The average household in NZ has about $400,000 in housing (March 2014).
The average household has about $32,000 in other financial assets.
About $55 billion or 8% of our wealth is outside housing.
About $775 billion or 92% of our wealth is in housing.
More for young people, but parents and grandparents should read it too.
Next week more for people age 55 plus but all age groups should read it too.
Kiwis love houses, and put all their money into them. Consequently they will never be cheap, unless they go and live a a small rural town where jobs are likely to be scarce or don’t pay much.
But if we don’t buy a house, we have to pay rent.
Rent at say $500 pw. average over 25 years (the term of an average mortgage) soon adds up to $500,000.
And that is without the effects of inflation, although wages hopefully will keep up with inflation.
Buying a house seems a much better option.
The Real Costs
Let’s say you buy a $500,000 house, and borrow $400,000 over 25 years at 7%.
- you will repay $400,000 capital
- you will pay $448,000 in interest
- you will pay say $8,000 pa. in rates, repairs and insurances – another $200,000+.
Total cost over $1,000,000
That means you have to earn about $1,250,000 before tax to pay for it - OUCH !
A house worth say $1,500,000 after 25 years cost you over $1,000,000.
But otherwise you would have paid $500,000 in rent.
What if you can clobber the $448,000 mortgage interest ?
That nasty $448,000 is all bank profit. If you can clobber it, you will have less stress of work, employers, and husband and wife both having to work, et al.
Less pressure on you both, less pressure on your marriage - a better environment in which to raise your children.
Instead of buying a 4 bedroom 2 bathroom home, buy or build two 2 bedroom units and rent one out - or alter a biggish home into 2 units - or add a sleepout. Even if it costs $100,000 more, the rent will knock a huge amount off your mortgage.
So borrow $400,000 for a house and YOU pay $2,827 p.m. – debt free after 25 years
OR borrow $500,000 for 2 units - payments $4,100 pm.
You pay the same - $2,827 pm and your tenant pays $1,200 pm.
You will be debt free after 18 years, continue to get rental income ( at last, some money for you), and own a more valuable property - perhaps $150,000 to $250,000 more valuable.
A better way - 2
Save the $2,800 pm a mortgage would have cost you by living in mum and dads garage, or be night manager at a small motel – any way you can to get free accommodation.
Save and buy a section for cash. Save more and build / relocate a minor dwelling for cash.
Save more and build a smallish house on the property, and rent it out.
Save the rent now as well as your $2,800 pm and when cash permits, extend the house, make it real nice, and move in yourself - your reward - a near new debt free home.
You can now rent out the minor dwelling, and with some cash about, start to enjoy a much better quality of life – for husband, for wife, and for your children.
If overall property and building costs were $500,000 to $600,000, you could do this all in 15 to 18 years – debt free plus rental income by age 42 to 45.
Statistics say most of your friends will still have substantial mortgages at age 50.
A better way 3
Work offshore in a country that pays well, offers free accommodation, or low taxes, or preferably both.
Borrow to buy a house in NZ and put a tenant in. Direct the reant and your savings toward the mortgage too.
Rent plus your savings off the mortgage, and pretty soon you will be on the plus side of the drag curve - in very good financial shape by age 40, and never look back.
So many more
So many people accept the “status quo” and borrow heaps to buy a house, but you don’t have to. Nothing ventured , nothing gained.
If you would like to help me to help others, email me your success stories and I will publish them in a future article.
Supplied by Alan Clarke, financial & retirement adviser, & author. He also writes regular articles for the media and on line.
His second book “The Great NZ Work, Money & Retirement Puzzle” is now available.
You can buy it on line at www.acfs.co.nz
Alan is an independent authorised financial adviser (AFA) FSP26532
His disclosure statement is available on request and free of charge.