Capitalising current assets

Question

Kia Ora,

Our circumstance is,

We are aiming to save 5% deposit to purchase a house within Manukau City valued up to $300,000 and we want to reach $15,000-$17,000 before December 2005. We currently have $3,800 saved in an ASB Fast Saver account @ 6.45% (approximately). Our combined income is $87,000 and we are currently saving $400 each week. I have a student loan which is a percentage I repay from my weekly income.

My question is,

Are there investments available to capitalise on $3,800 to reach our goal of $15,000-$17,000 before December 2005?

Thanks and I hope this makes any sense to you. I appreciate your time and I hope we can discuss future options in
relation to this query.

Regards,

Winnie.

Answer

Saving toward $17,000 at $400.00 per week, plus your $3,800 already saved will not give you your target by the beginning of December. The total will be $10,600 (plus a little interest). For you to achieve your goal you will require $800.00 per week (total $17,400). The interest earned at moment (6.45%pa) is a little on the low side for say a 12 month term but for the short period to December little will be gained, without risk, by making a change.

If you can save $800.00 per week between you (which I see as difficult as it is more than half your net income combined of $68,550), you can then step forward on your plan of buying a property and I have no problem with the objective of a house purchase however I think there are a couple of points to consider.

By approaching a property purchase on very low deposit (5.00%) you are in the least attractive position of any borrower.

Generally speaking you will end up with a fee set that includes at least a significant insurance cost (low equity fee or reinsurance fee it is called) for the fact you have a low deposit. Also, you may not be able to access the best overall provider or package, depending upon the organisation providing the mortgage.

On the wider risk side to be considered is the fact that if you need to sell for any reason: health, job change, family etc (and it does happen) the sale fees involved will more than likely be a close approximate of the sum of your deposit (about $14,500).

Plus you leave yourself very little equity margin should the overall property market take a little softening. If this eventuated and the market slumped say 10% it is not impossible to see you out of pocket up to a further $15,000.

Many would argue that we are near the top of the cycle in residential property value terms and low deposit highly geared folk are often the first to hurt.

A mortgage of $295,000 will cost approximately $2,500 per month ($576.00 per week) at today’s rates.

My suggestion is that you are saving really well and should be able to do a little better if you really try, take another look at the time frame, and maybe hold off buying until you have near 20% deposit ($60,000).  A $240,000 mortgage will be around $1,800 per month.

You do not comment on the size of your student loan but you should really do some careful numbers to see just how long you will take to clear this, the Labour party has announced an intention to waive the interest which is a great help to those 461,000 folk with loans, but I do not expect the action will be instant and Labour need to be re-elected first of course.

Sorry, this might not be what you want to hear and the real estate folk will certainly not, but this is a much safer position from which to borrow. Save yourself some future worry and heartache.

Original Article published July 2005