Buying a house to live in is an emotional decision, not a financial one.
Newspapers and televisions scream that “Rent is dead money” – so what is the hundreds of thousands of dollars in interest the average buyer will pay to the financial institution from whom they borrow the money to buy this property, if it too is not “dead money”?
To quantify that: at 6%, a $400,000 Principal and Interest loan over 25 years will cost $373,162 ($287 per week) in interest – at 7%, the interest is $448,135 ($345 per week)! If the loan is started on an interest only basis, the interest on $400,000 at 6% per annum is $461.53 per week and at 7% it is $538.46 per week(1).
To put this in perspective, the current median rental for a 2-bedroom unit in Red Hill, considered an inner-city suburb of Brisbane, is $365 per week. If you need something larger, a 3-bedroom unit in the same suburb is $480 per week(2).
Ah, I hear you say, but you’re paying-off someone else’s mortgage not building an asset for yourself. And I absolutely agree with you – if you spend the money you would have used for the deposit and fees rather than investing it along with the difference between your mortgage and rental payments.
The compound annual growth rate in median price for 2-bedroom units in Red Hill has been 1.2%, comparing the median price of property sales in the preceding 12 months to the median price of properties sold in the same 12-month period 5 years ago. This is based on 29 property sales over both periods. This data was current to 3 April 20172.
The net performance after fees from the IML Australian Share fund over the 5 years to end-February 2017 has been 12.96%(3).
Which would you rather have used to build an asset?
3 http://iml.com.au/performance/fund-performance – 7th April 2017