Stay money savvy

COLUMN Deborah Carlyon

Is it a good time to buy a house?  It’s a question I hear often and for first home buyers, it’s an especially big life stage decision. Moving from sharing a flat with friends or a partner to owning your own home is a financial commitment, and often a relationship commitment at the same time. Overlay that with worries about the direction of house prices, whether to go floating or fixed, which suburb, whether to buy something perfect or a do-up, and it’s no wonder it seems easier to stay renting.   
The key issue is affordability. Do your cash flow sums before you start house hunting. Interest rates are at an all time low at around 5.60% whether floating or fixing for a year. Rates are unlikely to increase until 2013 so banks are offering two years fixed at only 5.80%. With high rents in the major cities, buying a house is looking sensible based on outgoings alone. If you are paying $400 per week to rent a modest three bedroom house in north or west Auckland, Christchurch or Wellington, you can borrow $325,000 and repay the loan over 30 years at $430 per week.  With a 10% deposit, you could buy a house for $360,000. No, it won’t be in the central city – for that you’ll need more deposit money plus flatmates to help pay the far bigger mortgage. 
Owning a home comes with added responsibilities and extra costs – rates, insurance and maintenance - so factor those in. There is no doubt though, controlling your own environment has definite attractions. If you can do so at a similar cost to renting, you will be approaching home ownership very prudently and the direction of house prices becomes less relevant.
If your rent is affordable, you are presumably already saving for a deposit. By not overextending yourself on the house purchase price and mortgage, you can afford the added costs of home ownership along with improvements in a few years. I’m sure your parents have told you that’s the way they created a comfortable home and increased their equity.     
One of the most common renovations is the addition of a deck to transform a sloping lawn into a usable barbecue space or to open up a 1950s council house for modern living. A building consent is not usually required, making it a cost-effective renovation at under $10,000.
How best to finance it? Stay savvy. Let’s say you have $95 per week spare - after two years of bank savings you’ll have the cash. If waiting sounds dull, there’s always the immediacy of $10,000 on the credit card with minimum repayments of only $46 per week. Affordable? At 19.95% interest it will take 10 years to repay. That’s a frightening cost of $24,000 – almost two and half times the renovation cost. So use your $95 per week and you’ll repay that $10,000 on the credit card in two years eight months at a total cost of $13,200.   
Adding $10,000 to the mortgage at 5.80% is surely better? Yes, it’s a far lower interest rate but the timeframe is a trap. Over 30 years, it will cost only $13.50 per week which adds up to $21,000 - double the renovation cost. So if you can afford the $95 per week, far better to clear the renovation loan over two years three months at a cost of $10,670. Then you will have spare money again: for uncontrollable expenses such as a hike in council rates and inevitable interest rate increases, and for new goals - be it more renovations, starting a family or saving for retirement.
Deborah Carlyon is an Authorised Financial Adviser. Her Disclosure Statement is available on request and free of charge by emailing deborah@stuartcarlyon.co.nz. This column does not provide personalised advice.

You might be interested in reading: The A to Z of financial knowledge.

This article by Deborah Carlyon featured in Issue 003 of New Zealand Renovate Magazine. New Zealand's first and only magazine solely dedicated to home renovations.

 

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