Should You Buy Now, or Wait and Save?
by Nick Carydias, Senior Mortgage & Finance Consultant
Saving up the deposit for a house is never easy. It can take years and years of hard work and commitment to finally gather enough funds for the deposit on that first property.
The question is, if you already meet the minimum deposit requirements, should you buy now, or wait and save more?
We’ll start by assuming you’ve done your financial planning both conservatively and correctly, and you can now afford to purchase your first home. Let’s take a look at a typical example:
A couple, Dianne and Peter, are currently renting a small two bedroom apartment. They’re paying $375 a week, which amounts to $19,500 a year. Between them they have an annual pre-tax income of $110,000. Over the last four years they’ve managed to save $10,000 a year, a total of $40,000 towards their home deposit. Ideally, they want to buy a 2-3 bedroom house for about $340,000, but they’re still debating whether to buy now or wait.
There has been much discussion in the media about the First Home Buyers Grant. Whilst we could include in this scenario the real benefits that a first home buyer can derive from these grants, there are many circumstances where people are making a decision to buy or not buy property when they would not be entitled to the grant. Therefore, for the sake of this discussion, we are not taking the First Home Buyers Grant into account.
Scenario 1: Buying Now
If they go ahead now, the purchase costs on a $340,000 house (stamp duty, legal fees, transfer and registration fees, bank charges and so on) amount to about $16,000. Plus there’s mortgage insurance* of approximately $7,150**. Deduct this $23,150 from their deposit of $40,000, and it means they need to borrow a total of $323,150.
In this scenario, their monthly payments of principal and interest will be $1,746, or $20,952 a year. But Dianne and Peter are saying they should wait so they’ll be able to save more funds for the deposit, and reduce their borrowings, mortgage payments and mortgage insurance.
Scenario 2: Buying Later
If they decide to wait before purchasing they’ll need to save an extra $34,000, and if they continue to save at their usual rate, this will take them another three and a half years.
If, however, they also decide to save a big enough deposit so they don’t have to pay mortgage insurance, then they’ll need a 20 per cent deposit, or $68,000. So the deposit plus costs in this scenario will increase to $84,000.
Their total borrowings will amount to $288,000 and the monthly payments of principal and interest will be $1,556, or $18,672 per year.
If the past is any indication of the future, it’s reasonable to assume at this point that their property will increase in value on average seven per cent a year. So in three and a half years time – by the time they get their bigger deposit together – their property may be worth $431,092. That’s an increase of $91,000.
And the right scenario is …
As discussed above, when Dianne and Peter were paying rent ($19,500) and saving ($10,000), it was the equivalent of putting aside $29,500 a year. If they bought their home now, their annual repayments will be $20,952, which is $8,600 a year less than when they’re renting and saving - $8,600 that could be used to reduce the principal.
Over that three and a half year theoretical waiting period, this would mean reducing their mortgage by about $30,000 – which would bring it into line with the mortgage level if they’d waited to save a 20 per cent deposit, plus costs.
In summary, Dianne and Peter will be better off buying now, because the value of their property will grow by around $91,000. If they wait until they have what they consider a good deposit, the property will still have gone up in value by $91,000, so they’ll need even more cash and an even larger loan.
If you’re able to afford to purchase, the earlier you buy and enjoy the benefit of ownership, the better. And that applies to whether you’re purchasing your home to live in or as an investment.
So, my final word on the subject is … DIN. Do It Now.
*Mortgage insurance is a one off fee paid by the borrower when the ratio of the loan amount exceeds 80 per cent of the property value. The higher the loan to value ratio above 80 per cent, the higher the mortgage insurance premium. In most cases, this fee can be added to the loan amount. Take note, this insurance policy is to the benefit of the lender if you default. In other words, the bank gets the payment from the insurance company after the bank has pursued you for any outstanding monies of the loan. You don’t get any benefit from the payout, you just pay the premium.
**Carefully calculated from one of the mortgage insurances companies that provide this type of insurance.
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