COMMENT: With house prices rising sharply over the last 12 months and interest rates set to increase over the next few years, it’s highly likely new homeowners will be looking to for ways to pay down their mortgage quickly.
Cutting down on luxury spending and putting those savings onto the mortgage is a great way to do this, but more and more homeowners are investigating getting in a flatmate to help reduce their mortgage pain.
For those that are against having a flatmate, I understand the hesitancy. You’ve finally bought your own home and you want some peace, quiet. You don’t want someone else’s dishes in the sink and shoes in the hallway. It’s important, however, not to underestimate the financial benefit of having a flatmate, especially in the first years of a mortgage.
Most mortgage calculators show how much you could save on your mortgage by making consistent extra payments. But it would be ridiculous, and often highly demoralising, to think about having a flatmate for 30 years. So what if the calculation was just for five years. How much would five years of having another person in your home save you?
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Let’s look at a homeowner in Auckland with a $700,000 mortgage. The minimum mortgage payments would currently be around $640 per week, and over 30 years the amount of interest to be paid would be around $652,000 assuming an average mortgage rate of 5% p.a. over the whole life of the mortgage.
The question, therefore is, how much interest might you pay over the life of your mortgage if you receive flatmate income of $150 per week after tax for just the first 5 years of the mortgage, putting it all onto your mortgage? I’ve used $150 per week because it’s on the low side of rents in Auckland, meaning you may be able to rent out even your smallest bedroom and still receive the benefits. More income will just mean even more savings.
It turns out that you could save around $86,000 in interest payments, with the total interest paid, by the end of your mortgage, around $566,000. Why so high when you have only received $39,000 of flatmate payments over the 5 years?
The reason is that, every week, you are paying off $150 from your mortgage and that debt would have otherwise had interest charged on it over and over again for up to 30 years.
There are a lot of assumptions in these calculations: what interest rates will average out to be over the next 30 years, whether or not you sell your property and downgrade prior to 30 years, how much you can get for a room in your home etc. Hopefully, your income will increase over that time and you will make additional payments. There’s a lot that can change the end result but don’t get bogged down in the exact numbers.
The important point to take away is that, particularly in the early years of your mortgage, the financial benefit of a flatmate isn’t just the amount they pay you. It’s the interest that would have been charged on that debt for the rest of the term of your mortgage. The benefit can be three or four times the actual rent received.
In very simple terms, rental income of $150 a week actually adds about $450-$600 per week onto your retirement nest egg. Is that worth the pain of someone else’s shoes in your hallway for a few years? For some new homeowners, it may be worth considering.
- Rupert Gough is the founder and CEO of Mortgage Lab and author of The Successful First Home Buyer.
