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Are You Better Off Renting Or Paying A Mortgage?

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Contributor:
Brian Dalley
Brian Dalley

As housing affordability is set to get worse many are now being left with no alternative but to rent even though homeownership is their preferred option.

Much like in Shanghai China, where house prices have skyrocketed and it now takes around 70% of the average income to afford a bank loan, New Zealanders are not alone in their struggle.

A government official in China commented he didn’t want house prices to tumble but would instead prefer to limit lending to slow the market down and return to sustainable growth.

Sound familiar?

New Zealanders and the Chinese prefer homeownership over renting all be it for different reasons, but where to from here?

Lets first look at the difference between renting and ownership in dollar terms.

Talking with a young couple recently that had managed to save a $40,000 deposit and want to purchase a property in East Auckland for around $400,000.

John and Jo are currently renting a property that would sit in that price range and they would dearly like to purchase it but the property owner has no intention to sell as the market is flat plus it is a great little rental. Rent is $390 per week.

If the property owner did decide to sell the property to them and they put down the $40,000 deposit and borrowed $360,000 over 25 years @ 6.5% they would be paying around $595 a week including rates and insurance.

That is an extra $205 per week to live in the same house.

At first glance, on paper it would not make sense to enter into an agreement to purchase the property as an owner occupied property, as it is going to cost them $205 more a week to do so.

Jo mentioned that it wasn’t a pretty picture I was painting and it was starting to sound like I was an advocate for renting.

“Not at all” I replied, but in your case I wouldn’t be in any great hurry to go it alone as there is an alternative.

Her partner John has a brother working offshore who wants to invest in property in New Zealand and then cash it up upon his return in a few years.

My advice was for John and Jo stay renting for the time being. The three of them kick in an equal amount John and Jo $40K, Johns brother Tim $40K and borrow $320,000 instead of $360,000. That would cost them around $530 per week.

Mortgage $530 less rent $390 divided by 2 = $70 per week. A lot more affordable and gets them both on the property ladder.

Down the track they could cash up and go their own way.

Many are starting to do just that, co-investing as they are finding it increasingly difficult to go it alone.

Home and Income properties are an ideal vehicle for co-investing, as are properties with two living areas.

Sitting on the fence watching and waiting isn’t recommended; likewise standing in the middle of the road is dangerous as you are likely to get run down by traffic from both sides.

If homeownership is a priority as it is with the majority of New Zealanders, then look at alternatives, as there is no time like the present to invest in real estate.

BUT IT MUST BE AFFORDABLE and it should take no more than 30 to 40% of your income to do so.

Brian Dalley is a leading Property Consultant | former NZMBA Mortgage Broker, and Real Estate Agent. You can read more of his views and opinions on his website www.propertyprofit.co.nz. 

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