Home Loan or invest?

[BlackFZR]

Brains trust of PSB.

I'm finally in a position where I can start to have a few toys (new/old) without requiring to sell them, as well as looking at investing in either property, or a shares portfolio.

Based on this, I'm starting to explore the posative's and negatives associated with both.

Allthough there is some breaks associated with getting a home-loan, I'm trying to work out whether the breaks in terms of savings (stamp duty, & $7,000 government first home-buyers grant), are a worthy reason to end up paying out $999,000 total (6.8% fixed rate for 3 years, then allow 7.8% for the remaining 22) for a house that in the current market is only worth $450,000. In addition to the mortgage payments, I estimate that there would be an additional $1,500 per year for water & council rates, totaling another $37,500. So after 25 years, I would own my own home, at a cost of $1,036,500 (based on minimum payments), not including any renovations, maintenance or anything else. If I chose the right area, and had on average 4% yearly increase in property value, the house may be worth $1,199,600 at the end of 25 years.

Alternatively, if I chose to invest..... I couldn't quiet invest as much, as I would be paying rent. Assume an investing capital of $1,000 per fortnight. Put very simply over the 25 years, I'd manage to invest out of my pocket in the vicinity of $650,000. Assuming a 4-5% annual increase/profit on my fortnightly investment, my rough calculations show a return of $1,272,868.

In summary, property shows a return (profit?) of $163,100 after 25 years for an investment of $1,036,500.
investment shows a return (proft?) of $622,868 for an investment of $650,000

Does my calculations seem correct? and what about my estimated interest/increase for property and investments?

[Barfridge]

with your house calculations you haven't included the savings of not paying rent, this may tip things heavily in favour of a mortgage.

[speed3]

Plus if you start paying a bit extra fortnightly you'll start cutting the interest pretty quick. Also if you ever get decent sums of money you can whack it straight onto the mortgage and cut it further. Paying an extra 5K now could save you much more than that later.

[out_in_front]

Also factor in inflation on the rent payments - approx 3-5% per year depending on the economy

[BlackFZR]

BF......

Home Loan payments at that amount is ~$1600 per fortnight. Where I'm living at the moment, I pay approximately $300 per week. Hence the difference in investment amount versus mortgage payment per fortnight reflects the cost of rent.

[Daleski]

You need to chat to a financial planner.

Alot of investers still rent and own investment properties instead of paying mortgage and living in the house. also depending on how much capital you have you should consider interest only loans. bank managers don't tell you to much about them as it dosen't make them as much money.

There are obviously tax breaks on invesment properties and none with the house you live in, this is the reason investors tend to still rent.

This is how it has been explained to me via a finacial adviser and his advise was to get enough equity i.e. 20% of the mortgage and change to an interest only loan paying the same amount i am now and I could own the home in 15yrs not 30.

I'm not in anyway smart or know alot about money but this is the advice I have been given.

[BlackFZR]

Also factor in inflation on the rent payments - approx 3-5% per year depending on the economy

I figure that if my wage doesn't increase enough to cover rent increases, something is wrong.

[BlackFZR]

You need to chat to a financial planner.

Alot of investers still rent and own investment properties instead of paying mortgage and living in the house. also depending on how much capital you have you should consider interest only loans. bank managers don't tell you to much about them as it dosen't make them as much money.

There are obviously tax breaks on invesment properties and none with the house you live in, this is the reason investors tend to still rent.

This is how it has been explained to me via a finacial adviser and his advise was to get enough equity i.e. 20% of the mortgage and change to an interest only loan paying the same amount i am now and I could own the home in 15yrs not 30.

I'm not in anyway smart or know alot about money but this is the advice I have been given.

Good points. I suppose my concern is at the moment I don't really have that 20% to start of with, so just wanted to invest as I save, and then evaluate whether to move into property or not.

Financial Planner consultation is on the cards.

[Daleski]

Good points. I suppose my concern is at the moment I don't really have that 20% to start of with, so just wanted to invest as I save, and then evaluate whether to move into property or not.

