Janine Starks considers the case of a single female with $400k in the bank looking to buy a house without taking out a mortgage in an overpriced property market

Janine Starks considers the case of a single female with $400k in the bank looking to buy a house without taking out a mortgage in an overpriced property market

By Janine Starks*

From my mailbag:

"I am a single woman in my 30s, with no children.  I’ve never purchased a house and have always rented."

"There are two reasons for this – I was worried about job security (due to being made redundant once) and I’m based in a big city, so house prices have become expensive. I have saved $400,000, but it isn’t enough to buy in the location I want and I’d prefer not to have a mortgage."

"Financially, renting and owning seem equivalent at the moment. I’m thinking of moving to a smaller city with more affordable houses but this reduces my earning potential. The interest on my savings doesn’t cover all my rent and I don’t want to rent indefinitely due to the unfortunate attitudes of many landlords."

"Financially, what factors should I be weighing up?"

"Singles disease"

You really must be congratulated on being a savings-machine. You’re an Agony Aunts delight. An amount of NZ$400,000 is quite an impressive stash for someone still relatively young and single. 

There will be plenty of potential suitors reading this column and wishing it wasn’t anonymous. And those in Wanganui and Invercargill, where house prices are the most affordable will be hoping you head their way. 

You ask about financial considerations, but reading between the lines of your letter, I have a feeling you’re already in the diseased state of “analysis paralysis”. You are going to think I’m bang out of order on this one, but it can be a bit of a ‘singles disease’. Financial decisions are much easier to make when you have emotional support. In pairs, there are two people egging each other on and it halves the weight of a decision. 

While I’m on this train of thought, we may as well add that you are pretty risk averse. Why? One redundancy is a pretty bland track record for someone in their 30’s, but it’s put you off home ownership for at least a decade.  Solutions such as an emergency fund or flat-mates were perfectly feasible for someone with your discipline.    

Email questions to starkadvice@gmail.com
subject line: Financial Agony Aunt.
Anonymity is guaranteed.   

My observations are not intended to get your hackles up. The paralysis is simply one of the side effects of being an intelligent, logical and risk-conscious single person; all fabulous traits.

I just want to raise the idea that your lack of house-action might rest with your emotions and difficulty with compromise, rather than your purse. It is easily masked by very rational and sensible excuses about housing valuations, job security and whether ‘renting’ or ‘buying’ is cleverer at various points in the economic cycle. Is the idea of moving to a smaller city a serious one, or another delay tactic?

Life is a series of choices

Owning your own home is difficult to analyse in a financial vacuum. It has more to do with happiness and security and can’t be viewed as an investment. I’ve always viewed my own home as a liability. Rent is a liability too. You have to choose one liability or the other in life. 

It’s more likely that emotional factors rather than financial limitations have got you to where you are today. The reason I’m spending some time drawing this out, is because you might need to allow yourself to make an emotional decision to break the deadlock. For someone like you who is logical, conservative and weighs up the financial pros and cons, that will be hard.    

Decision time

So here we are; $400,000 in the bank and at a point in the economic cycle where housing and rental affordability are about equal. It takes roughly 25% of a household's take-home wages to pay the mortgage on a cheap house and 23% to pay the rent. The mortgage figures allow for rates, insurance and maintenance and are based on a house in the lower quartile of the price range. (See interest.co.nz's Rent or Buy Report for more). In your case, if this was really about money, you could be renting a room in a shared flat at a fraction the cost of mortgage. But this is more about making a commitment to a city and being brave enough to go it alone. 

Here are a few questions and observations:

·       When you think about moving to a smaller city, does it tickle your excitement button?  Setting aside house prices, what’s pulling you there emotionally?

·       If you take a lower paying job in a smaller city, will the quality of work be the same?  While part-time is attractive, it’s often undervalued.  Can you live with that aspect in 5-10 years time?

·       If you leave for the provinces, what will you miss? 

·       Moving to a smaller city to avoid a mortgage is a ‘plus’, but it could be neutralised by the ceiling on your income. 

·       Think about friends, lifestyle and job satisfaction to decide where you want to live. Happiness is everything, so mould your finances to fit that decision.

·       Its not a case a whether you can own a home, it’s only about the location or size of the home. Is compromise really that awful?  If it is, is a mortgage really so awful?  If it is, how about a flat-mate paying off the debt? Something must give. 

·       Your financial discipline is outstanding – you will pay off a small mortgage quickly. It won’t be torturous in your case.

