A young technical migrant wishes to purchase a house in Sydney/ Melbourne having completed her postgraduate and she secured a job. The client earns an $ 80,000 salary in a year. She is financially independent and has saves $ 50,000 towards making her dream of owning a house in Australia within 10 years come true. However, the price of house in Sydney/ Melbourne is very high and she is not sure if she will afford one.
This task seek to evaluate her chances of owning the house in Melbourne based on the salary and savings. The cost-effectiveness of an investment is an important factor that client has to consider before making the decision. The study will further workout an effective financial plan for the customer.
Other essential factors that should be considered when developing a financial plan for the proposed purchase are; first, historical and trend of housing price in Melbourne. Second, the historical income data for Melbourne as well as future forecast of the income in the next 10 years. Third, determining a better financial option between seek a bank loan or mortgage insurance to funds the purchase. A recommendation will be made to the client after considering all the necessary parameters in the Melbourne housing and income market.
According to the Australian Senate committee on housing, it is difficult to afford a house in Australia. Generally, an average price for a good house is equivalent to seven years of average earnings (Karamujic, 2015). The gap between house price and income is continuing to increase compared to four years in the 1900s (Acton, 2012). The current prices in the market have priced out first-time potential buyers. Some of the factors that have stimulated the increased prices of houses in Australia are entrant of international investors, household stress, and urban sprawl and tax concessions (Winter, 2014).
According to the housing experts, median house price in Coburg or Brunswick 15km from the Melbourne CBD for a two bedroom house stand at $ 500,000 in 2018. The same house prices stood at $ 489,398 during the same period in 2016. Likewise, the house price for a two-bedroom house was $ 90,000 20 years ago. The figures shows that the house prices in city grows by an average of 7.5 % annum which is equivalent to $37,500 in a year (Tomlinson, 2012).
Assuming that she will acquire the house at the end of ten years, the price would have increased by $375,000 totaling to $ 875,000. The price is based on the assumptions that the cost of building materials and land, corporate tax, and influence of foreign investors remain constant. Currently, the average price of a two-bedroom house in Melbourne stands at $ 500,000 (Brammall, Tyson, 2013).
In the 1960s, the average weekly earnings in Australia was $57 which is equivalent to $ 740 today. In 2017, the average weekly earnings for Australian was $ 1160 which is an equivalent to 57% increase. A national income is influenced by political stability, GDP per capita, foreign investment, terms of trade and technological investment. A 57% increment in 50 years is equivalent to 5.7% in 10 years and 0.57% in one year. With such a grown increment income for Australian employees, the gap between income and housing price will continue to expand (Kapil, 2013). In 2017, an average salary increment of 3.9% was adopted in Australia. We can estimate the client basic salary in the next ten years assuming that the increment will remain constant during the period. Currently, the client is earning $ 80,000 per year. In ten years’ time, she will be earning $ 111,200.00 which is equivalent to a 39% increment. However, the increment can only be achieved if both inflation rate and taxable income rate remain constant (Hughes, 2017).
The client is single and does not have dependent. Furthermore, as a technical migrant, the client is treated as an Australian resident and not a non-resident. Based on the client’s basic salary of $80,000 per year, her net income can be determined using the ATO tax Calculator as shown below;
|
Timeframe |
Gross Pay |
PAYG |
Medicare |
Budget Repair |
HELP |
Take Home Pay |
|
Hour |
40.49 |
8.88 |
0.81 |
0 |
0 |
30.8 |
|
Week |
1,538.46 |
337.44 |
30.77 |
0 |
0 |
1,170.25 |
|
Fortnight |
3,076.92 |
674.88 |
61.54 |
0 |
0 |
2,340.50 |
|
Month |
6,666.67 |
1,462.25 |
133.33 |
0 |
0 |
5,071.09 |
|
Year |
80,000.00 |
17,547.00 |
1,600.00 |
0 |
0 |
60,853.00 |
The client will enjoy a take-home pay of $ 60,853.00 per year which is equivalent to $ 5,071.09 per month and $ 1,170.25 on a weekly basis. Some of the deductions to be incurred by the client are; Pay as you go (PAYG) standing at $ 17,547 per annum, and Medicare costs standing at $ 1,600 per annum.
