Author Topic: What's wrong with making minimum repayments? (Aussie property related)  (Read 617 times)

Mikaelus

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My partner really wants to own property.

I'd rather rent and put money into shares or something else with a higher rate of return. We've had the rent vs buy discussion and while she can agree that maybe buying isn't the best financial move, it doesn't seem too bad she'd like to do it for emotional reasons. I'm happy to go along with it as long as it's not going to be financially catastrophic.

We're thinking of buying a small apartment in Brisbane, Australia. We're looking at properties around the $350K range.

We figure that the minimum mortgage repayments would be around what we pay in rent (roughly $20K p.a. or $400pw).

We plan to just make the minimum repayments for the duration of the 30 year mortgage. That way she gets to own property, our cost of living doesn't go up too much, and I can invest any extra income I get as I see fit.

Is there anything risky or foolish about this plan?

I realise the $35K we're going to put on a deposit could probably get a higher return if invested elsewhere.

I also realise that my cost of living will go up slightly when owning a home due to (my estimates):
Council rates $1400p.a.
Body Corp. $3200p.a.
Insurance $500p.a.
Maintenance $2000p.a.
TOTAL: approx. $7100p.a. (or $3500 each)
(Did I forget anything in there?)

I also realise that if we take 30 years to pay off the mortgage we'll end up paying more in interest than the house is worth.

I realise that interest rates could rise and then our mortgage would be harder to pay off.

If we're OK with that, what risks are we running by only making the minimum repayments on our mortgage?
« Last Edit: January 08, 2018, 09:40:16 PM by Mikaelus »

Finances_With_Purpose

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Re: What's wrong with making minimum repayments?
« Reply #1 on: January 08, 2018, 05:07:04 PM »
So I asked basically this question a while ago on here, and you should see that thread.  Goldlielocks, chastakavitch (sp?), and others gave great info.  They even listed a ton of things.

Short answer: yes, your cost of living can explode.  See that post.  See that NYTimes calculator.  (Rent does not equal mortgage payment; there's a lot more that goes into it, and I see you've listed some of those things already.) 

I'm unfamiliar with your country, but here are a few observations to consider:
1.  I don't see any move-in costs and other fix-up things listed.  (See post above.)
2.  For maintenance, many folks recommend 1% of purchase price, which would be $3.5k, no?  And maybe more for older properties or ones w/ issues.
3.  TONS of undiscussed expectations that come with housing and owning: talk, talk, talk to your wife about this.  She may want the lawn a certain way, things to look a certain way, etc., all of which costs money.  For some reason, it comes out more when you own a place.  (In your case, I would be especially careful because your lady already wants a house for non-financial reasons - which I understand, as I do too, but it can also signal other reasons/desires that you'll want to explore, so you both know what you're getting into.) 
4.  Interest rate risk, too?  Here, we get fixed-rate loans.  I would be extremely hesitant to take on a note with a 30-year interest-rate risk attached. 
5.  How much will tax rates rise?  I have many friends who're being crushed by taxes as they have more than doubled in a relatively short period, and are going up 10%/year.  That kind of compounding hurts. 
6.  Ditto utilities.  Those can jump quickly too, and your baseline will likely be higher for a home and/or place you own (unless it's similar size and composition to what you now rent). 
7.  Do you have homeowners associations and the like?  Fees, etc.  Other taxing entities?  (Schools, etc.?) 

Consider all those things.  But most importantly, see the considerations on that other thread. 

The interest rate alone would make me very wary of doing a large mortgage there relative to my disposable income/assets.  What if rates hit 15% again, as they did in the 80s?  Wages tend to be slower to catch up.  Good luck with that.

I don't say that to raise fears - it shouldn't be about emotions as much - but to point out that this has happened in recent living memory.  I would be wary of making many predictions of what might happen 30 years out, whether it's interest rates or Dow projections or whatever.  You could be taking on something that raises your risk of financial catastrophe significantly. 

Maybe she will buy in to save more, since she wants the house, and then you could do it less on debt?  Just a thought.

Anyway, just leaving all this here for your consideration. 

SwordGuy

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Re: What's wrong with making minimum repayments?
« Reply #2 on: January 08, 2018, 06:58:50 PM »
30 years is a long time to make a bet on variable interest rates.

How often do they re-set?  How much notice would you have?

What kind of interest rate can you get now?


Mikaelus

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Re: What's wrong with making minimum repayments? (Aussie property related)
« Reply #3 on: January 08, 2018, 09:50:02 PM »
Thanks Finances_With_Purpose. Great questions and the thread you linked to was really good reading.

In answer to your questions:

1) Yeah, that's a good point. I should think about that...
2)Yeah, I might be underestimating maintenance a bit. I'm looking at buying an apartment which seems pretty low maintenance, but still...
3)Yeah. Good point. Communication is key.
4) Yeah, I'm a bit worried about that too. Here in Australia it's usually a fixed term rate for 5 years then you renegotiate.
5) This is a fear of mine. I'm worried interest rates will rise and then we'll be screwed.
6) Utilities I'm not too concerned about. We're paying for them while renting. I assume they'd be the same.
7) Yeah, there's a bunch of other fees involved. Council taxes (~$1400p.a.), strata/body corp. (~$3200p.a.), and others...