·       While mathematically it makes sense to put all savings into a house to keep a mortgage low, it’s hard to cope emotionally with a bank balance of $400,000 declining to zero. If you decide to buy, keep back a good sized chunk for emergencies and to maintain your freedom.

Compromise exists at all levels of wealth. Accept it, work with it, don’t fight it and enjoy your exciting future of becoming a home owner.      

Email questions to starkadvice@gmail.com, subject line: Financial Agony Aunt. Anonymity is guaranteed.   

*Janine Starks is Co-Managing Director of Liontamer Investments. Opinions in this column represent her personal views and are not made on behalf of Liontamer.  These opinions are general in nature and are not a recommendation, opinion or guidance to any individuals in relation to acquiring or disposing of a financial product.  Readers should not rely on these opinions and should always seek specific independent financial advice appropriate to their own individual circumstances.

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Agree Ivan. The biggest potential bad investment decision would be to buy a house or invest the cash in a way that it could be subject to a relationship claim in the future. Maybe look at setting up a trust before you do anything else.

Wouldn't some form of pre-nup be better than a trust? Trust can be problems in themselves, as it has to be seen as something that wasn't setup as a way to protect assets, which means using a trustee, so everything is done correctly. Trustees can be very expensive.

Invest that 400k in a physical asset at 10%, use the cashflow to pay off a mortgage.  Done.

Congrats on saving the 400k. But, are you kidding; 400K is not enough for your house where you want to buy? Holy crap what/where does she want to buy? Even if she did buy a 600k house the mortgage wouldn't be so bad.

Congrats on saving the 400k. But, are you kidding; 400K is not enough for your house where you want to buy? Holy crap what/where does she want to buy? Even if she did buy a 600k house the mortgage wouldn't be so bad.

I'd suggest reading up on Peak Oil.
My partner and I were in a similar situation.  We bought the house because it allows us to invest in a future of increasingly expensive energy; we are insulating the house and improving it, energy-wise.  Would could not do this with the rental property we had.  Yes, houses are WAY overpriced, so we paid too much, but in our opinion the alternative was worse.  If you can keep your money (a good question in troubling times), then you could well pick up a bargain when the big crash hits.  Lots of 'if's in there though!
Also I'd suggest not buying too much house - since they're over-priced I'd suggest buying the least you can get by with comfortably (and be realistic).
Also you might want to consider how safe your money invested actually is.  Consider systemic failure of the banking sector...  Might be best to diversify a bit.

If you buy a house I'd suggest one with enough garden to be able to grow a decent veggie garden, and the possibility to plant fruit trees.

About an acre would be enought to survive on, well a family of five anyway.

Only if you don't eat meat.

Oh yes. But a fishing rod is that is too hard perhaps? Or in NZ we have the pest that is red deer. There are some other pests that can be eaten if you are desperate also:-P It just means you have to take your search away from the cities.

You just got to meat the right people.         :)

And if you don't get along with said family, cannibalism is an inexpensive option for meat!

Are you kidding me? This sounds like an "IN YOUR FACE" letter..."Waa waa waa waa! I've saved bunches of money and you haven't!"... if this young lady has the nouse to save 400K (and I say 'well done that woman!') then she sure doesn't need much financal advice from anyone...

Question - how much of the $400K did you inherit?

Simple, rent.

Having singles disease myself I sympathise with this woman. It is extremely difficult to commit to major decisions without a partners encouragement. Having someone backing your decisions, is so much more important than I had ever realised.

Need to meet the right man Belle

Perhaps interest.co could expand to include a dating service. Good money in that and there sounds like a few around here that could use it.
Or how about an anti dating service. notinterested.co.nz

Oh I want to marry her now..! scarfie..........just got to clear it with the wife first ...er...she's kinda funny about me doing stuff like that.
gotta say I was shocked in all the response nobody asked her to put up a profile pic....may have given a clue to the excellent savings record. 

Not really AJ, but I do need to make some serious decisions about a few things and stop fluffing around. Like do I get the new 4x4 ute, or stick with the oldie. Gawd will there be diesel to fill the thing anyway?

I'd stick to the old unless its done over 300k and hasn't been looked after. Ive a new Nivara its a big beast and hard enough on fuel etc, useless on the farm, the asb brakes kick in and it won't stop. My Holden has 400k on the clock still goes fine, its our main car, I buy good vehicles and keep them forever. New utes are hard on Diesel, I liked the older utes with tractor engines that went forever and what you see is what you got. I need another car in the States and that is interesting, the cars have such high milage and you live in a car as the distances are so great, made an offer on a mates Acura and looking at a landcruiser but no diesel, all petrol, had to get used to car doing 14 mpg.

