Property strategies when retirement is 50/50

- Caglan Bagci, NZIJ MORTGAGES


Boris Babyboomer came home late after another solid effort in the office. Relations with his wife, Brenda Motherofthree were strained of late. Spending had been the key to getting things back on track in the past. Overseas holidays, an MG, private schools for the children, renovating interiors to keep up with changing fashions....

The silence would normally be broken by Brenda saying 'Boris, we need to talk'. The conversation would normally end with Boris reaching for his wallet. Boris knew it was going to be an expensive night as the silence had lasted longer than usual.

Brenda took a breath and quickly blurted out, 'Boris, I want a divorce!', to which Boris replied 'I wasn't planning on spending quite that much.'

A year after the divorce Boris is living in a rented apartment close to his office. He has gone on an overseas holiday, bought a Harley Davidson and a boat. He feels 20-something but a 50-something man in the mirror looks back at him. 50-something is also all the money he has left with retirement just around the corner. Can he afford to retire? Where will he live? What will become of him?

Boris wants to buy a house to live in. His problem is that as he wants to retire in less than 13 years, he does not have long to pay off a mortgage. If Boris buys a house he wants to live in and takes a 13 year repayment term, his next 13 years will be miserable as the mortgage payments will be so high that he will have to cut back on so many activities that he currently enjoys.

He could alternatively buy a cheaper house that he does not want to live in but to him this is misery in another form. He could take a 30 year repayment term and delay retirement (more misery!). He could rent and save money in a managed fund- the government is encouraging this endeavour. He has however, left it a little late to accumulate a meaningful amount of capital and he will still need somewhere to live.

Or he could buy two houses, be happy and retire early. 'What?' I hear you ask. How can he buy two houses when he can't pay off one by retirement?

The first house he will live in and take a 30 year loan repayment term. This means he can live in a house he wants to live in and still have a life. The second house he finds tenants for and takes an interest-only mortgage.

If you have been reading my articles for a while you will know that any quality property that is worth buying will very likely be negatively geared. This simply means that it won't generate enough income from rental income to pay the interest and other associated costs such as rates, insurance and repairs and maintenance. So Boris will have to make up the shortfall on the rental property.

The economists tell us that residential property at least doubles in value over a ten year period in New Zealand's major centres. Historical evidence also supports this.

In 13 years' time when Boris wants to retire he sells the rental property, clears all of the debt and lives in an unencumbered property that he wants to live in. He then takes a reverse mortgage and uses the equity in his house to supplement any pension he receives from the government.

Too vague? OK, he buys two houses for $400,000 each. He lives in one and it costs him $600 per week for each property. Each property could achieve a market rental of at least $400 per week. This means that in addition to paying his own mortgage he must supplement the rental property by $200 per week. In ten years' time each property may be worth more than $800,000. He has created over $400,000 of equity in ten years. Is that good?

Well, if Boris stayed in rental accommodation and saved $400 per week ($200 to the rental property and $200 the difference between owning and renting) over a ten year period he will need an average net return on savings of more than 12% to accumulate the same amount of capital. So yes, property prices are climbing and the yields are not there any more but it's still pretty good.

But the real moral of the story is if you don't want things to be as hard for you as they are for Boris, work hard on your personal relationships.

I am happy to respond to any questions on this article or anything in previous issues. Send your questions to mortgages@nzij.co.nz