Author Topic: Mortgage set up  (Read 1914 times)

JT

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Mortgage set up
« on: February 02, 2013, 02:07:45 AM »
Hi fellow mustachians

We're looking to buy a house that can be divided into an upstairs/downstairs arrangement.  We'll rent out the downstairs and live upstairs.

Here's the figures:

House cost: $750,000
Mortgage required: $187,000
Term: 30 or 20 years
Fixed interest: 5.25% with ability add up to 500 more each fortnight (fixed)


Annual salary: 44,590
Passive income: 20,000
Total: 64,590

Additional payments to mortgage: 7,800
Annual expenses: 23,000
Total: 27,800

Residual income: 36,790

Rental income: 360 - 400 per week

We'll use the rent to pay the mortgage, the passive income to pay the expenses and the salary to top up the expenses, top up the principal payments and invest the rest.

Does this sound OK?  I've gone over and over it in my head and just need an external perspective now.

Accrued thanks to you!


lizzigee

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Re: Mortgage set up
« Reply #1 on: February 02, 2013, 01:23:07 PM »
Hi JT,  I  haven't got the experience to answer your question, but I'm sure you'll get a lot of advice on here, mustachians don't seem to be a particularly unforthcoming bunch!  However, just a couple of questions to help clarify the situation.  You're looking at a 20 or 30 yr mortgage,  so what age are you? Do you feel comfortable detailing what your passive income is from, and the size of any retirement savings.  You say "we", so is the income referred to just from one of you?  Can/does the other partner work?  And for overseas mustachians, our interest rates in NZ are waaay higher than the US so 5.25 is a good rate, and we can't write off the mortgage interest on our residence against our income. We are taxed on our income from the first dollar, with almost zero deductions possible for salary and wage earners.

Ozstache

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Re: Mortgage set up
« Reply #2 on: February 02, 2013, 01:47:15 PM »
Are you going to be happy sharing your house for so long with others?

How does this stack up against buying a standalone rental and therefore being house buddy sharing free?

KingCoin

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Re: Mortgage set up
« Reply #3 on: February 02, 2013, 02:34:19 PM »
"House cost: $750,000"

I assume this is a typo?

Will the house be setup as two separate residences, or will you be sharing things like the kitchen and laundry room.

If the latter, you're probably better off looking into a multi-family housing unit. Otherwise you basically just have roommates (nothing necessarily wrong with that, but it's worth calling a spade a spade).

Why not just buy a smaller residence for yourself? What return are you generating on the marginal portion of the house you are buying?

marty998

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Re: Mortgage set up
« Reply #4 on: February 02, 2013, 03:52:09 PM »
Probably not a typo. Not sure about the kiwi market but a duel residence in Oz could fetch well over $1m.

KingCoin

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Re: Mortgage set up
« Reply #5 on: February 02, 2013, 04:00:30 PM »
Probably not a typo. Not sure about the kiwi market but a duel residence in Oz could fetch well over $1m.

Ok. Probably works out to about a 4.5% cap rate. Not great.

gooki

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Re: Mortgage set up
« Reply #6 on: February 02, 2013, 06:26:29 PM »
The big issues for me are.

What the demand for such a rental would be, and can you keep vacancy low.

What are you going to do when interest rates are 9%?

Other wise $375,000 for a rental that returns $360-400 a week is pretty much standard for NZ, so it's neither special or particularly poor. But you are relying on capital gains to get a decent return. Something that isn't guarenteed.

nz

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Re: Mortgage set up
« Reply #7 on: February 03, 2013, 11:55:32 AM »
Is this in Auckland? You have a lot of equity.......have you considered moving somewhere else completely mortgage free?

Dmy0013

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Re: Mortgage set up
« Reply #8 on: February 03, 2013, 01:55:19 PM »
If you dont mind me asking how old are you???

House price is 750,000 and you only require 187,000 so you have a huge chunk of cash...  So im guessing your not in your 20's... and with the rest of your information it makes me think you are closer to retirement...

Do you really want to share a house with someone else when your retired?  as someone else had mentioned have you looked into buying yourself a mortgage free house?  If your heart is set on owning a rental have you looked at just getting a separate house??

Rental income 360-400 weekly?  I have a hard time with your numbers, that for a weekly rent sounds very high to me... If my rent was 1600+ monthly I would just buy my house as thats a good sized mortgage payment...

And why would you do a 20-30 year mortgage?  Sounds like you should have the ability to do a 3-5 yr mortgage perhaps even less depending on how Mustachian you are...


Im not a pro in the rental market, and I do live in canada so I understand there are different rules... The house price and rental does not make sense to me, nor does a 20-30 yr mortgage, nor does locking in at a 5% interest rate... Whats the variable there?