Lots easier to convert to wood gas with a flat deck should the need arise, but you want a slow strokey motor not a reviing multi valve machine. Older Patrol's and Landcruiser's would work well. Diesel engines can make a better conversion but you still need to inject about 5% to get ignition. AJ you should be fine in the US with lots of suitable vehicles.

I have a strong aversion to debt as well. It is really difficult to earn a good return on your investments at the moment, I have some in one managed portfolio which is performing very poorly. I am also concious that many (including Bernard) would like to see some devaluation to occur which would help decrease others' outstanding debt but eat into our collective nest eggs. In that kind of environment it seems logical to invest in some hard inflation-proof assets, such as maybe a house or land. The low interest rates also encourage taking a loan (which ironically increases the already huge national debt) and do something useful with the money. I predict though that one day the world will not see us a safe place to invest and interest rates could rise sharply and suddenly. 

I think you'll find that even in Greece, mortgage rates are pretty normal.

"happiness and security", "investment", "housing and rental affordabillity are about the same", "brave". This is all RE propaganda talk. Affordabillity of a mortgage with suppressed interest rates is not what is the issue here. House prices are at near top bubble hight and the low rates are meant to keep prices there for as long as possible. So sinking your savings into a house at this moment is like buying a tulip bulb in early 1637. The whole idea of keeping interest rates low is FIRE needs greater fools. What you want is a market with high instead of low interest rates. So enjoy your (somewhat forced) freedom. For the moment, renting rooms as a flat/house mate is imho a good idea. Don't accept bad behaviour of landlords, move.

Low interest rates? Got to attract the last few suckers in to keep the Ponzi going.

The current environment is definitely one where liquidity of your investments should be considered.

MartinV - Peak oil - plenty of oil under the Arctic. No need for a woman in her 30's to worry about peak oil as it won't have any impact during her lifetime.

nzinvestor - we're a bit more sophisticated here re energy.
"Plenty of oil" is regarded as unsubstantiated nonsense, please cite reference(s).
"Oil exploration is expanding in the Arctic - where ice covers an estimated 160 billion barrels of oil, five years' supply at today's consumption rates",
Given that all sources of oil dwindle from initial flows, given that the EROEI of oil (all sources) has been dropping for decades, and given that all exporters are using more internally :
Today's consumption rates, unfortunately for you, don't provide for real underwritten 'growth', so for you to obtain 'dividends', requires a higher rate, meaning a shorter time. Actually, big-picture, it's too late to grow. It was a shaky call when we started hollering back in 2005 (peak is always only seen in the rear-view-mirror) but it's pretty obvious now.
It reinforces my lack of faith int he 'invisible hand', when ignorant comments are splashed around by parttakers therein.

"MartinV - Peak oil - plenty of oil under the Arctic. No need for a woman in her 30's to worry about peak oil as it won't have any impact during her lifetime."
In high school I learned that there are vast quantities of alcohol in certain areas out in space.  When the class heard this there was great excitement from the boys.  The problem with the alcohol is more obvious than with the oil - extraction will be so much effort that it's just not worth extracting.
I will not be able to afford to run my car/lifestyle on arctic oil.

The following from nzinvestor would be one of the most glaring examples of the short sightedness of the species..................
 No need for a woman in her 30's to worry about peak oil as it won't have any impact during her lifetime..........
Uh duh! it is our very own inability to consider a world beyond our own mortality............ ,not just in energy but all things will be the seed to our undoing as a species.
I want it all and I want it now.........what an infestation we have become. 

I would recommend reading financial history on tha nature of what we currently call 'money' and to gain insight into what governments do in terms of debasing your hard earned money.
That's a lot of cash to be holding.

If you think that the government is responsible for most of the inflation you don't know much about where money comes from,
The following two links are for humour only, not to be taken seriously,
but that is really the basis for the argument, that its all the governments doing.

To the original poster of the question--assuming it is a genuine question.
Obviously the ability to save $400K means the ability to continue to save exists at the same levels and divert it towards mortage exists. So realistically a loan should not be so daunting.
But if you do not want to have to be in a position to cover mortage at all then, it is possible to buying  a home and income. Or buying a house where one can have a flatmate or two without them getting underfoot is also possible.Still need a mortage but payment comes from other people.
Not trying to sell anything (don't need to) . Happy to provide a better sounding board than Ms Starks and the rest of the comentators here.  Send me an e-mail -- vin.projc@gmail.com .

