Author Topic: What's wrong with making minimum repayments? (Aussie property related)  (Read 1286 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 »

SwordGuy

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Re: What's wrong with making minimum repayments?
« Reply #1 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 #2 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.

nath

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Re: What's wrong with making minimum repayments? (Aussie property related)
« Reply #3 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 don’t 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.
Don’t be scared about major interest rate changes and economic factors. When it’s 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 won’t 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 #4 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 #5 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.