The client will also have monthly household expenses to incur. The client’s monthly household expenses have been summarised as shown in the table below;
|
Items |
Units |
cost Per Unit ($) |
Monthly Expenditure ($) |
|
Rent (1 bedroom house) |
1 |
1700 |
1700 |
|
Food & Grocery |
For 1 person |
300 |
280 |
|
Travelling ($ 4 per trip) |
1 person |
4 |
100 |
|
Utilities |
200 |
||
|
Leisure: Fitness Club |
70 |
||
|
Clothing & Shoes |
2 dresses per month |
64 |
128 |
|
2 pair of jeans |
80 |
160 |
|
|
1 pair of Shoes |
50 |
50 |
|
|
Other Items |
80 |
||
|
Entertainment |
90 |
||
|
Total |
2858 |
||
|
Monthly Income |
5,071.09 |
||
|
Surplus |
2,213.09 |
Note: Each item has been estimated at an average cost in Melbourne City.
Assuming that the client is not planned any savings during the period, her capacity of monthly repayment will be 2,213.09 (Monthly net Income less total monthly household expenses).
Lastly, there are several providers of home loan in the Melbourne housing market. The three most affordable home loan providers in the Melbourne market are as shown in the table below;
|
U Bank |
Heritage Bank |
Beyond Bank |
|
|
LVR |
$200k-$700k |
80% |
80% |
|
Advertised Rate (Variable) |
3.69% |
3.69% |
3.73% |
|
Comparison Rate |
3.69% |
3.71% |
3.73% |
|
Monthly repayments |
$1,839 |
$1,839 |
$1,848 |
|
Total repayments |
$662,040 |
$662,040 |
$665,280 |
|
Minimum deposit % |
20% |
20% |
20% |
|
Loan term |
1 – 30 years |
1 – 30 years |
1 – 30 years |
|
Estimated upfront fees |
$0 |
$150.00 |
$0 |
|
Settlement fee |
$0 |
$150 |
$0 |
|
Discharge fee |
$0 |
$200 |
$295 |
|
Total Cost |
$662,040 |
$662,540 |
$665,575 |
With the house value at $ 500,000 and a 20% upfront cost, the client should apply for a 4 400,000 bank loan. The U bank has the best loan offer the customer. With a home loan of $ 400,000, the customer will incur a total cost of $662,040 at the end of the loan period for a $ 500,000 two bedroom resident house in Melbourne. The loan interest stand at 3.69% (variable) (Pape, 2017).
The bank can only give 80% of the house value meaning that the client will have to make a 20% upfront payment. With the house valued at $ 500,000, the upfront payment stand at $ 100,000 (Dufty-Jones, 2016). Moreover, the customer will have to pay a total government stamp duty of $ 1,380 for mortgage and transfer fee to own a house in Melbourne. At the moment the client cannot meet the required upfront payment which is higher compared to her $50,000 savings. Therefore, she will have to pay for a mortgage insurance (Brigham & Ehrhardt, 2014).
According to Mortgage Insurance Calculator, a first residential home buyer with savings of $ 50,000 and who is seeking to buy a house worth $ 500,000, would have a cost of $ 15,668.52 as Lender Mortgage insurance in addition to $1,681.50 government fees (stamp duty). In total, the client will have to pay $ 17,350.02 and an upfront cost of $ 25,000. She will enjoy a $10,000 government grant as a first buyer (Saggers, 2017). The client cannot afford the house loan under the mortgage Insurance. To acquire a loan of $ 400,000, the client will have to pay a 5% upfront cost. She will subsequently have to pay $2,183.66 per month for loan repayment. At the end, she will have to pay a total of $ 786,117.04 comprising of the loan amount and $311,117.04 total interest. The mortgage Insurance plan is expensive compared to a 20% upfront loan option (Karamujic, 2015).
|
Amount ($) |
|
|
Savings |
50,000 |
|
Less: Mortgage Insurance |
15,669 |
|
34,331 |
|
|
Less: Stamp Duty |
1,682 |
|
32,650 |
|
|
Less: 5% upfront cost |
25,000 |
|
7,650 |
She has a surplus of $ 7,650 from her $ 50,000 savings after paying for mortgage insurance, stamp duty, and a 5% upfront cost. In addition, her monthly surplus (2,213.09) can meet the monthly loan repayment ($ 2183.66) (Bobilak, 2016).
The client has a monthly surplus of $ 2,083.09 after meeting her household expenses. On the other hand, she is required to pay a monthly loan repayment amounting to $ 3,448 for a 20% upfront loan. On the other hand, the client will pay $3,263.99 as monthly contribution of the 5% upfront cost loan in addition to the stamp duty after paying the mortgage insurance. She is still short of the required monthly loan repayment amount (Brammall, 2013).
