What it costs you to delay buying Property
The Cost of Waiting to Buy Property: An Example of How Delays Can Add Up
In real estate, timing can make a huge difference. Whether you're buying your first home or an investment property, waiting for the "perfect time" to make a purchase might cost you more than you realize. One of the clearest ways to understand this is by looking at how waiting even a year can impact your potential return on investment.
Let’s take a closer look at how waiting for one year could cost you, using the example of a property with a 10% price increase over that time.
The Scenario
Imagine you're looking at a property that is currently priced at $500,000. You have saved up for a down payment, and you're preparing to enter the market. However, you're not quite ready to make the jump. Perhaps you're waiting for interest rates to drop, or you're thinking prices might fall soon. This delay may seem harmless, but let’s explore how waiting just one year could add substantial costs to your purchase.
Property Appreciation: The Impact of a 10% Price Increase
Real estate values can fluctuate, but a general trend in many markets is upward growth. For the sake of this example, we’ll assume the property values increase by 10% over the next year, which is a common appreciation rate in many markets over time.
Current Property Price: $500,000
Price Increase After 1 Year (10%): $50,000
New Property Price After 1 Year: $550,000
So, after waiting one year, the price of the property has risen by $50,000.
Down Payment Increases With Price
The down payment is usually a percentage of the property’s purchase price, often around 20%. So, when the property price increases by $50,000, the amount you need to put down also increases.
Original Down Payment (20% of $500,000): $100,000
New Down Payment After 10% Increase (20% of $550,000): $110,000
That’s an additional $10,000 you need to save or come up with when you buy the property in a year. If you’ve been saving for your down payment, this means you now need to find more money.
The Additional Loan You’ll Have to Take
In addition to the larger down payment, the amount you need to borrow also increases, which impacts your monthly mortgage payments. Let’s assume a 30-year fixed-rate mortgage at an interest rate of 5%.
Original Loan Amount (After Down Payment of $100,000 on a $500,000 Property): $400,000
New Loan Amount (After Down Payment of $110,000 on a $550,000 Property): $440,000
Here’s a look at how this increase in the loan amount affects your mortgage payments.
Original Monthly Mortgage Payment (on $400,000 loan):
At 5% interest, your monthly payment would be approximately $2,147.
New Monthly Mortgage Payment (on $440,000 loan):
At 5% interest, your monthly payment would increase to approximately $2,362.
That’s an increase of $215 per month. Over the course of a year, this adds up to $2,580 in additional payments.
Opportunity Cost of Waiting
Besides the higher down payment and the larger mortgage loan, there's another important cost to consider: the opportunity cost of waiting. If the property appreciates by 10%, it’s likely that rental prices or the potential returns on investment in the area will also increase. The longer you wait, the more you miss out on potential appreciation, rent increases, and equity buildup.
Let’s say you were planning to rent out the property as an investment. If the rental market also appreciates, waiting could mean you miss out on higher rental income. Additionally, if you plan to sell the property at some point in the future, the increased value means that you will benefit from the price appreciation over time, but only if you buy sooner rather than later.
The Total Cost of Waiting
To summarize, here are the costs of waiting one year to buy a property that appreciates 10% over that time:
Higher Purchase Price: $50,000 increase in the property price
Higher Down Payment: $10,000 more needed for your down payment
Higher Loan Amount: $40,000 more borrowed
Higher Monthly Mortgage Payments: $215 more per month, which totals $2,580 over one year
These costs total up to $62,580 (the $50,000 increase in the property price plus the $12,580 in higher loan-related costs).
Conclusion: Is Waiting Worth It?
Waiting to buy a property might seem like a prudent choice if you think the market will cool down or interest rates will drop. However, in many cases, especially in a rising market, waiting can cost you more in the long run. The higher price, larger down payment, and bigger loan could add thousands of dollars to your total costs, while the opportunity costs of missed appreciation and rental income can further compound your losses.
When you look at the numbers, waiting a year could cost you more than simply buying now, locking in your purchase at the current price and securing your place in the market before property values climb even higher. In real estate, timing truly is everything, and sometimes acting sooner rather than later is the key to financial success.
The Cost of Waiting to Buy Property: A Closer Look at the Price of Delays and Lenders Mortgage Insurance (LMI)
In real estate, timing is crucial. While you may feel like you’re making a smart move by waiting to save for a larger deposit, especially to avoid paying Lenders Mortgage Insurance (LMI), this delay can often end up costing you more than you realize.
To illustrate this, let's revisit the scenario of a $500,000 property appreciating by 10% over a year, and also consider the added element of saving for a larger deposit to avoid LMI.
