Buying a home does not entail particularly surprising costs, but the question is how much does it cost each month?
If you look for the entire state at the moment, the average price for a villa is USD 2,725,000 and the corresponding figure for a condominium is USD 2,300,000. These figures can be a good starting point for calculating what the monthly cost of the loan itself might be.
We then say that a buyer finds that villa which is the average villa and borrows 85% of the cost. The remaining 15% we say that the buyer had saved away before (which is obviously the best option). That would mean a mortgage loan of about 2.3 million. We have also assumed here that the buyer has saved money for the legal process.
Right now, interest rates are very low and you should be able to get around 1.7% in variable interest rates. That loan would then cost about USD 3,300 per month in interest. Which does not sound very much, but it is largely because the interest rate is very low now. Around 2008 before we had the last major economic crisis, interest rates were just over 5% and if we include this in the calculation, the result will be quite different. The same loan would then cost USD 9,650 per month in interest.
Now we have also only looked at interest for month one after the loan. If you do not repay interest, the interest expense does not decrease, but an amortization requirement is in progress and for a loan of this size it is about USD 3,300 per month in amortization. A standard villa in this country would now cost at least around USD 6,600 and when the interest rate then starts to run up, the corresponding price is USD 13,000.
It is important to think about the future
If it’s a financial decision to take a good look into the future, it’s a purchase of a house. If you want to have an economy that can handle say USD 8,000 in loan costs, then it is not smart to buy an accommodation that costs USD 6,600 when conditions are at its best. The risk is then very high that the costs will be far too high a few years into the future. Because you can be sure that interest rates will go up.
A cheaper accommodation then?
I have written many times that there are in principle always alternatives to accommodation that are clearly cheaper. Sure it may mean some commuting but it will be much better financially. If we look at a house that costs 1 million, the figures instead are USD 1,200 now at interest per month and 3,500 at 5%.
If we then add an amortization requirement of USD 1,666 per month, the total cost will be USD 2,900 now and USD 5,200 when the interest rate has gone up a bit. Thus, quite a lot of money less per month than the standard villa. Thus, the cost of the cheap house will be significantly lower when interest rates have gone up than they are now for the standard villa.
Saved money and only interest costs
In the examples we have looked at now, we have assumed that a buyer has saved money to cope with legal speed and that no top loan is needed. If top loans are required, these are normally more expensive than the bottom loans, which of course incurs the costs.
Then, as I said, we were just looking at the loan here. Buying an accommodation generally also entails other costs that may not be obvious from the start. Few of us, for example, move into a house where all our furniture we already have fits perfectly or is adequate, the wrong color on the walls or that it is generally in the wrong style belongs to the usual ones too. Therefore, always expect that it costs more than the actual purchase price to move.
Don’t think about the purchase price
A good tip is to not really think that you have bought a home for, for example, USD 2 million. If you do not pay this cash, it is not what the true cost is. If we say that you borrow 2 million and do this in the form of an annuity loan (which is a little more expensive than straight amortization but fits better in this example) then one with 3% in interest and a repayment period of 30 years would cost just over a million USD in interest. The monthly cost would be approximately USD 8,400.
So if we were to turn this into a house it would not cost 2 million but 3 million. Even better, it is likely that the house will cost you USD 8,400 per month.