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Home buyer’s emotional decision can bring freedom or pain when speculating on capital gain only. Why is it important to look for options reducing the costs of ownership before signing the S&P agreement?

 

 

Homeowner’s Choice

Paying 1.4 Million Dollars out of Pocket

 

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Klauster Properties Ltd.  -   Homeowner's Blog

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Homeowner’s joy and misery

If you follow the crowd by purchasing a home as soon as you get a mortgage approval you would pay in coming 30 years for this example:

 

· 966,6 thousand Dollars to the bank, on interest only 582,600 Dollars

· 1,062 million Dollars as total cost of the house

· Total payment equals 1.4 million Dollars when paid off in 30 years ownership

 

 

Now you would expect that the value of your property also has doubled or even tripled, right? Yes, but where is the profit? Here is no “free meal” as you have heavily paid for finance and depreciating house (maintenance, repairs). 

 

If you sell in this example after 30 years for less than 1.4 million Dollars, you would make a loss. And if the government introduces the long discussed capital gain tax, the  taxman would claim a share of your wealth creation program, too.

 

True, each case is different because of circumstances. For instance I paid for my first mortgage 9.7%, and that is my point— look at your numbers and don’t speculate on capital gain!

 

Take Away

This example illustrates how the average family would “invest in a family home”, saying the freedom of home ownership comes with a price. For most of us owning a family home is worth spent money. Also to consider, if you would have spent that sort of money into your own business than you wouldn’t be just home wealthy—you would possibly be rich. Good luck

 

 

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The passion of making experiences available comes from renting in different countries and working with people who are interested in home ownership. Helping people to avoid pitfalls has been most rewarding, when forming relationships.

 

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Entering a loan agreement with a bank or lender can be fraught with unexpected side effects. Money can dilute familial relationships and financial hardships cause sleepless nights with related health problems. Well, that are reasons to think more clearly about financial decisions.  Especially owning a home or purchasing a house are good reasons to clarify your financial position.  That includes looking at “numbers” which are the mental foundation in coming years when paying off a mortgage, increasing or reducing debts. Have clarity about your driving force and expected time frames.

 

 

Home ownership - freedom or pain?

 

For families buying a home is more or less an emotional decision to escape the limitations of a rental home, right? But anyone who has ever pursued a dream understands that doing so requires to take significant risks, since there is no guarantee that dreams come true. Personal, political and economical circumstances change all the time.

 

Pursuing a dream and obtaining finance is for many people overwhelming, being occupied with joy and not double checking the figures especially the amount of interest to be paid during the duration of the loan. That can be done easily using an online mortgage calculator.

 

People who are working in a job have limitations because they exchange time and effort for money. And that has physical limits like working hours and hourly payment rates.  Therefore the income is restricted. Why is this clarity important? In contrast interest rates and home related costs can go up steeply causing a cash deficits to income. The government deficits between spending and revenue (taxation) will be paid by the consumer as prices are adjusted by inflation. But what are your options?

 

 

 

Change of Lifestyle

 

Have you ever tried to understand why NZ has a very dated and health adverse housing stock? I talk about owner-occupied homes, not like media commentators always pointing in direction rental homes. From regular table discussions you might know that people still live in homes built for ages, cold and damp for decades.

 

Since my family has gone through the process of renovating I understand that owning a home has limits for many homeowners. The income is just enough to pay the bank.

 

Another common phenomenon is buying and selling in short succession for two reasons; driven by capital gain or financial hardship. These both reasons do contribute to a conflict with modern lifestyles. Homes were cosy with a fire going in the past. Nowadays everybody has a day job and when coming home at night these homes are freezing cold.

 

NZ has more land per resident than most countries in the world, but why then are land and house over-priced compared with other developed countries? For political reasons people  debate that NZ’s residential properties are tax advantaged because of the principal residence exemption from capital gains tax.

 

Huge tax burden on housing combined with obstacles for investors have created a shortage of new built housing over decades and the deterioration of the existing housing stock. You need to see the negative influence on housing affordability. Even if you don’t agree you have to face an overpriced housing market and stiff competition of willing home buyers. What to consider when doing the numbers?

 

 

Costs of finance vs. Capital Gain

 

Take independent advice if you are not money savvy. Often people speculate on capital gain only. True, in history more people enjoyed increased property values than LOTTO wins. Also true, most people see the capital gain based on the purchase price not looking at the real costs of finance and ownership.

 

Getting a feeling for numbers, here is an example by using the WESTPAC mortgage calculator.

 

In this example below you would expect to pay for a 480 thousand Dollars house over 30 years approximately 1.4 million Dollars out of your pocket. How is that possible?

First-time home buyer

‘s Emotions

 

 

Total over 30 years

Purchase Price  (PP)

480,000

 

Deposit to the bank (20% of PP)

96,000

96,000

30-Year-mortgage, 7.5%, monthly payment

2,685

966,600

Total finance on purchase price

 

1,062,600

Rates, insurance, repairs

6,300 p.a.

189,000

Long Term Maintenance (major work on roofing, cladding, piping, kitchen/bath upgrades, etc)

5,000 p.a.

150,000

Total payment over 30 years

 

1,401,600

Housing costs  (total pay minus Purchase Price)

 

921,600