PDK  even as a oil man I agree with you on not drilling in the Arctic  such a stupid idea
but the thing is there is plenty of oil in the world . oil is Abiotic the earth keeps producing it
but the man made global warming brigde loves saying were running out keeps the price up

Sorry, your hypothesis is neither backed by research, nor anything else for that matter.
Kindly explain how 'the earth keeps producing it', and whether that is at or better than 85mbpd. Then explain why all - repeat all - sources become exhausted. I have on my office wall, a wee reminder of that - a picture of "The Well-Head of F7, Masjid-i-Sulaiman".  It produced "7 million tons" between 1911 and 1926.
It has failed to re-fill.
You may want to re-think.

Yes, the earth does keep producing it, but nowhere near the rate we burn it everyday. Think how many millions of years it took to form the oil that we have managed to burn in decades.

An oil man? what sort? no real oil geologist Ive read suggests oil is abiotic...none...nada....
Nothing to do with AGW, try reading an oil man who is the CEO of Shell....demand from India and China and a constrained supply....as per M. K Hubbard.......and ASPO and etc etc.
Abiotic is pretty much considered rubbish, there is no scientific support for it. Some decades ago a fruity loop (in russia?) found oil very deep....the result of plate movement causing deep rock structures to ride over oil bearing rocks......a fairly unique occurance and never repeated.....
Even if abiotic was true, the Q has to be asked why then do known oil fields all peak and decline....IF the abiotic "production" was significant then they never should....or they should regenerate.....they dont....
Example, the USA peaked in 1970.....40 years ago, those dead fields are still dead.....If there was a significant regen via abiotic process we'd see evidence after 40 years......or even better, Spindletop.......100 years ago and they still have the original pump running....it produces 1 cup an hour.....

well if you think we will run out good on ya

You're correct , Baz , no need to drill in the Arctic . Why bother when the USA is sitting atop 2 trillion barrels of oil , in shale deposits . At $US 100 per barrel , it's economically feasible to tap into it .
....... that's 8 times the oil reserves of Saudi Arabia .
America is one of the richest countries in the world , in energy resources !
Peak oil ? ........... Pah !

Two silly remarks in a row. Not for lack of trying to educate, either.
Baz - it's not 'running out' is the problem, it's 'peaking'. Typically happens half=way through, but exascerbated by cherry-picking the first half, and internal consumption ramping throughout (Saudi A, for instance, will inetrnally consume all it produces, by 2030).
GBH- no homework done, then, in spite of me putting up the sources? A somewhat religious approach, that which replaces investigation with faith/clutching at straws.
Your claimed figure will be 'estimated total in place', not URR? And at what EROEI, pray tell?
I reckon shale is currently 3:1, and it's being cherry-picked, although eficiencies will of course offset declining quality. BAU (and are we in good shape currently?) requires somewhere between 8:1 and10:1. Why money fixated folk don't understand this, beats me.

Tch tch tch , Murray , Gummy is no incompetent chef ....... when it comes to the good oil , I got my sauces ......
....... Alan Kohler " The death of peak oil " , Business Spectator , 7:17 a.m. Febrewary 29'th .
........ 7:17 a.m. old chum , mark that in your colander ....... the exact date that peak oil died .
R.I.P . Peak oil .......... anyone got a bugle ?

Who's the fool who quoted "x hundred years of coal supply' again? Same one clings to this claim. Interesting, that, methinks.
The shale and tar sources have been known, and quantified, for nearly 100 years. Not recent rabbits out of hats, they aren't. We took them into account, as did the Club of Rome. They ran World3 with 'Double Resources', and it gave about 20 years grace. No more. You can't have the growth - the real growth - that is needed to underwrte your magic wealth-increases, without real growth in high EROEI energy.
But it begs an interesting question: why are they drilling deep-ocean, Arctic, bio-fuelling, coal-to-oiling then? Oh, that's right. They've a superabundance right there at home.

I personally don't believe in charities. Our taxes should pay for the services that chairities provide, if they are actually needed. Thus I believe in paying fair and reasonable taxes, and not avoiding or minimising them.

Rent or Buy.  The better security is in buying. 
If the bad thing happens.  Lose job or get sick or whatever.  You are really going to be screwed if renting.  What's the security there.  And you find that when things actually are going well some landlord will turn up and want his place back for some reason.
Obviously the better thing is to have some assets, renting or buying.  Either equity or cash in Bank.  But ownership means having a lot more control when you need it.  Buying gives you control and choices.
$400,000.00 now means little or no mortgage if you buy.