Most employers put money in.
The government puts money in.
Any scheme where someone else contributes has to be good.
Why not do the same if you are buying a house with a big mortgage?
Dave and Barbara ages 49 and 46 came to see me and asked for advice.
They were both divorced and are in a new (2 years) relationship. Between them they have $250,000 and want to buy a decent house which will cost $400,000 to $450,000 in the city where they live.
They are earning $100,000 gross between them.
No dependent children either, so no need for a big 3 to 4 bedroom house.
In thinking it over, I looked at the long term –what their finances would look like when they get to retirement at say age 65 to 68 ?
Their Kiwisavers at age 65 should total about $250,000 - by then $250,000 might buy what $150,000 buys today - not what retirement dreams are made of.
First of all I recommended they keep $30,000 to $50,000 for emergencies, because they both will need to keep earning right through to age 65 to be able to pay off a mortgage. Sickness, redundancy, economic downturn or other adverse events could hit them very hard . Who wants to lose their house for the sake of not having $40,000 or so tucked away for a rainy day ?
Then put in as big a deposit as possible - $200,000.
If they borrow say $220,000 for a $420,000 house, the mortgage will cost $1,800 per month over 20 years (at 8% mortgage interest - best to assume on the high side) and they will pay $221,000 in mortgage interest alone.
But what if they borrow say $270,000 to buy a house with a sleepout, flat, or that can be divided into a home and rental.
- Then they will pay $1,800 pm, and their tenant will pay $800 pm (assume rent of $200 pw - the low end)
- Between them , they could pay off a higher value property in 15 years - 5 years sooner
- And pay less interest of $194,000 (their “share” of interest would be $136,000)
- A debt free higher value property sooner.
They would also get some tax relief - deductions on the rental mortgage interest.
Like Kiwisaver- wherever you can get someone else to pay a portion, you win !
Tenants living next door to the landlord behave better too.
Plus when debt free and retired, they will have rental income still coming in – very nice to have.
But what if we can’t find a house with a sleepout, or that can be divided ?
There aren’t many, we can’t, it won’t work, we would rather have lifestyle, we want to live in a nice 4 bedroom 2 bathroom home …………………………..
No such word as can’t
Look for a house with a sleep out and rent it out.
Look for a house with space and build a sleep out.
Nb. the Auckland unitary plan is going to allow a more dwellings on most properties.
Look for a house where you can modify the garage into a flat (carports are inexpensive).
Look for a house that can be easily be divided into separate accommodation.
Even better, find a house that has one of the above features, and has future sub dividable potential too.
Buy bare land and build two new units.
How much better off will you be?
Debt free after 15 years vs. another 5 years mortgage to go.
A property after 15 years worth say $650,000 vs. a house worth say $525,000.
After 15 years, a tenant paying you $10,000 to $15,000 pa – money you don’t have to work for.
Extra income in retirement of $10,000 to $15,000 with virtually no effort from you.
Debt free 5 years earlier – then you can save a lot more for retirement – say an extra $50,000 to $100,000 that you would have otherwise paid to the bank in interest.
I could go on ………………………………………….
Supplied by Alan Clarke, financial & retirement adviser, & author. His second book is virtually complete, & he also writes regular articles for the media & on line – see www.acfs.co.nz
Alan is an independent authorised financial adviser (AFA) FSP26532 & his disclosure statement is available on request and free of charge.