Can you save your way to wealth?

When it comes to the property market, the biggest cost could be that of delaying your decision. If the market is growing at around 7%pa and you are saving $2000 a month from your wages, then as you save $24,000 in a year that $500,000 property has grown by $35,000 – so it’s gone up by more than you will have saved.

With a 20% deposit plus costs ($240,000), to buy that same property it would take 10 years, by which time it would have increased in value by $484,000 to $984,000.

The sooner you can get into the market, the better. (See table “Sooner rather than later”.)

So the question is should you pay mortgage insurance? LMI is an insurance policy paid to lenders to give them security, because often you’re borrowing more than 80% of the property value and considered a higher-risk mortgagee. The higher percentage you borrow and the more money you borrow the more it costs. As LMI doesn’t give you any cover, most people tend to avoid it. However, it can be of amazing benefit. Even if LMI costs you $10,000-$20,000, you can often add this to the mortgage and, as a result, you’re only paying interest on that cost in the short term. If your property doubles from $500,000 to $1 million it doesn’t make a lot of difference whether you owe $500,000 or $520,000 in 10 years.

Similarly, if you had to save only a 5% deposit and 5% of costs, it would allow you to buy at a price of $613,000 in three years instead of 10. By year 10 you might have made $371,000. In effect, you’re paying $10,000$20,000 to get into the market many years earlier. (See “LMI: a modest price to pay”.)