Mary Holm: High price of a dream home

Q. I am 37, recently separated (three months), have no children and am employed full-time in a PA role on a salary of $63,000.

I am currently living with friends but paying all-inclusive rent of $200 a week. This is mainly due to paying off a credit card debt of $10,000. This is now $7500.

I do not have/need a car at present and will not purchase one until I am debt-free.

Basically what should I do now? Should I look to buy or rent (preferably on my own)? Renting seems to me to be a waste of money now. Alternatively, should I buy and rent the property out? Too risky?

I have no savings and would need to borrow, if possible, 100 per cent. Good or too risky? What would be a good deposit to aim for? What should I be looking to save and in what budget range should I be looking to buy?

I can only stay so long with friends so would appreciate any advice.

A. It's great that your friends took you in. It's also great that you are now thinking of moving on. Staying with friends has a use-by date.

So what should your next move be? I suggest you rent a place for a while, for several reasons:

* It's best not to take on any more debt until you've paid off the credit card.
Let's say the interest rate on the card is 19 per cent. Repaying that debt improves your wealth as much as a risk-free investment with a 19 per cent return. It's a superb "investment" in your financial wellbeing, and you should put all your spare money into it.

* Rent is not a waste of money. It is payment for your accommodation, in just the same way as you spend money on food and clothes.
True, people often refer to rent as dead money in comparison with paying off a mortgage, because home ownership usually makes them wealthier.
In the current market, though, that may not apply. If you borrow to buy a unit or a house and prices later fall - which is quite on the cards - you will be worse off than if you rented for a while.

* These days rents are really low relative to house prices. And as a single woman with no children - and therefore probably a desirable tenant at a time when tenants are short - you might even be able to talk a landlord into lowering the rent for you.

* I don't like the idea of your getting a 100 per cent mortgage. In this iffy market that is quite a risky strategy. Better to get rid of the credit card debt and then save, say, $20,000 or $30,000 for a deposit. At that point you could start looking for a unit or house.

In what price bracket? That depends on how much you are prepared to spend on mortgage repayments. A good guide will be how much you are able to put into repaying your credit card and then saving your house deposit.

An online mortgage calculator will show you how much you can borrow given the repayments you can afford.

I suggest you start out modestly. To be blunt, the fact that you have no savings at 37 suggests you haven't been all that careful with money in the past. My apologies if I'm leaping to an unfair conclusion.

In any case, you are doing really well now, knocking back that credit card debt and doing without a car - which can be a huge cash gobbler. Still, it seems wise to take things one small step at a time. You can always upgrade later.

What about buying a place and renting it out while you remain a tenant elsewhere? Some people find the economics of that work well for them. Most people, though, prefer to live in their own home for non-financial reasons. See how you feel once you've saved for your deposit.

One more thing: I suggest you rent on your own and find a light, cheerful place. You're going through a tough period in your life and it's important to have your privacy and to live somewhere that's not depressing. Go well!


Q. People paying up to say 33 cents in the dollar in tax, who claim that they are being taxed at 33 plus 12.5 GST, making a total of 45.5 cents in the dollar, are using woolly thinking.

Of course, if they live at home and pay no board, have no life insurance or retirement plan and spend all their tax-paid income on taxable items, then they can say they pay 41.375 cents in each dollar earned. That's 33 cents plus 12.5 per cent on the balance of 67 cents, after tax - which is 33 cents plus 8.375 cents.

This is further reduced because the first $38,000 is not taxed at 33 cents.

A. Quite right. And it just goes to show why those international tax comparisons get so complex.

It's bad enough working out our own tax rate. It also points out how we are taxed more heavily on the money we spend than on the money we save.

And if the money we spend is borrowed money, we pay interest as well. No wonder big spenders don't get ahead.

It might be worth thinking of this as you venture out to buy last-minute gifts.

It's worth also contemplating Brent Sheather's message in this section a couple of weeks ago: Money won't buy happiness.

* * *

This is my last Money column for 2005. And what a year it has been.

We started with tips on leasing out caravans and ended with a woman setting out on a new, financially smarter life.

We've kept Inland Revenue and tax experts on their toes with questions about capital gains tax on share trading, landlords' depreciation deductions and tax on second jobs. We also suggested readers protest to Inland Revenue about proposed changes to the taxation of overseas investments - and many readers did so. What's happened to those submissions? Inland Revenue and Treasury are writing a report to be sent to the Ministers of Revenue and Finance soon.

In response to a reader's comment that, "It is most unlikely that an IRD committee will take any notice of a small investor", a spokesman assures me that officials do take note of what everyone says. Look for more developments next year.

On other tax issues, many readers have aired their views on tax breaks for parents and on income splitting. And we've discussed how to get the most out of student loans and whether that is ethical.

This year, with many of us nervous about property prices, several readers wondered whether it would be better to wait to buy a first house (maybe), and even whether they should sell their house and rent for a while, in the hopes of buying back at a lower price (too risky and a hassle).

But we certainly haven't always been negative about property. Among others, we've shown a woman approaching retirement how she could afford her dream house in the country and given some pointers to an 18-year-old apprentice saving for his first home.

A few letters - in which spouses disagreed about borrowing to buy a rental or about property versus shares - left me worried I might contribute to matrimonial disharmony. I hope not.

We revisited the oldies but goodies: the impossibility of forecasting foreign exchange; rental property versus shares; repaying your mortgage versus investing elsewhere; and actively managed share funds versus index funds. And we helped a student write a university paper on another perennial, home ownership versus renting.

The column bubbled over on to the front page in May when we realised that all is not as it seems when banks compound interest on term deposits. Around that time, we also looked into retailers charging more to customers who pay by credit card.

Why am I using "we" instead of "I"? So much of the good stuff in this column comes from readers. You come up with fascinating questions, useful tips and some startlingly different viewpoints. It's great when a debate rages on this page.

Sometimes you correct me, rightly or wrongly. And sometimes you bring me up short. I wasn't endorsing the National Party in a pre-election column. I didn't even vote for them. And no, I won't hand this column over to Rich Listers to write. I'm too curious about what the next letter will hold.

A big thank you to everyone who wrote in this year. Most of your letters haven't been published and I feel bad about that. I hope you unpublished ones found responses to similar letters helpful. Thanks, too, for the kind comments many of you make about this column. I edit them out, but I love receiving them. Have a great Christmas. See you on January 14.