Sorry dont mean to be rude, I just want to make sure you have done your homework and your numbers are solid, and depending on a few other variables I would really challenge you to review your choice at 20-30 yr mortgage...  We are in a 5 yr variable mortgage and our loan was 272000...  Just want to make sure you know your other options!

JT

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Re: Mortgage set up
« Reply #9 on: February 08, 2013, 02:27:52 AM »
Hi JT,  I  haven't got the experience to answer your question, but I'm sure you'll get a lot of advice on here, mustachians don't seem to be a particularly unforthcoming bunch!  However, just a couple of questions to help clarify the situation.  You're looking at a 20 or 30 yr mortgage,  so what age are you? Do you feel comfortable detailing what your passive income is from, and the size of any retirement savings.  You say "we", so is the income referred to just from one of you?  Can/does the other partner work?  And for overseas mustachians, our interest rates in NZ are waaay higher than the US so 5.25 is a good rate, and we can't write off the mortgage interest on our residence against our income. We are taxed on our income from the first dollar, with almost zero deductions possible for salary and wage earners.

Thanks for replying - I plugged in 20 or 30 yrs for the mortgage because one of the options I've got is fixing the term and paying up to $500 on top each fortnight (Bank Direct).  This would see the term drop to about 8 years, and I could top up at the time of refixing the interest rate.  I am 46.  Retirement funds are 190,000. (Which I know isn't enough but I was out of the workforce being a stay at home Mum!).  I can claim expenses from the rent income as a taxable deduction. 

JT

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Re: Mortgage set up
« Reply #10 on: February 08, 2013, 02:37:10 AM »
"House cost: $750,000"

I assume this is a typo?

Will the house be setup as two separate residences, or will you be sharing things like the kitchen and laundry room.

If the latter, you're probably better off looking into a multi-family housing unit. Otherwise you basically just have roommates (nothing necessarily wrong with that, but it's worth calling a spade a spade).

Why not just buy a smaller residence for yourself? What return are you generating on the marginal portion of the house you are buying?

Not a typo.  And for the area (in Auckland) this is about normal.  The house virtually has a two bedroom unit on the ground level - with its own kitchen and bathroom.  The property market here is hot and a smaller residence tends to go for about $550,000.  There is a leaky building problem in Auckland and so the 550,000 relates to non leaky building type houses.  The other option is we move into a block of flats - but they're tiny and not necessarily great for a family.  The return could be 6.6%.  Although currently, it's at 5.9%.  Non financial reasons are staying close to school (700mt) and work is only 7km away (by bike). 

JT

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Re: Mortgage set up
« Reply #11 on: February 08, 2013, 02:42:30 AM »
Are you going to be happy sharing your house for so long with others?

How does this stack up against buying a standalone rental and therefore being house buddy sharing free?

The house has a self contained, two bedroom unit on the ground floor.  No sharing of kitchens or bathrooms!  The entry level houses are not cheap. $550,000 seems to be the going rate for town houses. Housing in Auckland is suffering from too many people and not enough houses.  Fortunately, this house is close to public transport and good schools and on a great street and only two train stages away from the CBD.

JT

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Re: Mortgage set up
« Reply #12 on: February 08, 2013, 02:50:20 AM »
The big issues for me are.

What the demand for such a rental would be, and can you keep vacancy low.

What are you going to do when interest rates are 9%?

Other wise $375,000 for a rental that returns $360-400 a week is pretty much standard for NZ, so it's neither special or particularly poor. But you are relying on capital gains to get a decent return. Something that isn't guarenteed.

Rental demand is high because there are more people in Auckland than accommodation.  The house is close to Auckland CBD, public transport, good schools, and is in a nice neighbourhood.  At this stage, the rent will more than cover the mortgage and my top ups of $500 per week will help reduce the principal.  If I made the loan shorter (have looked at 15 year mortgage) then a 9% interest rate would be difficult.  And this is where the 20 or 30 yr mortgage comes in.  I may relocate within 5 years so the long mortgage shouldn't matter.

JT

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Re: Mortgage set up
« Reply #13 on: February 08, 2013, 02:54:51 AM »
Is this in Auckland? You have a lot of equity.......have you considered moving somewhere else completely mortgage free?

Yes, this is in Auckland.  I have considered moving somewhere else but we're locked into the zone for school.  We could move away from the area, but this would disturb the schooling.  There's a little 3 bedroom body corp unit we're looking at tomorrow.  But this wouldn't appreciate the same way the house would.

JT

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Re: Mortgage set up
« Reply #14 on: February 08, 2013, 03:29:21 AM »
If you dont mind me asking how old are you???

House price is 750,000 and you only require 187,000 so you have a huge chunk of cash...  So im guessing your not in your 20's... and with the rest of your information it makes me think you are closer to retirement...

