In our last blog we outlined what Rentvesting is and a few reasons why it’s been quite popular from a lifestyle and housing affordability perspective.
Now, let’s look at an example:
Karen was separated 1 year ago, with 1 child, Ella, who is 8. The family home was located in Bardon, in Brisbane’s inner north-west. The property was sold upon she and her husband agreeing to separate. Once the current loan and all other joint debts were paid out, she and her husband each walked away with $60,000.
Karen elected to rent in the same area to remain near her daughter’s current school and friends, and close to her support network of family and friends. She works fulltime in the inner southern suburbs and knows the transport network to get her and her daughter to their respective work and school. Karen’s priority in the short term was to make the change in circumstance as least disruptive as possible for her daughter.
The property Karen found to rent (3 bed 1 bath 1 car) home in Bardon was $460 per week. She preferred a house over a unit or townhouse to accommodate her daughter’s trampoline and swing set and give her space to have friends over to play. While she could have elected for a smaller home of 2 bedrooms, she ideally wanted a small home office to enable her some flexibility to work from home if needed, and to create a study and homework zone for Ella. The property has a modern renovated kitchen, a bathroom that could be more up to date, but is clean and practical, and is secure.
As her first year Lease was coming up for renewal, Karen looked at the possibility of purchasing a home. While she didn’t mind renting, she felt that owning property was a source of security. She had maintained her $60,000 from her sale and had not ‘eaten into it’ in the course of the year, but neither had she made a lot of interest on it.
To purchase a home of the same calibre in that area, would attract a price tag of approximately $600,000. On speaking with her Broker, it was determined that a maximum loan of 95% including mortgage insurance, would be $545,000 (Mortgage insurance capitalised to the maximum of 95% would take the total loan to $565,500). With transfer duty and associated purchase costs including conveyancing (of approx. $17,000) Karen would be looking at a total outlay of approximately $72,000 – which is simply more than she has available.
While her salary of $120,000 gross per annum income meant that she could afford the loan, from the bank’s perspective, it would be very tight and at the maximum level of affordability, even if she did have the deposit required…
In Part 3, we will look at “What Karen Did Next” – Stay Tuned.