lord elpus said...Danny,I don't know how old you are but we...

lord elpus said...

Danny,

I don't know how old you are but we started by buying whatever we could afford, even if it wasn't the long term place we wanted to live.

It gets you going in two ways.

1) Enforced savings.

I don't need "enforced savings", my wife and I manage to save her entire income, every week. :)

2) Whatever the people on here tell you, property prices WILL rise. In five years not only will you have made significant inroads into the mortgage but you will also have benefited from the tax-free capital gains. Something no renter will benefit from.

You can keep saying prices will rise, it doesn't make it true.

Let's suppose I can save $3000 per month, and I currently have $21,000.

Now, if I rent and keep saving at the same rate in 5 years time I will have $180,000 saved.

The house I want to buy is $350k today.

Let's assume that the house has risen at 5% PA. In 5 years the house will be worth $446,698.55. Minus my $201,000 ($180k + $21k), I now have a mortgage of $246,000.

If I buy, I will need $350k - $21k ($329k). The morgage repayment will be $2018/month - about $190 wk more than my rent. That works out to $49,660 worth of repayments over 5 years.

After 5 years of repayments I will owe $307,000 on the house. Of course, I can still save money. Lets take the $180k I would have saved over 5 years, minus repayments ($49,660) minus $3k a year for rates and costs ($15k), leaving me with $115k savings.

So, assuming house prices grow at 5% a year...

I keep saving, then buy:

$249k mortgage, $0 savings, $200,698 equity
Net worth: $201k

I buy now, houses grow at 5% PA:

$307k mortgage, $115k savings, $140k equity
Net worth: $255k.

So, assuming house prices grow at 5% PA for the next 5 years, I will be $54k better off buying a house, but I have taken on a large amount of risk.

Now, what happens if house prices don't grow? (in fact, they are projected to fall!).

I keep saving, then buy (at 0% growth):

$149k mortgage, $0 savings, $201k equity
Net worth: $201k

I buy now, houses grow at 0% PA:

$329k mortgage, $115k savings, $21k equity
Net worth: $136k

So, if house prices don't grow over 5 years, I am $65k better off by waiting 5 years to buy!

Note that these figures do not take into account interest on my savings, and assumes I live in the house.

It seems to me that since house prices look like going nowhere, or falling, I am better off just waiting the 5 years and saving more money. I expose myself to less risk by doing so also.