Buying a home is a matter for the heart rather than the head

BUYING a home is both a financial and an emotional decision. So producing a spreadsheet to argue renting is better will not win the argument, writes the Barefoot Investor.

Rent or buy can be an emotional argument for a couple.

BUYING a home is both a financial and an emotional decision. So producing a spreadsheet to argue renting is better will not win the argument.

 

SACHIN WRITES: My partner and are currently having a massive argument: I am pro renting and she is against it. We do not have any debts, and have about $80,000 in cash and shares. We both want to buy a house — but for me it is not the right time. I have put together an Excel spreadsheet to show her how renting is better, but for some reason I am unable to win this argument with everyone saying that house prices will go up. Scott, I need your help to show her that renting is not bad!

BAREFOOT REPLIES: Sachin, Dude. Mate. Cobber. You’re going about this all wrong. With a spreadsheet? Really? Come on! I can just picture you sitting her down at your computer: “If we =Sum: B2-B11, clearly the figures show, darling, that we’re much better off renting this one-bedroom, half-a-bathroom apartment. I mean the spreadsheet doesn’t lie. It’s just maths, honey.” No, it’s not. Buying a home is both a financial and an emotional decision. Your position is this: you’re worried about losing money if you buy and house prices go down — or, that you could have waited till prices crashed and bought a nicer home for the money you spent. Your partner’s position is this: she just wants a home to call your own. So who wins the fight? Well, let’s go back to the spreadsheet. Truth is that no matter how much you fiddle with your formula, your spreadsheet will never be able to spit out when (or if) the housing market will crash. So, you’re effectively delaying your decision (and your life) for something over which you have absolutely no control. So now open a new spreadsheet. Use your analytical skills to work out whether you can comfortably afford a home. Do a forecast for the next 10 years, factoring in outliers like getting married, having kids, going down to one income, and interest rates hiking to 10 per cent. Then make the decision together, as a team.

MARKET TOO SMALL

BEN WRITES: Last week, you advised Dennis that he would be better off investing in the Australian Foundation Investment Company. However, he would have done even better with Vanguard’s ASX 200 index fund (VAS). I punched the numbers and the total return over 10 years for AFIC was 6.4 per cent versus VAS at 9.12 per cent. I know you like AFIC, but LICs can be tricky and you still can’t beat low-cost, broadbased, index-tracking ETFs.

BAREFOOT REPLIES: I’m a huge fan of international index funds — not only have I promoted them heavily in the past decade, I’m an investor in Vanguard’s funds myself. The problem with indexing here in Australia is that our market is too concentrated. Our index is basically four banks, a couple of retailers, a couple of miners, and a telco. Besides, your figures are incorrect: VAS has only been around since 2009, and in any case, AFIC has slightly outperformed the index over the past decade.

WHAT’S THE LESSON?

SAM ASKS: I had my tax done this week and found out that I have (finally) paid off my HECS debt! This is great news, but my accountant advised me that I cannot let my workplace know, so I can ensure a decent refund next year. This sounds like a great plan. But I am in my 30s and there is a reasonable voice in the back of my mind wondering if I should do something else with the money.

BAREFOOT REPLIES: You don’t have a HECS-HELP debt anymore. So why is your accountant advising you to keep deducting repayments? My guess is it’s one of two reasons: either your accountant thinks you’re a little dopey and that you can’t be trusted with your money, or your accountant is a little dopey and can’t be trusted with your money. Over to you!

TOO MUCH STRESS

BEV WRITES: Are you kidding? Last week you advised ‘Rachel’ a single mother to let the family home go and then rent? When I got divorced, I had a terrible solicitor who lost me my family home. I had two children and ended up renting. We had to move five times in 10 years due to changes with either the landlord or the real estate agent. Do you understand the stress that causes, including being at the mercy of an owner? I was never able to purchase a home again!

BAREFOOT REPLIES: I’m sorry you got a dud lawyer. However that doesn’t change the facts: Rachel was a single mum earning $65,000 a year, wanting to take on a $640,000 mortgage. I told her that she couldn’t afford it, and that doing so would put herself under severe financial stress. That was the right advice for her wellbeing, and therefore for her kids. Most mums want to keep the house in the event of a divorce, but in most cases they’re better off without it.

THANKS ON BANKS

RICK WRITES: Not so much a question, I just wanted to say thank you. I read your article about calling your bank and bluffing to get a cheaper home loan rate. I did exactly that. Although, things have changed now. They won’t offer you anything on the spot. Instead they’ll send you the forms, you’ll need to fill them out (with fake UBank details of course) send them back to your bank, and their retention team will make contact. Your idea has just saved me $20k over the life of my mortgage.

BAREFOOT REPLIES: Given this column is read (or at least seen!) by a couple of million Aussies each week, maybe the banks are wising up to my script. Maybe. Still, research from comparison site finder.com.au has found that four out of five people who hit their bank for a better rate, get it. Either way, you’ve proven that sometimes it pays to go postal!

 

barefootinvestor.com

The Barefoot Investor holds an Australian Financial Services Licence (302081). This is general advice only. It should not replace individual, independent, personal financial advice