Sep
05
As a first home buyer in Australia, am I better to buy as cheap as possible or go for better long-term growth?
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My wife and I live in Queensland. We are looking to buy our first home – in south-west Brisbane. We are in two minds: buy as cheap as possible (but possibly either a fairly old property or a newer but very small place on a tiny piece of land) or go for something nicer (newer with 4 bed, 2 bath, 2 car garage on a bigger block) to maximise re-sale value in a few years’ time.
We really want to get on the property market asap but not have a loan hanging over us for 30 years and never get ahead.
The idea behind the older or smaller place is that as it is cheaper we should be able to pay it off quicker (or at least pay off a large portion before we are looking to move up the ladder in 4-5 years).
The idea behind the newer or bigger place is that although it is more expensive we would probably be happier living there and while we won’t make huge inroads into the mortgage in 4-5 years the capital growth should be greater as house prices climb.
Any suggestions/advice?
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2 Comments
September 8th, 2009 at 12:59 pm
There’s an old adage in real estate investment, “buy the cheapest house on the most expensive street.”
Expensive neighborhoods have the most potential for a high return on your investment. What you want to do is find a cheap seller, not a cheap house. In other words, look for a property you can buy at a discount because the owner is motivated to sell quickly.
While fixer-uppers have potential to give a good return if you have a lot of experience with that kind of property, it is generally not a good choice for a first-time homebuyer.
Also, don’t worry too much about being saddled with a 30-year mortgage. Most first-time homebuyers sell within the first few years to upgrade to a better property, like you said. So you only have to worry about what your costs are for the few years you live there. Remember that a bigger house is going to cost more to maintain and cost more in utilities, month to month.
Take a good look at the amortization tables from your lender. Most likely only a small fraction of your mortage payments will count toward your equity during the first few years (the ones you are concerned about). It is going to be almost all interest.
In the 4-5 years you say you are going to own it, your payments will not be buying you significant equity in the property. You actually will not be much closer to “paying it off” unless you make double payments (an extra payment on top of your mortgage payment). The full amount of the extra monthly payment would normally apply toward the equity in its entirety. Generally, the way you are going earn a down-payment for your next home is to sell this one at an appreciated value.
Finally–and this is important–to determine what you can afford, take an honest look at your financial statement (all banks have a blank template you can get for free). You should be able to set aside savings for 3-6 months living expenses minimum before you budget what you can afford in mortgage payments. This is because emergencies and unexpected costs are part of real life. Trust me on this. Plan for them in your calculations.
September 10th, 2009 at 6:24 pm
We had exactly the same choice to make, and we went for the “newer and bigger place” a few years ago. We were looking at a smaller/cheaper/rennovation job and every day I thank my lucky stars I didn’t buy it.
It is really important that you enjoy the time you have in the house, instead of coming home every day to a house you wish you didn’t have or is one continual “to-do” list.
With the current propery market, our house doubled, mortgage has gone down, so we are much better off.
Having the mortgage for thirty years isn’t really the problem, it’s whether you can afford the repayments. So if you can afford the repayments (comfortable) on your income, I would alway recommend the bigger house.
If the mortgage worries you, or If you want to find out how to pay the mortgage of in 25 years (or less) and set yourself a target, then you can use a spreadsheet or download one of the better mortgage packages out there. I use the one from that lets me set my target loan term to 25 years, and every time I import my new statements and balances it shows me how much extra I need to add to my repayments to stay on track (and shows me the tens of thousands I will save). Also gives me a breakdown of all the expenses and fees, and checks the banks interest calculations (to make sure I’m not being ripped off). Basically good little tool to keep the mortgage under control, and take the worry out of the 30 year factor.
Good luck.