It’s serious decision, but what do the numbers tell us? Let’s look at a hypothetical couple over a 10-year period. They can both move cities and continue in their current roles with no effect on their income. They earn enough to get a $1.1m mortgage (approximately enough to purchase a near-average $1.375m house in Auckland with a 20% deposit).
A $1.1m mortgage has weekly payments of around $1,070 over 30 years and, for this example, let’s assume they’re making the minimum payments.
After 10 years (with a few assumptions built-in on future interest rates), the couple is likely to have paid off around $237,000 of their mortgage meaning their remaining mortgage would be approximately $863,000 with 20 years remaining.
It’s anyone’s guess what a house in NZ will be worth in 10 years’ time. In fact, it’s anyone’s guess what they’ll be worth next month! For this example, I used 5% compounding growth per year. After the gains in recent years, we’re likely to see a period of stagnation (or no growth) so an average of 5% doesn’t seem too far from a reasonable expectation.
Based on that, after 10 years, our Auckland-based couple would have a house worth $2.24m - having gained $865,000 in value, with a mortgage of $863k still outstanding.
The couple has a $275,000 deposit so their mortgage would be $445,000 (instead of $1.1m in Auckland). Because they are still earning the same, they are able to still make payments of $1,070 per week on their mortgage which means that after 10 years they will be debt-free (they actually pay off their mortgage in nine years and five months). But what about the value of their home after 10 years?
Using our 5% average growth rate, their $720,000 house is now worth $1.17m, an increase of $450,000 as opposed to Auckland’s couple with an increase of $865k.
It’s here where things get murky as to who is better off. Our Christchurch couple is now mortgage-free and can choose what they do with their regular mortgage payments - savings, additional holidays, etc. Our Auckland couple has, however, made over $400,000 more in capital growth but face another 20 years of mortgage. This is simple maths - an asset worth $1.4m growing at 5% will have better capital growth than an asset worth $720,000 also growing at 5%.
One consideration may be for the Christchurch couple to purchase their own home for $720,000 and a rental property at roughly the same value. They will then have combined assets of $1.4m (just like the Auckland couple) but they would have the additional benefit of rental income to pay down their mortgage faster (in approximately 16 years rather than 30 years). In this instance, from a financial point of view, the Christchurch couple with an additional investment property looks to be far better off than any couple with just one owner-occupied home.
Disclaimer: This article is meant as general advice and is based on broad assumptions of future capital growth and interest rates. No action should be taken based on the information in this article alone. Always seek advice before making any major financial decisions.
- Rupert Gough is the founder and CEO of Mortgage Lab and author of The Successful First Home Buyer.
