Ask Paul: Should I buy an apartment or keep renting?

Dear Paul,

I hope you can advise me on a rather big life dilemma. 

I'm a single 55-year-old lady, have no dependents and have rented on my own for the past 13 years. 

I had previously purchased a home in Victoria with my now former wife. I earn $61,000 a year before tax.

I have $7000 in savings and $300,000 in superannuation. I am due to inherit $170,000 with the passing of my mum.

I am really torn between buying a reasonably priced, modest one-bedroom apartment that I can afford or just continuing to rent and invest my money. 

I don't want a huge, 30-year mortgage over my head considering my age. I don't want to work until I die, either, and preferably would like to retire at 67. 

I don't know who to trust when it comes to financial planners or advisers. I know this crucial decision will affect the rest of my life. Please help! - Trudy

You are right, Trudy. This is a big decision. When it comes to property, I can wade in and at least make some pretty strong observations. The problem with anyone's opinion is that it contains bias.

My very strong bias is towards homeownership as soon as possible - it is a really good goal before we retire. My logic, I think, is sensible. Homes are Australia's 'sacred asset'. There is no tax if you sell and no land tax. But very importantly for you, a home is an exempt asset for age pension purposes.

If we jump forward about 12 years, when you qualify for an age pension, in today's money this is about $29,000 a year for a single pensioner. Now this is not a lot if you are paying rent, but it is a pretty good start if you own a home.

Here, though, you need to do your numbers. What you mean by 'modest one-bedroom apartment' is the key, as is where you would live.

What I do know is that the apartment market in Victoria, in particular Melbourne, has generally performed pretty poorly. There are a bunch of reasons for this, with a lot to do with state taxes on investors, but for you this is a bonus, a chance to buy at a decent price.

We can work backwards by agreeing that at retirement you should have no mortgage. So, if you keep your $7000 as emergency money, what can you buy with your inheritance of $147,000?

What is your borrowing capacity?

We know you will keep building super. If you work 10 more years on your current salary, only getting CPI increases and your super fund earns the historical average of a large, low-cost fund, using these assumptions, you will have about $790,000 in super.

It seems to me that directing your rent money to a mortgage, paying extra if you can and in 10 years taking money out of super to pay off the mortgage, leaving a balance in super, plus the age pension when you qualify, is a pretty sound plan.

Just for the heck of it, I took a look at a favourite suburb of mine, Carlton in Melbourne.

There are currently 64 one-bedders for sale. With a carpark, these seem to sit around $360,000 to $400,000. I would argue that by using your inheritance and a modest loan, you can afford this. Mind you, Toorak might be a problem! Regional areas would make it even easier.

My radar is screaming 'you should buy that modest apartment, get it paid off fully with super when you retire, draw down an income from super, plus an age pension at your qualifying date'. You need to do your own research and chat to a lender, but in your shoes I know what I would be doing.

I wish you the very best on this big call.

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