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Renting is cheaper, but get your foot in the door and work your way up the ladder; Buying beats renting for building wealth, not that there's any rush. Without borrowing to sustain it, there can't be a boom.
Topic Started: 9 Oct 2013, 11:20 AM (634 Views)
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Bank on getting a foot in the door

October 9, 2013
David Potts

Buying beats renting a home for building wealth. Not that there's any rush. So don't be spooked by the hype about auction clearance rates. The fact is, vendors are being realistic - rising unemployment will be a dampener on the market, inflation is barely visible, and the banks can't give away loans because debt has become a dirty word.

Without borrowing to sustain it, there can't be a boom. Besides, supply is increasing as new construction picks up.

By rights, property prices should rise by the increase in national income, or nominal gross domestic product, which, if Treasury is right, will be 4.5 per cent this financial year, although admittedly, averages don't preclude hot spots.

So you need to get real before getting realty. Most home owners think renting is dead money. I wonder what they'd call council rates or the inevitable maintenance? And having an agent only a phone call or three away who can fix things must be worth something in busy lives.

Best of all, renting is cheaper.

But unless you're disciplined and patient enough to invest what you'd be saving by not having a mortgage - much easier said than done - the brutal truth is you're not going to finish up with an asset by renting.

Frankly, it's the forced saving in owning a home that's the clincher. Anyway, the system is slanted towards buying a home, so if you can't beat it, why not join it?

There are grants galore and stamp duty concessions to help you buy. Your home will be free of capital gains tax when you sell, there's nothing like a mortgage to keep you on the financial straight and narrow, and when you retire, it will be ignored in Centrelink asset tests.

First-home buyer grants for building a new home vary between states. New South Wales and Queensland are the most generous, offering $15,000, while Victoria pays $10,000.

Your first property almost certainly won't be your last. That's why first-home buyers often settle for something that's not quite what they want, but they get a foot in the door, so to speak.

Judging by the recent warnings from the Reserve Bank, lenders are becoming less strict about loan valuation ratios, but you should be.

If you have a deposit of 20 per cent or less for the amount you want to borrow, you'll be up for lenders' mortgage insurance.

For example, a $316,000 mortgage on a $350,000 property purchase - a loan valuation ratio of 90 per cent - would cost $8349, according to information online from mortgage insurer Genworth. That will wipe out half the first-home buyer's grant.

Lenders will spread this over the life of the mortgage, so it will add only a little to monthly repayments, but over time you'll be paying interest on it.

Incidentally, your lender will make an allowance for at least a 1 per cent rise in interest rates to work out your eligibility.

There's a 2 per cent difference between the lowest (4.49 per cent) and highest (6.50 per cent) variable rates on offer. On an average 25-year $300,000 loan, the highest would add $360 in monthly repayments, or more than $100,000 in extra interest.

Fixing the entire loan is a bet against the banks that many borrowers have subsequently rued. Even so, with one, two and three-year fixed rates below 5 per cent, it's a cheap price to pay for the certainty of knowing exactly how much you'll have to pay over that time, especially when the smart money is predicting rates will start rising again about the end of next year.

Case study: Couple opt to work their way up market

As you'd expect of an accountant, Michael Trajkovic methodically applied financial analysis to buying a home, down to the precise proportion of the loan that would be fixed.

After looking at ''three or four dozen and visiting at least 24'' properties, Michael and partner Krystina Tsatsoulis, both 25, decided it was best to settle for somewhere cheaper in the outer suburbs, so there was a smaller loan and they didn't have to pay mortgage insurance. Contrary to popular belief, mortgage insurance, which usually kicks in if you're borrowing 80 per cent or more of the value of the home, is for the lender, not you. Depending on the size of the mortgage, it can add tens of thousands to the cost.

''We don't have to pay mortgage insurance,'' Michael says. ''We could have got a bigger loan and somewhere closer to the city or work, but we decided we didn't need what we want at this point. It was better to move further out and be closer to family, buy cheaper and be easier to pay off.''

The plan is to upgrade to something bigger and more suitable as a dream home in a few years, and using this property as a rental. ''If we move out, the rent would cover the interest,'' Michael says.

Read more: http://www.smh.com.au/money/borrowing/bank-on-getting-a-foot-in-the-door-20131008-2v4ra.html
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Billy Jack
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The Duke of Brisbane Town

Hilarious but good article friend.

Classic false choice friend.

There aint no point in buying anything that is located in a city with practically no transport, choice of supermarkets, service provider or anything else. But hey, if you can buy or rent here for 50 years "YOU'RE ****ING WELCOME"! I mean, who the heck would want to decide to live anywhere else, rent here for a year, rent there for a year, and spend your life, well, living? WE WANT Y'ALL HERE AND Y'ALL CAN'T LEAVE. SO DO THE RIGHT THING AND BUY.

Y'all know it's the best place in the world to be, so just make a choice already dammit. Rent here for 50 years, or buy here. 50 years later and I guess you wouldn't know no better anywho.
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Broken ladder
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The picture reminds me of myself 10 years ago.

Yep 2003 was a great time to buy in the outer suburbs.

“You better get in before you miss out!!!” … “You can’t loose on Bricks and Mortar!!”

Well sorry… Costello’s tax cut to the rich, spiked inflation and interest rates sent most of the IP owners out west to the agents for a quick sale

Higher interest rates led to plenty of places on the market, then prices dropped by 10-20%…

90 minute commute to town each way ..got to much.. So I rented it out…..

Then a nice tenant recommended by the agent lost his job and ended up doing a runner.

I sold 5 year later for $30K loss… not even including the interest on loan over that time or agents fees.

Can’t see Fairfax ringing me for my story.

It was not until the Rudd's doubling of the FHBG that things improved.
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