The client need should have a financial plan so as to achieve her “Australian dream”. The plan is divided into two;
To secure a $ 400,000 mortgage loan, the client should pay an upfront fee of $ 100,000. However, she cannot meet the condition because currently she only have $ 50,000 savings. Therefore, she will have to either invest her savings or save her currently monthly surplus for a given period to obtain the required $ 100,000 upfront cost in addition to approximately $ 2,000 government fees. In total, she requires $ 102,000 before making the purchase. With $ 50,000 savings already, the client will require additional $ 52,000 to make the purchase (Koulizos, 2012).
Saving her monthly surplus in a personal bank account is an available option for the client. It will take her 23.5 months (approximately 2 years) to save the required $ 52,000 in addition to her $ 50,000 savings.
Second, the client should deposit her $ 50,000 in a savings bank account. This option with guarantee a fixed interest of 2.75% for a period of two years. She will also have to save her monthly surplus in the account as well. At the end of the two year saving period, the client will have accumulated $ 106,632.13 (Lindeman, 2010).
Option (ii) is the best because, at the end of the period, the client will have $ 106,632.13 compared to 102,000 for option (i).
The 5% upfront payment in addition to stamp duty and mortgage insurance is already affordable to the client. She can pay for monthly loan repayment from her monthly surplus (after deducting household expenses). Likewise, her $ 50,000 savings can be used to meet mortgage insurance for the loan as well as the government fees for the purchase of the house. She will pay the mortgage for a period of 30 years (Pape, 2017).
The client will incur a total cost of $ 764, 040 under the 20% upfront payment method and $786,117.04 under the 5% upfront payment in addition to stamp duty and mortgage insurance. The former is cheaper compared to the latter. Therefore, the client should make the purchase two years from now (Whittaker, 2018).
Considering that the mortgage interest increases from 3.69% to 7% three years after the purchase has been made, the customer will have a negative financial impact. She will have to pay a higher monthly loan repayment from the beginning of the third years because the mortgage loan was given at a variable interest rate. The total amount payable is affected by fluctuation of the interest rate.
At 3.9%, the client pays a monthly interest of $ 727.89 and a monthly principal of $ 1821. At 7%, the client pays a monthly interest of $ 1550.1 and a monthly principal of $ 1602.09. In total, the client will have to pay $ 2713.2 per month at 7% compared to $ 1,839 at 3%.
A Monthly payment of $ 2,713.2 is higher compared to her monthly surplus of $ 2,213.09. However, after acquiring the house, the client will use the rent expenditure to pay for the additional cost of loan repayment. The risk is manageable.
Based on the analysis, the client should consider paying the house at the end of two years. She will have acquired the necessary 20% upfront cost and government fees.
References
Acton, A. Q. (2012). Issues in Housing and Real Estate. Sydney: ScholarlyEditions.
Bobilak, K. (2016). Australian Property Finance Made Simple. Sydney: Global Publishing Group.
Brammall, B. (2013). Getting Started in Property Investment For Dummies – Australia. Sydney: John Wiley & Sons.
Brammall, B., Tyson, E., & Griswold, R. S. (2013). Property Investing For Dummies – Australia. Sydney: John Wiley & Sons.
Brigham, E. F., & Ehrhardt, M. C. (2014). Financial management. Mason, OH: South-Western Cengage Learning.
Dufty-Jones, R. (2016). Housing in 21st-Century Australia: People, Practices, and Policies. London: Routledge.
Hughes, D. (2017, July 13). Best places for buying a $500,000 investment property. Retrieved from Financial Review: https://www.afr.com/real-estate/best-places-for-buying-a-500000-investment-property-20170712-gx9rkq
Kapil, S. (2013). Financial Management. Pearson Education India: New Delhi.
Karamujic, M. (2015). Housing Affordability and Housing Investment Opportunity in Australia. London: Palgrave Macmillan .
Koulizos, P. (2012). The Property Professor’s Top Australian Suburbs: A Guide for Investors and Home Buyers. Sydney: John Wiley & Sons.
Lindeman, J. (2010). Mastering the Australian Housing Market. Sydney: John Wiley & Sons.
Pape, S. (2017). The Barefoot Investor: The Only Money Guide You’ll Ever Need. London: John Wiley & Sons.
Saggers, S. (2017). The Future of Property Investing in Australia: Don’t Risk Buying Real Estate Before You Read This Book! Sydney: BookBaby.
Tomlinson, R. (2012). Australia’s Unintended Cities: The Impact of Housing on Urban Development. Sydney: Csiro Publishing.
Whittaker, N. (2018, Feb 27). The right time to buy an investment property. Retrieved from The Sydney Morning Herald: https://www.smh.com.au/money/investing/the-right-time-to-buy-an-investment-property-20180227-p4z1x2.html
Winter, A. (2014). Andrew Winter’s Australian Real Estate Guide. Sydney: HarperCollins Publishers
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