Ask Paul: Is it too late for us to buy a home?
My wife and I are at a crossroads. We never thought owning a home was worth it until now, and I reckon we've missed the bus.
For years my wife and I deliberated over buying a home. We travelled for work in our 20s, so renting was easier while we were on the go.
By the time we settled down to have kids, one income made it almost impossible to save a deposit.
Fast-forward 15 years and we're 46 with two teenage kids and still renting.
We have around $260,000 in super between us, plus $80,000 in savings.
We're sick of seeing that $3000 rent money disappear from our bank account each month, and we are scared of renting as we age further, so is it worth having a $700,000 mortgage at our age?
If not, what is the best way for us to secure our future? - Luke and Terri
You haven't missed the bus. You will be jumping on at a later bus stop than you might have done with hindsight, but I'd still like to see you on the property bus.
So let's look forward. The reason I have consistently spoken about owning a home is little to do with the long-term rise in values that has been historically the case. It is that mortgage repayments are a wonderful forced wealth-creation plan.
Over a couple of decades, property values tend to rise: inflation and increased earnings from our work reduce the real cost of our mortgage. So, property ownership and a mortgage are a "win win".
Then, of course, we have the enormously important "intangible" benefits of owning a home. We humans seek security, and home ownership is the ultimate security: you can't be kicked out by your landlord, you can renovate it to suit your own taste, even paint it purple if you like.
This is where I disagree strongly with the "rent and invest" argument.
The technical side of this argument is sound. The idea is that rent is often less than your mortgage repayments, so you rent and then top up super, buy shares or use our negative gearing system to own investment property.
This can work well; in fact, gearing investments outside your home makes sense as the interest on your loans is tax deductible.
But I think the "rent and invest" argument suits very few of us.
As I said, a home mortgage will usually be principal and interest, so you pay it off over 25-year years or so. This is a very powerful forced savings program. There is also every chance you would pop extra payments into your mortgage from time to time, so for me owning a home, if you can, before retirement is a no brainer.
Equally, I am totally unfussed about you having a $700,000 mortgage at 46.
Look, I know it seems a bit silly if you take a 25-year mortgage at this age - the last payment is technically when you are 71. But this is not going to happen in real life. As time goes by and the kids grow up, you will find more money for your mortgage. Also, in 25 years inflation alone will see your property worth far more - over that long period of time the small amount left owing on your mortgage will be pretty much close to zero.
To further push the case for you to buy is your comment that you are sick of seeing $3000 a month go out the door in rent payments. This $36,000 a year would make an enormous impact on a mortgage.
If I stick with your $700,000 mortgage, right now your interest would be around 2.5%pa - certainly it should be under 3%. The interest on $700,000 would be around $18,000 to $20,000 a year, so right away you would be making capital repayments of nearly $20,000 a year, rapidly building more equity in your home.
We do need to look at the market and in many parts of Australia it is raging hot. Sure, sooner or later interest rates will move up, we'll have some sort of economic shock and values will fall. Waiting for that day, though, is a risky business. For all I know it could be tomorrow, in two years or 10 years. I, and no one else, has a crystal ball that accurate.
Do lots of research, visit many homes and buy a well-located property that does not stretch your budget too far.
Allow for rising interest rates and for any personal emergencies. Your job security is important as well. About the only time we lose on property is when we buy poorly in a low-growth location. Or we are forced to sell due to personal reasons or an economic disaster.
In January 1990, our mortgage rate hit 18.75%. The value of all property plummeted. Like many young couples, we slashed our spending, sold our car and hung on tight. Like most people, we survived this crisis, interest rates started dropping and property values recovered.
Waiting to buy a home, hoping for a market downturn, could work, but that is too uncertain for me. I'd suggest you do a close review of your finances, talk to lenders and start searching for a home.
From my perspective as a 66-year-old, you are spring chickens and a $700,000 mortgage, a good deposit and the capacity to pay $3000 a month rent means you have the capacity to buy your home.
I am sure at times it will be a bit of a struggle but you'll look back when you are living in your home with no mortgage and see the wisdom in home ownership. All the best for your property search.
Please send me a photo of what you choose to buy!
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