A critical financial life stage & how to have a small mortgage
We are hearing more and more discussion about mortgages, and how young people cannot afford to buy their first home. But to every problem there is a solution…
There is a critical financial lifestage for most young people from age 22 to 32, where they are unencumbered by children, and they can pretty much go anywhere and do anything.
OE or not, the "thinkers" in this age group know that somehow they should be saving for a first home as well.
Age 22 to 32 is 10 years – 2 to 4 years to have some fun, and some 6 to 10 years where they can go anywhere and seek well paid work.
There are many well-paid jobs offshore – a pretty much endless list, but it requires is young people with an adventurous spirit and a bit of drive. Ask around, you will be amazed what young Kiwis are doing all over the world.
Some include free accommodation and some are tax free. Saving in stronger currencies than the NZ$ helps too.
The Staggering Difference
A couple age 32 buy a $500,000 house.
Couple no 1 (CP1) have stayed in NZ, and have saved $100,000 deposit. They take out a $400,000 mortgage at 7% for 25 years. Repayments are $2,827 pm and the interest bill alone will be $448,000.
Couple no 2 (CP2) have worked offshore and have been able to save $200,000 so they borrow $300,000 for 15 years at 7%. Repayments are $2,700 pm and the interest will be $185,000.
After 15 years CP2 have cleared their mortgage and keep saving the same amount of $2,700 pm earning 5% net. After 25 years they will have a debt free house and investments of $427,000.
CP1 after 25 years have only just cleared their mortgage.
You may have to live in a place that is not ideal, but there are other compensations. You will make many contacts in your travels that could lead to a better career, plus invaluable job experience.
Staying at home
If you are progressing well in your career in NZ, then perhaps you should stay home. However you must look hard at avoiding rent. Does a parent have a garage that can be made into comfortable accommodation and be rent free?
Or you could take on the bigger mortgage and convert a house into two units, or buy two units, live in one and rent out the other for $20,000 pa.
Or take in flat mates, a privacy cost, but again someone else to pay $15,000 to $20,000 pa. off your mortgage. Think first though, living with others is not ideal.
Whatever you do, there is a way not to be "financially strangled" for 25 years – seek it out, and you will gain so much.
This article was supplied by Alan Clarke who is the author of a book entitled "Retire Richer" which is a practical guide for everyone age 25 to 85. Alan also writes a regular blog on www.investandretire.co.nz
Alan is an independent authorised financial adviser (AFA) and his disclosure statement is available on request and free of charge.