Rupert Gough from The Mortgage Lab breaks down the cost difference between renting vs. owning your own home in today’s market
For first home buyers, getting a mortgage can often seem daunting because of the huge number attached to the lending. After being told all their life that a $5,000 Credit Card was bad, first home buyers are faced with a $500,000 mortgage to pay.
Rather than focusing on the total amount of the mortgage, it’s often helpful to think about what the repayments might be. In today’s environment, a first-home purchase of $650,000 can often have a mortgage of $590,000 at around 3.6% (buyers who have 10% deposit pay a bit of a premium over those who have 20% deposit). This means weekly payments of $619 which could be close to what the person is paying in rent. Suddenly owning a home is not as scary!
There are a couple of extra things to note here. Owning a home comes with extra costs – rates, insurance and repairs and maintenance. The first two are regular payments and controllable, the third – repairs and maintenance – is something that can really blind side people and a strong argument for why first home buyers should consider buying a new-build home that won’t need any significant maintenance for 5-10 years (not to mention saving on electricity builds from well-insulated housing!).
But even if the total of all the housing costs came to $700 per week for a $650,000 purchase and, let’s say, this was $100 more than their current rent, that’s not a lot extra to have the ability to decorate your property as you like and, eventually, get capital growth.
How Banks Calculate How Much You Can Borrow
One important thing to know is that while a first home buyer with 10% will be paying a low interest rate, banks calculate how much buyers can afford at a higher interest rate – often 6-7%. When using a mortgage calculator online, use the following interest rates to calculate:
- 2.6% if you have 20% deposit or more to estimate what you could actually pay on a mortgage
- 3.6% if you have less than a 20% deposit to estimate what you could actually pay on a mortgage
- 7% to see what the banks will be making sure you can afford in order to lend to you, even though it’s unlikely interest rates will rise that high for years to come
A quick trick is to add up your current rent plus your savings and see how much mortgage that would get you at 7% per annum. If you wanted to borrow, for example, $590,000, the bank would need to see that your total rent plus regular savings was approximately $905 per week. If it is, you’re a step closer to getting into your first home!
If you’d like more information on the affordability of our new-build homes – get in touch with our team today!
Rupert Gough is the CEO and owner of The Mortgage Lab and is also the author of The Successful First Home Buyer, a step-by-step guide to presenting yourself as the perfect mortgage applicant.