The Scenario: Waiting to Save for a Larger Deposit
Let’s assume you’ve been saving for a down payment and are considering delaying your purchase until you can put down 20%, which is the threshold to avoid paying Lenders Mortgage Insurance (LMI). The idea is that by saving more, you can avoid the extra cost of LMI, which typically applies if you have a deposit of less than 20% of the property’s value.
Property Price: $500,000
Desired Deposit to Avoid LMI: 20% ($100,000)
However, you are currently only able to save 10%, or $50,000, for the down payment, which means you would need to pay LMI if you purchased the property now.
You decide to wait a year to save the additional $50,000 to reach the 20% deposit target and avoid LMI. But what will the cost of waiting look like, especially considering that property prices tend to appreciate over time?
Property Price Appreciation and Increased Deposit
We know that real estate often appreciates over time. Let’s assume the property increases by 10% over the next year.
Current Property Price: $500,000
Price Increase After 1 Year (10%): $50,000
New Property Price After 1 Year: $550,000
This means the amount you need to put down as your deposit will increase as well. Instead of needing $100,000 for a 20% deposit on a $500,000 property, you’ll now need $110,000 for a 20% deposit on a $550,000 property.
The Impact of Saving for a Larger Deposit
While your goal of saving a larger deposit to avoid LMI seems wise, the increased price of the property after one year actually increases the amount you’ll need to save. Let’s break down the costs of waiting versus buying now.
Current Deposit Needed (10% deposit): $50,000
Current LMI (on a 10% deposit):
Lenders Mortgage Insurance is usually a percentage of the loan amount when your deposit is below 20%. For a loan of $450,000 (90% of $500,000), LMI could range from $5,000 to $20,000 depending on your lender and risk factors, but let’s assume it’s approximately $10,000.
Now, if you wait to save that extra $50,000, you avoid the LMI, but:
New Property Price After 1 Year: $550,000
Deposit for 20%: $110,000 (up from $100,000)
Additional Deposit Needed (due to price increase): $10,000
So, you need to save an additional $10,000 for your deposit because the property price has increased by $50,000.
The Total Cost of Waiting: Comparison
To see the full picture, let's compare the costs of buying now versus waiting one year:
If You Buy Now (with LMI):
Purchase Price: $500,000
Deposit (10%): $50,000
Lenders Mortgage Insurance (LMI): $10,000
Loan Amount: $450,000
Mortgage Payment (on $450,000 loan at 5% for 30 years): Approximately $2,418 per month.
If You Wait One Year (to save a 20% deposit):
New Purchase Price: $550,000
Deposit (20%): $110,000
No LMI (because you have saved a larger deposit)
Loan Amount: $440,000
Mortgage Payment (on $440,000 loan at 5% for 30 years): Approximately $2,362 per month.
So, while waiting a year allows you to avoid paying LMI, the increased property price means you have to save an additional $10,000 for the deposit. Additionally, your monthly mortgage payment is only slightly lower than if you bought now due to the smaller loan amount.
The Hidden Costs of Waiting
When you factor in all of these elements, here's what the cost of waiting one year looks like:
Higher Purchase Price After 1 Year: $50,000 increase
Higher Deposit After 1 Year: $10,000 increase due to the higher property price
No LMI After 1 Year: Saving $10,000 by avoiding LMI
Lower Monthly Mortgage Payments: A reduction of about $56 per month, which totals $672 over the first year.
While the monthly mortgage payment is slightly lower and you avoid LMI, the overall increase in costs is still significant. The net cost of waiting can be calculated as follows:
Total Additional Cost After 1 Year (Higher Property Price + Deposit Increase):
$50,000 (price increase) + $10,000 (deposit increase) = $60,000
But, you do avoid the LMI of $10,000, and your monthly mortgage payment is reduced by $672 in the first year. The net cost of waiting could then be approximately:
$60,000 - $10,000 (LMI saved) = $50,000 in total additional costs due to waiting.
Conclusion: Is It Worth Waiting?
The decision to wait and save for a larger deposit to avoid LMI might seem like a smart financial move in the short term. However, the increase in property prices over time could lead to higher costs than you initially anticipated. In the scenario above, waiting a year costs you an additional $50,000 when you factor in the property price increase and the higher deposit needed, despite saving on LMI.
While avoiding LMI can certainly be beneficial, it’s important to weigh the costs of waiting against the potential savings. If the market is appreciating rapidly, waiting could result in higher overall costs, even after factoring in LMI. In many cases, acting sooner rather than later could be the better financial decision, especially if property values are rising fast.
Ultimately, the key takeaway is that delaying your purchase may cost more than expected, even when avoiding LMI is factored in. Carefully consider market trends, interest rates, and your personal financial situation before deciding to wait for a "perfect" deposit.