They are earning $100,000 gross between them.
No dependent children either, so no need for a three or four bedroom house.
In thinking it over, I looked at the long term - what would their finances look like when they get to retirement, at say age 65 to 68?
Their KiwiSavers at age 65 should total about $250,000 - by then $250,000 might buy what $150,000 buys today - not what retirement dreams are made of.
I recommended that they keep $30,000 to $50,000 for emergencies, because they will need to keep earning until age 65 to be able topay off a mortgage.
Sickness, redundancy, economic downturn or other adverse events could hit them hard. Who wants to lose their house for the sake of not having $40,000 or so tucked away for a rainy day?
Then put in as big a deposit as possible - $200,000.
If they borrow about $220,000 for a $420,000 house, the mortgage will cost $1800 a month over 20 years (at 8 per cent mortgage interest - best to assume on the high side) and they will pay $221,000 in mortgage interest alone.
But what if they borrow say $270,000 to buy a house with a sleepout, flat, or that can be divided into a home and rental?
* Then they will pay $1800 a month, and their tenant will pay $800 a month (assume rent of $200 a week - the low end).
* Between them, they could pay off a higher-value property in 15 years - five years sooner.
* And pay less interest of $194,000 (their "share" of interest would be $136,000).
* A debt-free higher-value property sooner.
They would also get tax relief - deductions on the rental mortgage interest.
Like KiwiSaver, wherever you can get someone else to pay a portion, you win.
Tenants living next door to the landlord behave better too.
Plus when debt-free and retired, they will have rental income still coming in - nice to have.
But what if we can't find a house with a sleepout, or that can be divided?
There aren't many, we can't, it won't work, we would rather have lifestyle, we want to live in a nice four-bedroom, two-bathroom home ... No such word as can't.
Look for a house with a sleepout and let it. One with space and build a sleep-out.
Note the Auckland unitary plan is going to allow more dwellings on most properties.
Look for a house where you can modify the garage into a flat (carports are inexpensive).
Look for one that can easily be divided into separate accommodation. Even better, find a house that has one of the above features, and has future sub-dividable potential too.
Buy bare land and build two new units.
How much better off will you be?
Debt-free after 15 years vs another five years' mortgage to go.
A property after 15 years worth say $650,000 vs a house worth say $525,000.
After 15 years, a tenant paying you $10,000 to $15,000 a year - money you don't have to work for.
Extra income in retirement of $10,000 to $15,000, with virtually no effort from you.
Debt-free five years earlier, then you can save more for retirement - say an extra $50,000 to $100,000 that you would have otherwise paid the bank in interest. I could go on ...
Alan Clarke is author of Retire Richer - A Practical Guide For Everyone Aged 25 to 85. He blogs on www.investandretire.co.nz and is an authorised financial adviser whose disclosure statement is available on request and free of charge.
