though, you should be able to stay put - as long as you are not overcommitted on your mortgage. After a few years, your property value will almost certainly rise.

All the same, it would be good to save a 10 to 20 per cent deposit before buying a townhouse.

That makes it much less likely you will wind up with negative equity. And, as Rob Tucker says above, it gives you more mortgage buying power.

Assuming, then, that you decide to save a deposit and buy a townhouse, you should be able to borrow around $126,000, using Mr Tucker's income rule.

But, to keep your mortgage payments easily manageable, you might want to go for a bit less.

What sort of deposit can you save? Let's start modestly, at $100 a week, earning 4 per cent after tax.

How much will you save over two years? That's tricky to calculate precisely. But we'll use the close-enough rule I wrote about a couple of weeks ago.

The total principal will be $100 x 104 weeks, or $10,400. Pretend you have that full amount for half the time - in this case, one year.

Multiply $10,400 by 1.04. That comes to $10,816.

With around $10,800 as a 10 per cent deposit, you could buy a townhouse for $108,000.

If you can be tougher on yourself, and save $200 a week, multiply our result by two to get a deposit of about $21,600.

That would be 20 per cent on a $108,000 townhouse, or you could go for a more expensive property.

The obvious place for your money while you are saving the deposit is bank term deposits.

Over such a short period, you don't want to invest in anything that will fluctuate in value. Also, you can tie your money up. If your goal is to buy in early 2003, keep getting deposits that mature around that time.

You might want to set up a separate savings account, and automatically transfer the savings, every payday, into that account. Then buy term deposits.

* Mary Holm is a freelance journalist and author of Investing Made Simple. Send questions for her to Money Matters, Business Herald, PO Box 32, Auckland; or e-mail: maryh@journalist.com. Letters should not exceed 200 words. We won't publish your name, but please provide it and a (preferably daytime) phone number in case we need more information. Mary cannot answer all questions, correspond directly with readers, or give financial advice outside the column.