Your home: mortgage or rent?
What’s the best way to put a roof over your family’s head? Chances are you're reading this because you're about to, or have recently, become a one-income family. Perhaps you’re ready to head back into the workforce, or maybe you're looking to buy your first home, or upgrade your existing home. Whatever your situation, financial planning for your family’s future is becoming ever more important. One of the biggest expenses each month will be your home.
When talking to your bank about getting a mortgage, you should negotiate to ensure you get the best deal possible. Most banks will have room to move on fees and possibly interest rates. If you're not comfortable negotiating, then engage a mortgage broker to do it on your behalf. Remember to also review your mortgage each time your fixed rate rolls over. This way you can make sure it’s set up to best suit your current financial situation. Otherwise you’ll end up paying more interest than you need to over the life of your loan. Keeping on top of your loan can save thousands of dollars and take years off your mortgage.
To rent or buy?
Home ownership has long been a Kiwi dream, but there are some disadvantages to playing the property game. For some renting is a much better option. If you're currently deciding whether to enter the property game, check out www.interest.co.nz Each month it weighs up the pros and cons of renting versus buying, and determines whether it's a good time for first home buyers to start on the property ladder.
Of course, there are pros and cons on both sides of the ledger. Let's look at renting. While your rent should be fairly stable, you don't have a guarantee of fixed rents, so you're at the mercy of your landlord who may choose to increase your rent, or even evict you. On the other hand, if the property market slides, you don't lose your investment - the landlord does. Another advantage of renting is that you could (make that should) take the money you save by renting and invest it in other areas such as shares.
Now to the argument for home ownership. You can view mortgage payments as an enforced savings plan. Each payment, you pay off a little more debt and accrue a little more equity in your home (unless you have an interest-only loan). As you increase the equity, you can also opt to use that as leverage to buy other assets which will increase your wealth. As a home owner you also get to indulge your desire for DIY, and if you're good at it you could add to the value of your property.
Other ways to save
Whether you're new to home ownership or have been diligently paying off a loan for years, there are still ways you can cut down your costs:
- Fix and float together: There are many advantages to splitting your home loan and having some of it floating and some fixed. You have the certainty of fixed rates and knowing how much those repayments will be, while at the same time you can take advantage of paying off larger chunks of the floating portion when cashflow allows.
- However, if you have a young family and only one income you'll want to ensure you live within your means. So, for the few years until you return to a double-income family, you might be better off on a fixed-term loan where you know exactly what your mortgage repayments will be each month.
- Revolving credit: This is an option, but only if you are good at budgeting. If you're likely to go over your budget, it might be best to choose another option. Revolving credit is essentially a large overdraft. Every time you get paid, your entire earnings are put into the one account, from where bills are paid only when they're due. The theory is that you're paying less interest overall.
Be patient, be prudent and you'll help keep your family's fortunes as safe as houses.
Adapted from an article in OHbaby! Magazine by Rochelle Gillespie