by Paul McBeth
Does it make more sense to rent or to buy? Just what are the costs associated with taking out a mortgage and with buying and selling a property?
These were among the questions posed by a Good Returns reader from Australia, who emailed us recently asking for help. She's coming to New Zealand soon for two to three years and is trying to decide what's the best thing to do. As some of the issues she's facing will be common to other readers, we've reprinted both her query and a response from mortgage advisor Lindsay Hore of Forsyth Barr.
If you have any mortgage-related queries you want answered or anything to add to Lindsay's response, please get in touch.
Regards, Ann Cunninghame
Hello Ann,
I am moving to New Zealand within four weeks for a period of two to three years and am trying to work out whether I am better off financially to buy a small, not over-priced property in Paraparaumu or to rent for this time period.
In order for me to do my calculations, I need figures on costs associated with taking out a loan and buying a property valued at approximately $120,000.
I also need to know the costs associated with selling the property. I hope you can assist me with my enquiry or point me in the right direction.
Thank you
Jackie
Hello Jackie,
Ann from 'Good Returns' has forwarded your email to me with a few queries on the rent versus buy debate.
I will cover the likely costs associated with buying as well as selling first, and then talk a bit about the property market and interest rates.
Costs for Buying
The main one is likely to depend on how big your mortgage is compared to the purchase price. A deposit of 20 per cent or more is ideal in that it avoids additional lending costs for borrowing above 80 per cent. For example, if you purchase at $120,000 and borrowed $108,000 (being 90 per cent), then you could face an "insurance" cost from the lender of anything up to $972.00!
On top of this, you have the bank fee (the establishment or front end fee), which is not usually likely to be more than $400 (approx: there are fee-free deals going from time to time).
The deposit size will also dictate whether a lender insists that a registered valuation is done. This costs about $300. You will also need a lawyer to complete the legal side and this is likely to cost from $500 upwards depending on the law firm used.
These are the main costs: others such as builder's report or council checks are personal preference.
Costs for Selling
Again you will have legal costs for this, although usually not quite as high.
The main cost is the real estate agent's selling fee. This is usually around four per cent (yep, FOUR per cent!). Although some do negotiate, it's not often! However, there is potentially some good news on this in the future in that there is a bill before Parliament to open up the industry to allow new players in to the market to sell houses (such as lawyers, banks etc) and this is expected to shave back commissions.
Should you rent or buy?
Whether to rent or buy will depend a lot on (as you have alluded to) whether the costs associated with buying and selling are offset by capital gains made over the time you own the property. Also, how would the interest cost of a mortgage compare with the likely weekly rental of a comparable property?
The property market in New Zealand is flat at present due to rising interest rates, economic uncertainty (globally and locally) as well as the recent change of Government and the more 'social' policies coming from them. As far as interest rates are concerned, they are expected to rise for the next six to nine months and stay up for 12 to 18 months thereafter. Of course the media insist on painting a gloomy picture every time rates move and this is keeping people nervous.
One argument is that, while the market is flat, you may pick up a good buy price-wise. Therefore, if things recover in two-odd years' time, you may benefit from an upswing in the market when you sell and make some money.
Of course, along the way you would have incurred buying and selling fees, interest costs, council rates, insurance and maintenance costs: all not associated with renting.
Your likely costs assuming a $96,000 loan (80 per cent of your purchase price) would be:
Buying costs +$1,000 approx
Interest for two years $17,280 (assuming 9.0 per cent)
Rates & insurance +$3,600
Selling costs +$4,500 agent rate plus legal fees
TOTAL $26,380
These costs, on a weekly basis over two years, equate to $253.65 and this would easily rent a good property out Paraparaumu way. BUT of course the big gamble is if there are likely to be capital gains and, if so, how much. That's where the crystal ball comes in handy! (There is NO capital gains tax in New Zealand either).
Paraparaumu is in one of the fastest growing areas of New Zealand, but its big problem is that it has bad access by road to Wellington. It's an issue always in the news and, if the Government eventually decides to agree with everyone else in the region and build a new road, it will surely benefit. Unfortunately, it's a mystery when/if this will ever occur.
I hope this helps in some way, but please feel free to fire back any further questions or comments you may have.
Regards
Lindsay Hore, Mortgage Advisor, Forsyth Barr Mortgage Services
Paul is a staff writer for Good Returns based in Wellington.
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