Couple no 1 have been able to save $100,000 deposit. They take out a $400,000 mortgage at 7%* for 25 years. Repayments are $2,827 pm and the interest bill alone will be $448,000.
* interest rates are at an all time low but 7% is entirely possible again in future……..
Couple no 2 have been able to save $200,000 so they borrow $300,000 for 15 years at 7%. Repayments are $2,700 pm and the interest will be $185,000.
After 15 years Couple no 2 have cleared their mortgage and keep saving the same amount of $2,700 pm earning 5% pa. net. After 25 years they will have a debt free house and investments of $427,000.
Couple no 1 after 25 years have only just cleared their mortgage !
That is, if they have not moved up into a bigger house and still have a big mortgage, as many people often do (making the banks ever richer).
If you are going to buy a home, you will have to work. Arrange it so you work more for yourself, and less for the banks.
· Work offshore for better income
· Work offshore and save in a stronger currency
· Free accommodation is sometimes available e.g. super yachts, Middle East
· Tax-free work is sometimes available too which speeds up savings dramatically
Saving faster living in NZ
· Seek fast career progress
· Use continuing education towards a bigger income
· You can't avoid tax but maybe you can avoid or reduce rent
How to handle increasing house prices
If prices are increasing slower than you are saving, then there is no rush to buy. This is far more likely if you have worked yourself into the position where you can save rapidly.
If prices are increasing faster than you can save, you may be better to buy, even with a big mortgage BUT to avoid financial strangulation, it would be essential that you buy a less-than-you -want house, and take in flatmates, or live in the basement and rent the house out. Or you could buy two flats instead of a house – whatever you do, make sure someone else is helping you pay the mortgage.
If you're working and saving offshore, but worried about prices increasing, you can buy a house and put a tenant in it. Your continuing savings and the rent will pay down the mortgage fairly quickly, and when you come back to NZ later on, you will be in a good position (if you have been diligent). But if you are not saving or stop, and the mortgage is huge, progress will be painfully slow.
Career development in NZ
If you are forging forward rapidly in NZ, it may be worth putting up with taxes and rent, or a biggish mortgage. However you would be wise to buy a less-than-you -want house to avoid too much strangulation, and make sure someone else is helping you pay the mortgage.
Starting a Family
The full effect of the right or wrong actions from age 22 to 32 will become evident when you start a family.
Age 50 to 60
The full reward or price of right or wrong actions from age 22 to 32 will become evident when you turn 55.
The NZ government has realised that it is educating and financing students for the benefit of other countries. Accordingly it is tightening up on those who have loans and are working offshore.
You would be well advised to take advantage of any early repayment offers which carry incentives, but at the very least, pay the interest. Otherwise interest compounds on itself and before you know where you are, your loan will be a lot bigger than it needs to be.
Developing your own business
I have referred a lot to people buying their first home, but there is always a group of young people who are intent on getting into their own businesses instead. This is admirable and the benefits of being your own boss are immeasurable.
However get some cash in hand first – far too many businesses in New Zealand start-up undercapitalised – and far too many fail. Use the tips in these two articles and raise a pile of cash before you go into business. If you do, you have a much greater chance of success, a whole lot less stress, and the whole project will be just that much more rewarding.
Whatever you or the do, there is a way to avoid being “financially strangled” for 25 years – seek it out, and you will gain so much. Good luck.
This article was supplied by Alan Clarke who is the author of a book entitled “Retire Richer” which is a practical guide for everyone age 25 to 85.
Alan also writes a regular blog on www.investandretire.co.nz
Alan is an authorised financial adviser (AFA) and his disclosure statement is available on request and free of charge.