Browse Forums Home Finance 1 Dec 31, 2010 1:25 pm A question which has been raised many times I know. But I wanted to hear from your thoughts on the subject for 2011.
So, I am like many, confused about what to do. My wife and I looked at buying our first home in WA this week. At the moment, we rent a house on the family farm at a very nice rate of $200/wk. She is a nurse and I a primary school teacher. We have a deposit of $50K and no credit history. The mortgage broker said we fit the bill well for buying a house under 500K. But that's a repayment of $700 a week! If my wife stops working to have a child, that's all my wage on repayments especially when interest rates increase. So I think a house under $370 would be much better/safer. But... I am unlikely to get anything for that price as you know. The house I was looking at is $499K, been on the market for 7 months and was originally asking $570K. Too cheeky to put an offer in at $400K? So what to do. I think I am in a lucky situation in a way. Small rent. None of the usual renting issues (bond, inspections, etc). So I am leaning towards staying here on the farm for a little while longer. Place our savings in a 6.5% savings account (deposit $3000 a month) which is growing at a rapid pace, and see what the housing market brings in 2011. I came across this page http://www.jamescox.com.au/renting-vs-b ... r-decision which was interesting. It shows renting to be a better option. More so, this rent vs buy calculator http://www.nytimes.com/interactive/busi ... 19&ei=5070 Even at a modest housing growth rate of 6% it appears renting is better, especially in my situation. Of course buying would have been better from 2000 onwards I am sure. I know giving advice on such a topic is tricky which I will take it at my own risk, but I would like to hear from those of you with experience in the matter. Is this renting and savings option flawed? Is it wise to build up a larger account balance in this period of time and look to buy a house later down the track? Are we better off buying something/anything (rather than saving) and get in the market. Its hard to get balanced information when most people we talk to here say "Buy buy buy!... Get in now or you'll miss out... The later you leave it the harder it will be." Just spoke to my grandpa about this. He interrupted me telling me there is nothing better than real estate along with how hard it was back in his day when he bought his first house. Then I told him how much I would have to repay each week. He paused for quite some time. Then admitted I have a problem. At the end of the day, all we want is what our parents and grandparents had. We don't want to buy a house (or houses) to make a quick buck. Just to buy a modest house close to work which we can live in and build a family in for a long time without being mortgaged to the eyeballs. If this is not an option, renting here is fine by us. Re: Buy or rent? Place earnings into a house or savings acco 2Dec 31, 2010 4:06 pm A savings account could keep pace with a house assuming you paid 100% up front. But you have not taken into account gearing your money. Eg if you have your $50K in the bank at (say) 6% (minus tax though) and houses went up at 6% also. BUT with $50K you could buy a house worth (say) $200K. Now it's the $200K that will go up by 6% so in effect 4 times the gain. Of course it may be negatively geared at the start so there may be some initial weekly costs. I would stay renting (seeing the rent is cheap) and buy a property that is close to neutrally geared. Over time the rent will pay it off or you can sell later and use the equity to buy your PPOR. So I would choose 1 or 3 but definitely not 4. Re: Buy or rent? Place earnings into a house or savings acco 3Jan 03, 2011 11:29 am travelbug But you have not taken into account gearing your money. Thanks for the input. And a good point raised. So does the rent vs buy calculator take that into account? http://www.nytimes.com/interactive/busi ... lator.html I guess not Re: Buy or rent? Place earnings into a house or savings acco 4Jan 06, 2011 8:29 am Hi. In my opinion, to rent or to buy you have to consider it separately. But on top of that there one major factor you need to consider. Regardless whether the property market is going up or down, end of the day majority of your wealth is going to be invested in the property market. Therefore, from a risk management perspective, when you "buy" now, you expose yourself to the property price movement, you are actually hedging the property price risk in the future. Say if you purchase the property worth 500k and planning to live there for 10 years...subsequently buy a bigger property etc. Let's assume the 500k property price movement is similar to the property you are going to buy in the future. You are now less exposed to the future property price movement. 1. To rent Cost: Rental cost Gain: nil 2. To Buy Cost: Interest Expenses + land tax etc Gain: potential gain from property price in making the decision, i don't think you should consider the "potential gain from property price", no one can forecast what is going on. Price could move Up or Down... In you situation, considering you only have 50k down payment. You interest bill will be a lot higher than the rent...it is not worthwhile, alternatively what you can do is to save as much as possible while renting and purchase a property while you have ~ 30% down payment. In this case you will have some spare money to put into the offset account and the property will be paid off 20 times quicker than the aforementioned scenario Re: Buy or rent? Place earnings into a house or savings acco 5Jan 19, 2011 7:33 pm If you bought a cheaper property it wouldn't cost you much out of pocket. Buy something under value and do a basic reno to increase your yield. If you buy the right property it should cost you nothing to hold. Re: Buy or rent? Place earnings into a house or savings acco 6Jan 19, 2011 7:43 pm I would start looking to buy now. But (as you suggested) do not borrow as much as the bank will allow ($500,000). When interest rates go up, you would more than likely struggle. Find a house that is reasonably priced, that you could do some work on, but is livable. Re: Buy or rent? Place earnings into a house or savings acco 7Jan 20, 2011 11:23 am Also, forgot to mention, you have to declare your savings at tax time, and may have to pay tax on them, where as if you pay it onto a loan you don't need to pay tax on the money. Re: Buy or rent? Place earnings into a house or savings acco 8Feb 08, 2011 9:10 pm Im certainly no expert but will go on my experience. I bought a place on a single parents income paying 3X what I paid in rent but after 5 years my mortgage is 1/3 less on what I would pay- and thats after refinancing a couple of times. I know we had a boom after I bought but with the gorgon mine project and the expansion of FMG happening.... You are in a great position having such a low rent and decent double income coming in (not as much as it should be I know with me being a nurse and my brother being a teacher . I personally would consider continuing to rent as long as you are happy with that, buy a moderate place to rent out, negative gear and pay the difference in what you currently pay in rent which would work out less than what you chuck into your savings account each month. Its a buyers market in WA at the moment. If I were in your position id take advantage of it. Having it in a bank account means yet another tax to be paid. 1-3 looks good but 4 relies on being able to have cheap rent for an extended time. It seems very clear to me that your contract states that a security account does NOT need to be established so the answer to the builder is NO. 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