Wanna Live Almost Rent-Free?
Rent sucks. Literally and colloquially. It sucks out your ability to build wealth. It sucks to pay it, every month, on the dot, ad infinitum.
You move on at the end of your rental agreement with nothing to show. Except for the fiscal scars of regular outflows from your bank account.
I paid close to 20% of my monthly after-tax income in rent. And no, it wasn’t a swanky penthouse. It was an attic room in a house-share with three others. Not quite the Ritz. But it did the job: I could sleep and eat and call it “home”. I did this for close to five years before finally saving up enough to buy my place.
Mortgages are daunting at first glance. Here’s a basic primer. The banks (Ireland) lend you a maximum of 3.5 times your annual salary. You supplement that with a 10% deposit. Your total house budget is the sum of the two. You then sign a contract with the bank to pay off this mortgage in up to 35 years with an agreed-on interest rate.
Here’s my actual story.
I found a 3–bed apartment I like about 30 miles from Dublin City Centre for €170,000. The bank lent me €153,000 at a fixed rate of interest of 3%. I had saved up €17,000 (10% of the house price). Another €1,700 for “stamp duty” (typically 1%). And a final €1,500 for the legal fees. My mortgage payment for a 35-year term was €590. The management fees on the property — covering parking and maintenance — were €900. I also “overpaid” my mortgage by €60 every month — more on why I did this later.
An identical 3-bed apartment in the same complex was available to rent for €1250 per month.
Here’s an example of my ownership costs for the last three years versus if I had rented.
(36*590)+17,000+1,700+1,500 + (3*900) + (36*50)= €45,940
(36*1,250) = €45,000
So why bother owning when it seems to cost more than renting?
Answer: Home Equity.
When I started paying off the mortgage, I only owned 10% of the house. Three years of paying the mortgage, I own a little more (~15%). With a once-in-a-lifetime pandemic, house prices have stagnated. One of my neighbours sold his 3-bed apartment for €168,000. Assuming I get the same price, here’s what the maths looks like.
Sale price: €168,000
Outstanding Mortgage at the time of sale: €145,000
Less Legal Fees: €1,500
So, I bought a house, lived in it for 3 years, then sold it for slightly less than what I bought it for. What was the net ownership cost?
€45,940 -€21,500 = €24,440
That works out at almost €680 per month. The rent would’ve cost me €1250. That’s a whopping 45% monthly saving. Plus, I am left with a lump sum of €21,500 which I can use as the deposit to buy my next house. And so on.
Remember — house prices mostly appreciate. The operative word mostly.
Sidebar: Here’s a quick primer on how mortgages are structured. You see, banks like to collect their interest first. The €590 monthly payment I make does not go straight against my borrowed sum of €153,000 (the capital). Only about 35% of it does. The other, bigger 65% goes against the interest owed. The €60 overpayment on the otherhand, goes straight against the capital. Overpayments bring down the total capital owed and also the interest. Overpaying lets you build more home equity, reduces the term of the loan and reduces the interest owed. A three-pronged attack on debt! An affordable €60 monthly overpayment over the course of the 35-year term would have saved me ~€16,000 and 5 years.
This handy website is ideal for running the sums — use it!
So, if you are a renter who feels they’re being ripped off, here’s a simple rule of thumb to help you decide if you are ready to buy:
If you have savings that are greater than 10% of 3.5*annual income — buy!
If you don’t, get saving now.
Renting eats at your wealth. Buying builds your wealth. And yes, even during a once-in-a-lifetime pandemic with stagnant house prices.