Many people feel frustrated with renting and would like own their own home, but when is it the right time for you to buy a home? When does owning your own home outweigh the benefits or costs of renting? How will you save up the initial deposit for your own home?

The initial deposit is so important because it has a large effect on how much interest you will end up paying on your mortgage. Let's look at an example: You spot a cute two bedroom unit for sale for $200,000. You've saved up a $10,000 deposit to put towards a home. If you buy the property you will have to take out a $190,000 mortgage.

Let's say the current interest rate is 8% and your repayments are weekly. The interest on a $190,000 loan at 8% works out to be roughly $281 per week.

If you are paying rent on a similar 2 bedroom unit in a similar location and the rent is say $250 p/wk, then it probably doesn't make sense to go ahead with buying it because you'll be paying about $31 more in interest than you would be in rent. Interest and rent are both often viewed as "money down the drain" because its money you'll never see again.

The main difference is that paying interest on a loan allows you to own a property, and if the location is popular and the property value is expected to double after 5 years, then its likely that going ahead with the purchase will be a sensible decision. If property prices are stagnating, then it might not be a good idea to buy it.

Now say you've worked hard and saved up $50,000 for your deposit. Your mortgage on the $200,000 house will be $150,000 and your weekly interest on the loan is around $222 p/wk. You'll save $59 p/wk on interest (compared to having a $10,000 deposit) which is around $3,068 in savings per year (assuming an interest only loan for the purposes this example). Comparing the $222 p/wk interest with the $250 p/wk renting option, it now makes more sense to buy the home.

Now consider another scenario: You've found a 2 bedroom unit in the same suburb as the one you originally liked, but this unit is $170,000 because it has a smaller lounge, no front deck and it could use a few coats of paint. Your $50,000 deposit means your mortage is $120,000. Your interest p/wk is now only $178. With the money you save you can purchase paint and do it up yourself.

In the examples above, only interest has been taken into account and no principal. Paying interest only means your loan balance will be the same value after 5 years as it is today, whereas paying principal and interest means you are paying some of the loan off with each repayment period. If you pay a fixed principal amount of $250 p/wk onto top of the interest, it will take you around 17 years to repay your $120,000. This means you'll be paying around $428 p/wk in principal and interest for the first year or two until the interest decreases as the loan is paid off. If you are 23 now you'll be paying your last instalment when you are 40 years old.

Don't forget that there are plenty of extra costs involved with taking out a mortgage such as $10 per month bank fees, a loan application fee, initial legal fees and valuation fees. And remember you'll be paying council rates and building insurance now. Some banks will offer you a deal such as no monthly fees and a contribution towards your legal fees. Shop around to get the get the best mortgage deal because it will make a big overall difference to how quickly you pay off the loan.

The moral of the story is: 1. choose a house that is well within your budget, 2. save up as much as you can for a deposit, 3. work out your budget and expenses, and include the cost of maintenance, insurance and rates. Don't trade in your landlord just to become enslaved to a fat cat banker instead. See "Ways to save money" to help you reach your deposit goal faster.

Ways to save money.

1. Grow a bucket vege garden. You don't have to dig a garden into your rental's backyard to grow veges. Buckets are around 99 cents each (or 50c on special) and are the perfect size to create a container vege garden. And they are easily transportable if you have to move from your current rental property, especially since they come with a handle. Simply drill four small drainage holes into the bottom of your plastic bucket and fill it with organic compost (a bag costs around $6). Use one bucket per large plant (tomato plant, courgette, cucumber, watermelon etc) or four smaller plants per bucket (beans, spinach, buttercrunch lettuce). Tips: If you live in a warm climate, buy some water crystals to keep the soil moist. A small amount of general purpose fertiliser will increase yeild.

2. Don't eat out. Even a McD's combo costs around $12+ these days. Compare that to a bowl of homemade vege curry in the slow cooker (around $3 per serve). Try this recipe: 1 can coconut cream, 1 can diced tomatoes, 1 can lentils, 1 can chickpeas, an onion, some garlic, veges (courgette, cabbage, potatoes, carrots) a cube of stock to add flavour, 1 Tsp cumin, 1 Tsp tumeric, 1 tsp ginger,and some sweet chilli sauce (1-2 Tsp). Cook on low for about 8 hours (or 4hrs on high). To save time, add frozen vege since its already chopped. To save money use your own home grown veges.

3. Alcohol is so expensive at bars. Make your friends a delicious jug of sangria at your place and then head out. Just add 3 cups of cheap cask red wine, 2Tsp sugar, 2 cups of ginger ale or soda, a sliced orange and some ice. To make it stronger add a shot of rum. To make it tropical, add a can of pineapple pieces (including the juice).

4. Cleaning products can be expensive. White vinegar is cheap and is perfect as a rinse aid and window cleaner. Carpet shampoo for carpet machines is expensive but can be made using 2.5 cups of white vinegar with 5tsp dish liquid, added to a bucket full of warm water. The same mixture can be used to mop lino floors.

5. Increase your income. There are limitless ideas for earning a bit of extra money. You can make greeting cards, paintings and other crafts to sell at the local market. Some people sell seedlings at the market (ie. buy a packet of "money maker" tomatoes and sell the plants once they are about 12cm tall). Some clever people write fiction books and articles from home to sell to magazines. Others deliver newspapers for extra cash. Find a really cool product on Amazon that isn't sold here and import a few to sell on Trademe or at the markets. Even a garage sale can earn you an extra $50.

©Copyright 2012      Tenancy Support Services Ltd