Author Topic: Mortgage vs renting - what am I missing?  (Read 1829 times)

Mikaelus

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Mortgage vs renting - what am I missing?
« on: June 19, 2017, 08:34:58 PM »
Wondering if any of you can point out any flaws in my thinking in my decision to buy a house...

Currently my partner and I are renting an apartment for ~$18K p.a./$350p.w.

Hopefully by mid next year we will have saved enough for a deposit (~$35K) on a small apartment similar to the one we're renting now.

Once we put the deposit down, the weekly repayments should be roughly the same as we're paying in rent at the moment (~$350).

It might not be the best investment 9shares might be easier, pay better, etc.), and I don't like the idea of being in debt to a bank for years, and years, but if we're going to have to pay to live somewhere maybe it'd be better to be paying the money towards a house that we'll own someday rather than paying rent.

I like this idea, but I feel like there's something I'm missing... something I haven't considered about this. Any suggestions?

I hate debt, but then I don't really want to put in the effort to pay off a $300K home loan in under 10 years. If I treated my mortgage repayments like I treated paying rent now, how would it affect our FI goals? If we just kept paying $350p.w. for housing, would we run into any sort of problems?

I realise that by repaying the loan over many years I'll end up paying more for the house than it's worth (i.e. paying $350K + ~$180K in interest = $530K), but paying rent wouldn't I be effectively losing $18K a year every year? At least with the house I'd own it eventually?

I'm looking at buying in Brisbane, if that's relevant...

Any thoughts? It's such a huge investment I'd love to hear any mustachian's take on this...

curler

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Re: Mortgage vs renting - what am I missing?
« Reply #1 on: June 19, 2017, 09:23:29 PM »
I haven't worked through any of your math, but some things to consider:
1. Yes, this is why many people buy rather than rent.
2. Have you accounted for the lost income on your deposit?  If you put that money in the stock market instead, you would be making money, so factor that in.
3. The $350 mortgage payments doesn't reflect all your costs.  I don't know about Brisbane, but in the U.S. the property owner is responsible for property tax, which would be included in rent but not in the mortgage payment.  Are there also condo association or similar fees where you are?
4.  You will be responsible for fixing things.  Washing machine breaks?  Can't call the landlord and have them fix it, you are out money.

LDoon

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Re: Mortgage vs renting - what am I missing?
« Reply #2 on: June 19, 2017, 09:29:04 PM »
Need to consider maintenance costs (HVAC system, flooring, appliances, paint, etc.). Plus there will be costs associated with the general building not covered by the HOA/building fee.  Special assessments are not uncommon to fix major issues like roof replacement, foundation issues, flood, mold, etc.   

Apartments are cheaper to buy than a house, but you are at the mercy of the apartment board and other owners.  If a majority decides to pay $X for something (whether a necessity or an upgrade), then you are obligated to pay your share.  An apartment board will be able to provide a history of such expenditures so at least you can get an idea of whether that particular building has a tendency to issue those special assessments.


Mikaelus

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Re: Mortgage vs renting - what am I missing?
« Reply #3 on: June 19, 2017, 10:07:41 PM »
Thanks for the interesting responses guys.

Good points Curler.
- I have thought about the lost income on the deposit. I know I'd probably make more putting the money into shares or something, but I kinda feel that's not the option I'm looking at. I need to live somewhere, right? So it's either use that money for a deposit, or use that money for rent - either way I can't invest it. Am I wrong about that?
- Good point that the mortgage repayments aren't all I'll be liable for. I am aware I'll be up for property tax, body corp./apartment board fees, maintenance costs, etc. Definitely gotta think about those things.

Thanks LDoon! I hadn't thought about getting a history of the expenses. That's a great idea.

englyn

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Re: Mortgage vs renting - what am I missing?
« Reply #4 on: June 19, 2017, 10:10:50 PM »
Losing money by paying it in rent is exactly equivalent to losing money by paying it in bank interest, rates and strata fees. The only part you aren't losing is the component of your mortgage payment that is repaying the loan.

Work out what the interest only payments would be, add rates and strata and a bit for maintenance. Is that still about the same amount as your rent payment? If so, unless you think the Brisbane apartment market is wildly underpriced at the moment or due a large boom (which, probably not), you're likely better off benefiting from the flexibility that renting gives you. You might well decide you want a house, or to live somewhere else, within the next 5 years; and stamp duty and selling agent fees are a spectacular wealth reduction device.

Sydneystache

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Re: Mortgage vs renting - what am I missing?
« Reply #5 on: June 19, 2017, 11:29:20 PM »
Quote
I hate debt, but then I don't really want to put in the effort to pay off a $300K home loan in under 10 years. If I treated my mortgage repayments like I treated paying rent now, how would it affect our FI goals? If we just kept paying $350p.w. for housing, would we run into any sort of problems?

Think of it this way, you will own the roof over your head. Your minimum mortgage repayments will be the same as your rent. That's good so far.

Rent can increase (so that's something you need to account for), you're at the whim of the owner. Mortgage debt isn't the same as consumer debt (credit card, car loan etc). It's about financial discipline over the long-term.

If you increase your repayments to $400/week then $450/week etc you will reduce the time you pay off the loan. You ought to have an offset with your mortgage account then you can funnel the excess into your investments.

Blindsquirrel

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Re: Mortgage vs renting - what am I missing?
« Reply #6 on: June 20, 2017, 06:59:35 PM »
   In fly over country USA but you may wish to google AU real estate bubble. AU has had an incredible run up in prices the last 20 years and nothing goes up forever. Not very familiar with market but it sounds rather frothy to me. Just a thought.

omachi

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Re: Mortgage vs renting - what am I missing?
« Reply #7 on: June 20, 2017, 07:11:48 PM »
You might well decide you want a house, or to live somewhere else, within the next 5 years; and stamp duty and selling agent fees are a spectacular wealth reduction device.

This is the big part that appears to be missing from your calculations. If you're never going to move again, then it's a pretty easy comparison. If you do end up moving, you get to pay a bunch of fees to sell the house. Also, the early years of a mortgage are more interest than principal, so if you move early, you may find that the equity you do gain is offset by the fees you pay selling and buying the next place, not to mention costs of maintaining the property in the interim. Take a look at amortization tables and see how much equity you actually stand to gain before you'd likely move.

Beach_Stache

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Re: Mortgage vs renting - what am I missing?
« Reply #8 on: June 24, 2017, 05:41:54 AM »
I would make sure that you are going to stay in the place for a while.  If you buy, I really think the break even point is about 10 years, maybe less if the housing prices keep rising.  You will put a decent amount of money down that you are no longer investing (except in  your house) and keep in mind the closing costs of buying a place.  Then when you sell you'll supposed to expect to pay around 10% of the house price in closing costs and fixing up to get ready to sell.  If you can rent and save excess money for a while then that's an option, if your mortgage decreases with buying a place then that's obviously helpful, but when the AC goes out and you have to spend $10k out of pocket that's also not something that  you would have to pay for when renting.  I bought in 2006 before the bubble in the US and just recently sold the place at a big loss, so hindsight I look back and think about all the costs we had to pay for our condo, the special assessments, AC repair, other stuff, and think about the payback period at normal inflation.  I would expect to pay a certain amount in closing, a certain amount when selling, and in a 7-10 year period probably the same amount in something for a routine fix up, like the AC going out, a new roof or something else that goes wrong with a purchased place.  It's certainly a decision I wouldn't rush until you are confident that you will stick around in the place for at least 10 years, or be able to rent out easily if you want to keep it on the books and be turning a rental profit.