Good point SwordGuy. Interest rates here in Australia are around the 3.8% rate and are typically fixed for five years before they become variable and you have to renegotiate.

Finances_With_Purpose

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Re: What's wrong with making minimum repayments? (Aussie property related)
« Reply #4 on: January 09, 2018, 10:17:40 AM »
Thanks Finances_With_Purpose. Great questions and the thread you linked to was really good reading.

In answer to your questions:

1) Yeah, that's a good point. I should think about that...
2)Yeah, I might be underestimating maintenance a bit. I'm looking at buying an apartment which seems pretty low maintenance, but still...
3)Yeah. Good point. Communication is key.
4) Yeah, I'm a bit worried about that too. Here in Australia it's usually a fixed term rate for 5 years then you renegotiate.
5) This is a fear of mine. I'm worried interest rates will rise and then we'll be screwed.
6) Utilities I'm not too concerned about. We're paying for them while renting. I assume they'd be the same.
7) Yeah, there's a bunch of other fees involved. Council taxes (~$1400p.a.), strata/body corp. (~$3200p.a.), and others...

Good point SwordGuy. Interest rates here in Australia are around the 3.8% rate and are typically fixed for five years before they become variable and you have to renegotiate.

You're welcome.  If I were you, I would have a lot more conversations with your wife.  And I would strongly consider avoiding a mortgage above what you could handle if interest rates jumped a lot five years in.

We have those loans in the US too and they were really popular until 2008, when many people lost their homes because they underestimated the impact of even minor rate changes.

Don't be paranoid, but realize that a lot of the negatives may move in tandem: when markets get shaken, taxes rise (budget shortfalls), raises and bonuses diminish, and so on.

The simple solution is to keep your debt, if any, very modest. That way it won't strain you as much to repay, even if conditions change.

Also realize it will be very hard to walk away if the time comes even though it may be the financially right decision. (See articles re the sunk cost fallacy.) Humans will keep throwing away bad money after good. Your wife will hate it too; it makes future home buying difficult for a period of years. In fact, I saw a case study on here last night where someone was doing exactly that on a house, dumping more and more cash into a property that was a loss.

Anyway, I wish I had happier things to say, but I really wish you luck with it. I truly wish housing were more affordable.

nath

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Re: What's wrong with making minimum repayments? (Aussie property related)
« Reply #5 on: February 13, 2018, 03:50:43 AM »
Hi a Melbourne guy here.
Own 5 properties and can give you some Aussie perspective.
 In regards to the title question nothing wrong with minimum payments as long as you have other money working for you in the offset account or share market fund.
Keep in mind money paid off the mortgage is a guaranteed tax free return so you would need to be making 7 or 8 % return in shares to even match your saving for simply paying the mortgage.

Also donít forget money tied up in real estate is leveraged up to the property value so there is potentially much much higher returns when capital growth occurs, compared to a share market fund which is effectively just a savings account and can only grow so much when indexed.
Brisbane has a lot of apartments and may not see much capital growth in the medium term. However could be a nice lifestyle still and if you love it then buying could make sense.
Another option is buy down the coast further and commute? You can get a great house in QLD for cheap and live a nice coastal lifestyle.
Spending $350k or even $600k on a place is not a lot of money to spend these days compare to some people. particularly in the major cities.
Donít be scared about major interest rate changes and economic factors. When itís happening the writing will be on the wall. Very High interest rates will also mean high inflation and high asset values.
Consider a future place, big enough for the 30 years you are talking about. Not just the next few years.
Apartments can have hefty ongoing owners Corp fees. Kinda annoying if you can get a suburban house you wonít have that but you will have more future maintenance to plan for as you will have more to look after. Roofs etc.

Final consideration which might be the best option. Rent in Brisbane and buy an investment or 2. You can gain tax benefits, capital growth etc and then move in later when your ready.
« Last Edit: February 13, 2018, 04:04:51 AM by nath »

marty998

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Re: What's wrong with making minimum repayments? (Aussie property related)
« Reply #6 on: February 13, 2018, 04:23:33 AM »
If you are only putting down a 10% deposit you will be whacked with LMI.

You make the biggest savings on your mortgage by paying extra in the early years. After that, paying more saves you very little in interest, so after you've taken an initial bite out of the mortgage it's desirable to pay the minimum and invest the rest.

I'm agnostic here... if both of you are earning middle income salaries, then a $350k property should be relatively easy to swallow.

Kyle Schuant

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Re: What's wrong with making minimum repayments? (Aussie property related)
« Reply #7 on: February 13, 2018, 04:58:09 AM »
Per the ING calculator [https://www.ing.com.au/home-loans/calculators/repayments.html], $350k at current rates of 5.42% would mean that you pay $709,100 in all with minimum payments. Taking it out today, you'd pay it off in 2048.

An extra $100 a month means you pay it off 3 years earlier in 2045, and saves you $46,000.
$500 more a month means you pay it off 11 years earlier in 2037, and saves you $149,000.
$1,000 more a month means you pay it off 16 years earlier in 2032, and saves you $208,000.
And so on.

It is unclear to me why anyone would want to take longer to pay off their place, and spend more money on it than they have to. But perhaps you wish to start a charitable foundation to help our banks, since they're struggling so much.