Rent or own?
It is a buyer's market but does that make it a good time to buy? In our latest MoneyMakeover we look at one couple's dilemma whether to continue renting or take the plunge into home ownership.
Scott and Kerrie are a young common-law couple considering buying their first home. With $47,000 in savings they have enough to make a deposit and cover the start-up expenses, but worry about their short-term ability to meet the mortgage. Kerrie, 29, earns about $27,000 after tax from part- time work she does while attending university. She predicts her earning potential will be much higher when she graduates in a few years with a doctorate degree. Scott, 35, makes about $44,000 after tax. Between the pair, they have $120,000 in interest-free student loan debt. Their dilemma is whether to continue renting or to make a leap into the property market while it remains a buyer's market. "Possibly it is better for us to be renting but we're sick of paying someone else's mortgage and maintaining someone else's property," Kerrie says.
The savings, held on call at the bank, might generate more attractive returns if invested elsewhere and yet given the instability of money markets they don't want to sacrifice any capital.
Here's how their situation breaks down:
Set expenditures: $1666 a month (including rent, loans and insurances).
Variable household expenses: $790 a month (including food, power, phone).
Variable personal expenses: $333.33 per month (including gift, hair cuts, clothing, pet care, entertainment).
Students loans (interest free) $120,000.
For an expert opinion, MoneyMakeover consulted with certified financial advisers Liz Koh, founder of MoneyMax in Wellington, and James Smith with Bradley Nuttall Ltd in Christchurch. Here's what they had to say:
Kerrie and Scott have a good level of savings, however their income is uncertain. They both have student loans and these should be repaid from income rather than savings while they are interest free. Everyone needs to buy a property at some stage if they want security and peace of mind later in life. An important fact to bear in mind though is the house you live in is not an investment. Kerrie and Scott have three options:
1. Buy a home to live in, on the assumption that a lender is prepared to lend them up to 90 per cent of the value (say $270,000).
2. Buy a property to rent to someone else.
3. Continue renting until their income is more certain.
If Kerrie and Scott buy a house to live in now, they will save $300 a week in rent. However, if they borrow $270,000 over 30 years at 6.7 per cent (fixed for two years) their weekly repayments will be about $402 per week for a table loan or around $348 for interest only. In addition they will need to pay for rates, insurance and maintenance, which could be another $40 to $100 per week.
If they buy an investment property, they will continue to pay $300 a week rent but they will also receive rent from tenants of say $300 a week. They will have almost the same costs as if they live in the house themselves, however the costs - including interest, rates, insurance, maintenance and any property management fees - should be tax deductible. Buying an investment property is financially better for them and also gives them the option to move elsewhere to find work. However they would need to cover the shortfall between what they would receive in rent and their property expenses.
In the short term, with no expectation of property prices increasing, continuing to rent is financially the best option unless they can buy a property well below market value. Renting will limit Kerrie and Scott's property outgoings to $300 per week and give them more time to increase their house deposit.
In the interim, Kerrie and Scott should both join KiwiSaver to take advantage of the tax credits and extra benefits for first-time homebuyers. They should also prepare wills and take out life insurance and income protection insurance which will become essential when they buy a property. Finally, they should consider what would happen to their joint assets if their relationship were to end and prepare legal documents if they wish their assets to be divided unequally.
Scott and Kerrie are like many Generation Ys who missed the big upturn in house prices in the late 90s, have accumulated sizeable students loans and are saving hard to make a start in life. They are building a base for the future and establishing saving habits that will benefit them in the future.
Right now they need to keep going, get on the property ladder (without over extending themselves) and wait for greater employment opportunities with higher potential earnings.
Household income and expenditure
Their household income is a respectable $70,800 after tax, but they find it difficult to identify where it all goes. However, they made good progress saving $47,000.
Purchasing a first home
Scott and Kerrie want to get started on the property ladder. In addition to a decent deposit, they will also need to budget for legal and moving expenses, plus any work they want to do to the property when they move in.
As to whether now is a good time to buy? That's a more difficult question. We know interest rates are lower and the market is softer than back in 2007 but what we don't know is whether the housing market will weaken further, or if we will look back in a few years and think that now was a good time to buy.
I would suggest they base their decision on what suits them best, rather than speculate and make decisions based on things that are outside of their control.
KiwiSaver has been popular across New Zealand and rightly so. Every Kiwi should look to join to gain the $1000 kick-start payment and matching tax credits of up to $1040 a year from government.
For first-time homebuyers there is the added incentive of the first-home subsidy. Through this, savers are entitled to an additional lump sum after contributing for a minimum of three years, which is paid to your solicitor when you settle. Each person will receive $1000 for each year of saving, up to a maximum of $5000 per individual or $10,000 for couples.
Certain income and house price caps apply, but this is something Scott and Kerrie should look into as they consider buying their first home.
Wills are important documents and all Kiwis should have one. Although Scott and Kerrie do not have any property or investment assets, they still need to consider what happens to their personal possessions and specify such things as their burial arrangements. Not only does having a will create a written record of their wishes and speed up the process, it can also help to avoid any unnecessary family disagreements.
Without a mortgage or dependent children there is little need for Scott and Kerrie to have life insurance. However, other types of insurance would be beneficial such as income protection and medical cover. Unfortunately, any additional outlay takes away from their ability to save. However, there is still a need to protect their incomes and the premiums for any cover would be relatively inexpensive given their ages.
No person or entity will be responsible or liable for any errors, omissions or inaccuracies in this article or liable to anyone for any loss, damage, injury or expense suffered or incurred as a result of reliance on the information provided and opinions expressed in the article. Disclosure documents for James Smith and Liz Koh are free and available upon request.
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