Do you really want to share a house with someone else when your retired?  as someone else had mentioned have you looked into buying yourself a mortgage free house?  If your heart is set on owning a rental have you looked at just getting a separate house??

Rental income 360-400 weekly?  I have a hard time with your numbers, that for a weekly rent sounds very high to me... If my rent was 1600+ monthly I would just buy my house as thats a good sized mortgage payment...

And why would you do a 20-30 year mortgage?  Sounds like you should have the ability to do a 3-5 yr mortgage perhaps even less depending on how Mustachian you are...


Im not a pro in the rental market, and I do live in canada so I understand there are different rules... The house price and rental does not make sense to me, nor does a 20-30 yr mortgage, nor does locking in at a 5% interest rate... Whats the variable there?

Sorry dont mean to be rude, I just want to make sure you have done your homework and your numbers are solid, and depending on a few other variables I would really challenge you to review your choice at 20-30 yr mortgage...  We are in a 5 yr variable mortgage and our loan was 272000...  Just want to make sure you know your other options!

Hi and thanks, your bluntness is much appreciated.  I am 46.  There's a self contained, two bedroom unit on the ground level.  So no sharing of kitchens or bathrooms.  The rent is from a Real Estate Agency appraisal.  The Council valuation for the whole house is 670,000 and property is tending to go for about $100k above the valuation.  Houses are expensive.  Houses in the area can go for up to $850,000!  The property market here is under pressure from lots of people and not enough accommodation for them.  This, and the low interest rate (yes, 5.25% is low!!), is increasing house values.  And this doesn't look to be easing up any time soon as there's an anticipated million more people living in Auckland within the next 10 to 20 years!  The variable rates are around 5.75%.  I will possibly be relocating in the next 5 to 10 years so a 20 - 30 year mortgage can be paid off at that time.  Interest rates will rise and I'm calculating now for an increase to 9%.  A 5 year mortgage sounds wonderful but it would kill me at 9% and divert cash away from the things I really want to do - increase my investments.  (But I will reexamine this option.) While an entry level house would be great I don't feel there's much value in them as they're so expensive and you don't get much for your money.  If I can get help with the rent and expenses are tax deductible as a result of this income, then my position in the bigger house is much better than in a smaller house.  Since my post I've analysed the two scenarios on a spreadsheet and am satisfied the bigger house will work.  It's still a big decision though as I don't like debt.  I drive an 11 year old car (rarely), commute to work via bike and have been quite frugal. Our annual expenses are 23,000.  I happen to really like the house, the neighbourhood, the proximity to services/school/work/CBD/public transport, it doesn't use much power so is cheap in winter, it's north facing, and, if I lose my job we can move downstairs and rent out the top.  If we lived in a body corp unit and I lost my job, we'd be poked because there'd be no help to pay for utilities.  The thing that's important to me in the next 5 years (and punch me in the face if this is stupid!!) is to ensure there's enough cashflow to carefully invest. 

happy

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Re: Mortgage set up
« Reply #15 on: February 08, 2013, 03:59:02 AM »
Hi JT,

Friend of mine did the same thing: bought a house that split into 2 flats on 2 different levels. They wanted to live in a particular area but couldn't quite afford it: the rent made it work. When she was with her partner they lived in the bigger one and rented the other.  Sadly they split up so she moved into the smaller one with her child and rented the other one. She was lucky to find like minded tenants and really enjoyed having tenants.

JT

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Re: Mortgage set up
« Reply #16 on: February 08, 2013, 05:14:45 AM »
Hi JT,

Friend of mine did the same thing: bought a house that split into 2 flats on 2 different levels. They wanted to live in a particular area but couldn't quite afford it: the rent made it work. When she was with her partner they lived in the bigger one and rented the other.  Sadly they split up so she moved into the smaller one with her child and rented the other one. She was lucky to find like minded tenants and really enjoyed having tenants.

Hi Happy

We meet again!  I've always enjoyed hearing what you've got to say!  And the story offered this time is no exception.  What a great option your friend had.  I bet that kept her head above water!

happy

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Re: Mortgage set up
« Reply #17 on: February 10, 2013, 03:59:15 AM »
Hello JT,
Glad to see you still hanging around here :). My fave mortgage calculator (nab.com.au) says monthly repayments of $1120 on 187k over 25 years, so your rent should cover it with a bit left over for vacancies and repainting etc.

TomTX

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Re: Mortgage set up
« Reply #18 on: February 10, 2013, 07:34:32 AM »
Sounds like you have it under control, now that I better understand the NZ market.

My only comment is to make sure to retain a larger "emergency fund" or separate "house fund" to deal with repairs/replacement/upgrade. Around here, the "rule of thumb" is to set aside 1% of the house value every year for this purpose. Most years should be below that (especially if you DIY!) - but then you will have cash on-hand for when you need to replace the furnace, or roof, or whatever.

Good on you!