The average mid to late twenty year old Australian with a dependable job and long-term partner is increasingly being pushed to live the Australian dream – owning their own home. These pressures are contributed to by parents, grandparents and friends, not to mention the constant television, social media and newspaper articles pushing this inherited idea.
These days, it is common place to see countless photos circulating on Facebook and Instagram of happy couples placing SOLD stickers on the advertising board of their new home. This in turn creates an overwhelming feeling of being left behind. You sit there and wonder, “How could they afford that? Should I be saving to buy my own 2-bedroom shoe box in a suburb I haven’t heard of, just to keep up with the crowd?”
The answer is no, you don’t! The majority of this demographic has an ingrained fear from an older generation, who has the notion property prices will always grow. Many people believe the sooner you get into the market, the cheaper it will be; and by doing this you will save money in the long run, by not paying someone else’s mortgage. Although this can be very easy to believe, it is in fact not entirely true.
The common phrase you hear when the topic ‘rent vs buy’ is brought up, is that ‘rent money is dead money.’ This seems to be the home buyer’s trump card however, they seem to forget many of the additional expenses and cost associated with buying their dream home.
What most seem to exclude is stamp duty, the likely mortgage insurance cost (mortgage insurance is only payable if the loan amount is above 80% of total value), and the interest amount paid per annum on top of the mortgage repayments. Unless you had the foresight to start saving your pocket money when you were 10 years old, or have won the lottery, it’s highly unlikely you will be able to come up with the entire cost of the property, let alone an amount sufficiently substantial to make it viable.
Let me provide you with an example. You purchase a property in Melbourne and raise the 10% deposit for the purchase of the home. Assuming you don’t win the lottery, you might reasonably aim to pay off the loan over a 30-year period, with an interest rate of 5.5%. To make it fair, you will exclude ongoing costs like house maintenance, land tax and the very high possibility of moving your new, and potentially growing family to a bigger house during that 30 year period.
According to RP Data, the median housing price in Melbourne for 2013 was $610,000. The average Melbourne rental costs is $1,560 pm.
The auction has concluded and you have now begun your mission to achieve the great Australian dream. All you have to do now is deposit your hard earned savings into this dream home. Your new loan has been reduced by $53,800 (10% deposit); therefore the total loan is now $484,200. You may think this is a manageable amount, only $2,824 pm over 30 years. You would be happy to sacrifice $529 pm to live the Australian Dream.
Don’t write the cheque just yet! As I mentioned earlier, there are the formidable, overlooked costs which are mainly stamp duty and mortgage insurance, plus rates and maintenance costs not incurred by renters. If you included these overlooked costs into the loan, it would increase by $35,217 (Stamp Duty $25,727 and Mortgage Insurance $9,490), making the total loan $519,417. This in turn makes your monthly repayment $3,030 (excluding rates and maintenance costs).
After the 30 year period your property will have cost $1,127,129 in interest payments alone, compared to the rental costs of $1,014,054 over the same period. The interest amount is not coming off your mortgage and is, in fact, ‘dead money’.
I will be the first to acknowledge that removing yourself from the monetary figures, there is a strong sense of emotional attachment, security, independence and pride in owning your own home. In saying this, when you purchase your dream home without the required financial comfort, you may not be living the Australian Dream. Instead, you may be stuck in what seems like a never ending mortgage you were pressured into and, essentially, you may be missing out on actually living the real Australian Dream.
Whether you rent or buy, it’s important you do what’s right for your own circumstances and your own financial situation. Basically, don’t panic. Rent if you need to; buy if you can; don’t over commit yourself; and don’t stress about it!
By Nick O’Hare
Associate Financial Planner
Please note: The advice in this article is of a general nature only and has not been tailored to your personal circumstances. Please seek personal advice prior to acting on this information.
Our financial advisers and Income Solutions, as Authorised Representatives of GWM Adviser Services Limited, can only give strategic advice in relation to property and are not authorised to provide specific advice on direct property. Any property advice should be directed to a real estate agent or property adviser.
Assumptions: CPI 3% , Average Interest rate over 30 years 7% (based on rpdata) .
 RP Data is the largest provider of property information, analytics and property-related risk management services in Australia and New Zealand. Mitch Koper from Rpdata and riskmark international, Home Vallue Index Results, Friday, November 1, 2013.