Financial Planner consultation is on the cards.

That's what we have done. and we wanted our own place etc. we don't have the 20% for an interest only loan, nor did we have enough to remove the Lenders Mortgage Insurence (Theives). we are thinking about moving out to a rental now to a. be closer to work as i drive 250km a day. And b. to reduce my income.

Are you buying an existing or building???

[rgvlee]

I'd like to know how a bank makes less money off an interest only loan, vs principal an interest.

Also, your own home is probably the biggest legal tax break you can have. There are no capital gains when you sell.

[Roger Explosion]

How much do you want to worry about your money?
A mortgage, as long as you're not overstretching your self, is a very low stress way of managing your dough. I know its only a small factor, but it can play a large part in your general quality of life.

[Hewie]

Let chat

[Daleski]

I'd like to know how a bank makes less money off an interest only loan, vs principal an interest.

Also, your own home is probably the biggest legal tax break you can have. There are no capital gains when you sell.

Thats when/if you sell and take the profits. you can invest that straight into another investment and not pay captial gains.

google the question "interest only vs interest & principal".

Just some advice and numbers I have been given by my adviser.

[shmoo]

Other points;

* entry/exit and transaction costs are minimal with shares vs huge with property.
* liquidity with shares is MUCH better than property. For eg at the moment you wouldn't want to be trying to sell a house.
* there is absolutely no question that you can make more money out of shares than you will out of long term average growth rates in residential property - the difference is that you can trade shares whereas you're not going to be in a position to do so with property. So your level of involvement in the investment is totally different.
* you'll pay CGT on share gains.
* you generally need to be more actively involved in your share portfolio. Buy a house and for all intents and purposes you can forget about its value for years and years.
* less quantifiable is the fact that Australians just *like* property. In fact for many, the mere suggestion of renting repulses them. You can't argue either for or against people who think like that because they've already made up their mind.

My personal belief is that renting and having an active share portfolio will win out over buying a house. Residential yields in Australia (especially here in Perth) are essentially non-existent, they are that low. So you're relying on capital growth as the only way you'll make money. I've taken the route of having a share portfolio and then an investment property. All your eggs in one basket is rarely going to be a good idea.

[Stoneville]

Wait for a wee bit, housing prices are set to CRash .........

[Scoundrel]

Wait for a wee bit, housing prices are set to CRash .........

I think the crash has happened/happening and won't fall much further unless you're buying in the western suburbs or the Mandurah Canals.

[Roger Explosion]

^^^
Yeah, as long as you buy somewhere within a stones throw of the CBD, you'll be pretty well insulated.
Avoid any suburb with the words Estate, Waters, Gardens or Harbour in the title

[Waikikablukar]

I would be very cautious about investing any $$ into either shares or property over the next 12 months. I would be putting your $2000/month into a high interest account until some of the current conditions have settled a bit. Do this for a year and you will have $26794 with a 6% interest rate providing you have $2000 to start with and add $2000/month.

Also if you did this over a 25 year period as you are looking at above you will have $1,394,917.84. 6% savings accounts are readily available too and lower risk than shares. If you are only planning on making 5% then i would steer towards this than shares.

If you went with the 1st paragraph it gives you a nice little sum to go into shares if thats what you decide to do. Definitely keep an eye on the market though as it still think it will crash again from where it is now.

After the last crash a mate of mine bought 1000 Rio shares @ $33ea and sold them just over a year later at $91. If you keep shares for over a year you get a 50% discount in the CGT also. Dont know if things will get as low as they did in 2008 but i do believe that with the current conditions with the EU economies and also the US that the share market will suffer a drop followed by another correction.

[Hewie]

Volatility in the markets isnt a bad thing, it provides for opportunity.

It comes down to being disciplined about your investing and not becoming too emotionally attached to your money/investments.

[Homie]

some really good points & are all valid?? & it depends how aggressive you want to be with you investing??

always happy to run numbers for anyone as well