Rustar Real Estate Consultation
Have you ever thought that when a person buys an apartment on credit, in the end he overpays for it a half to two times. One thought about this will depress future borrowers, because not everyone is ready to purchase housing at a "double" price. And persuasions like "you invest in your future" comfort little money, no matter what, terribly sorry. And in vain, because you can mathematically prove that time is really more expensive than money, and a borrower taking a long-term loan is likely to benefit.
Today's reality is constantly changing prices for things and goods (including square meters). Real estate prices, as a rule, are higher than they were - due to inflation. Money is gradually depreciating, and things, on the contrary, are getting more expensive. If the prices per square meter remained the same for years, the borrower would really have been comforted only by the fact that although he had overpaid for the apartment, he invested this money in his family and children. However, thanks to inflation, this is not the only consolation. Rising square meter prices are gradually "eating up" the overpayment. Of course, there may be recessions and stagnation in the market, but this is clearly not threatened by the real estate market in Dubai - and in the long term - for 10-20 years - square meters will still be noticeably more expensive than now.
If the market is gradually growing, then the loan overpayment by 1.5 - 2 times overlaps with the fact that the apartment itself during this time will increase in price several times. But why does this growth depend? There is a critical rate of market growth, above which apartment price increases exceed loan overpayments, and below that they do not. That is, if the market grows on average faster than this value, then the borrower benefits from an increase in the cost of an apartment bought in debt. In order for the market to fully compensate for the payment of loans, a minimum growth is enough - an average of 3-5% per year. This is much lower than the current inflation rate. If the market growth rate is at the level of 10-20% per year, then the benefit for the borrower is obvious.
Example No. 1.
Standard loan
Take the standard parameters of a housing loan: term - 10 years, installment - 30% of the cost of housing and interest rate - 12%. Our calculations show that with these parameters of the loan, it is enough for the market to grow by an average of 3.6% per year. Then the amount by which the apartment will rise in price in 10 years, is just equal to the overpayment. If market prices over these 10 years will grow on average faster than 3.6% per year, then an increase in the cost of an apartment will override the overpayment of a loan. Suppose we took an apartment worth $ 300 thousand on credit. Then the overpayment for 10 years will be about $ 127 thousand. But over the years, the cost of an apartment with a market growth of 3.6% per year will reach approximately $ 427 thousand
Example No. 2
Zero down payment
We will leave the same parameters (term of 10 years, interest rate - 12% per annum), only the down payment will be zero. Recently popular banking product. Accordingly, in order to “close” the overpayment for an apartment, the market should grow somewhat faster - by 4.8% per year.
The dependence is understandable: the more a person takes, the more he overpays. The lower the down payment, the greater should be the growth of the market. What happens to our apartment for $ 300 thousand? In this case, the overpayment on the loan for 10 years will be about $ 180 thousand. But an apartment with a market growth rate of 4.8% per year will cost about $ 480 thousand.
Example No. 3
Suppose we take a loan with a down payment of 30%, at 12% per annum, but for a period of 30 years. It turns out that now the market should grow more slowly - only 2.8% per year in order to "eat" the overpayment for 30 years. So, the longer the term, the more expensive the apartment is getting more expensive. In this situation, over 30 years, the overpayment will be even more than the initial cost of the apartment. That is, the overpayment for an apartment worth $ 300 thousand will be $ 380 thousand. But an apartment for 30 years with a market growth rate of 2.8% per year will cost $ 680 thousand already.
As for the behavior of the third parameter of the loan - the interest rate, it does not require a separate explanation. It is obvious that the higher the percentage, the higher the market growth rate.
So, the main recommendations for buying an apartment on credit from the consultants of RustaR Real Estate:
- The lower the down payment on the loan, the faster the market must grow in order to compensate for the overpayment and vice versa. That is, the more you borrow money, the more dependent on the market.
- The longer the period for which the borrower takes a loan, the greater the gain. This is the power of compound interest - you repay the loan in equal shares, and market prices are growing exponentially.
- The higher the loan rate, the faster the market must grow in order to compensate for the overpayment. That is, high loan rates pay off at high market growth rates: if the market stands still, borrowing at high interest rates is unprofitable.
Surprise deposits or why Bill Gates bought a house on credit
Have you ever wondered why in the West people always buy housing on credit, even with money? Both millionaires and former presidents become borrowers. That's why they are millionaires: they know how to count money. Even if a person has money, it is more profitable for him to invest it in business, in his business or in stocks, finally, just put it in a bank for a deposit. And buying an apartment is not with your own money, but with bank money. Even on a deposit for the time that the borrower pays the loan, he “drops” more than twice, compared with the amount given to pay the loan.
Here is a concrete example. Let's say we buy an apartment for $ 300 thousand. Loan parameters: term - 10 years, down payment - zero, loan interest rate - 12%. Over 10 years, the "overpayment" for an apartment will be about $ 180 thousand, that is, about 60% of the initial cost of housing. But we took a loan from the bank. And they put their own $ 300 thousand on a deposit at 8% per annum. After 10 years, this amount will increase to $ 647 thousand, that is, more than 2 times. However, it must be borne in mind that at the initial stage the deposit will lag behind loan payments, and somewhere in the middle of the term it begins to overtake them. Usually a person makes comparisons for the first year of investment and is disappointed, but for some reason few think about the prospect. And in the future, the amount growing on the deposit account is guaranteed to overtake payments on a home loan, which are paid in equal installments over the entire period.
The borrower has nothing to lose.
Which of the above can we conclude? It turns out that in almost any situation on the market, in addition to the global financial or political crisis, buying a home on credit is a profitable business, even if you have cash to buy an apartment. However, in addition to mathematics, psychology is no less important in life. If you are uncomfortable living on credit, investing in financial instruments - all of the above is not for you. If you are ready to join the financial culture - remember, with housing loans you are unlikely to lose anything.
