Hi everyone,
Is anyone out there a number cruncher? I can't do the maths to work out the best way of purchasing. Here's the situation:
I'm living in Hong Kong and am going to buy an apartment in "Harbour Place" with a colleague. It's a new development and will be ready for occupation in September 08. The apartment costs $HK5.4Million. We have $HK1M each for the deposit. My $1M is currently in $NZ and is earning 7%. My colleague's $1M is in GBP and is earning 4.8%.
Purchase option one is to put down 20% in four staged payments over the next year, ie 5% now, 5% in three months etc. You don't have access to the apartment until you take up a mortgage in a year's time.
Purchase option two is to put down $2M as deposit and take out a mortgage (interest is currently at 2.8 – 3%). If we choose this option, the purchase price is 5% less than option one. We'd have to make the payments until September when it will be ready to rent. The rent should then cover the mortgage payments, but we can afford to make up the difference if we have to. The apartment should be very easy to rent. It has full frontal harbour views from all windows.
So which is the cheapest option – continue earning interest on our foreign currencies and pay 20% over a year? Or put $2M down and take out a mortgage of $3.4M now, with 5% price reduction, (we've chosen this ratio because the rent would cover the repayments).
The property market is booming here by the way. Everyone's taken their money out of the stock market and is putting it into property because the interest rate is so low.
Sorry it's so lengthy, and hope for some good advice. Thank youCan you clarify a couple of points CDS?
Option 1 – is that 4 x 5% deposits (March, June, Sept, Dec) then balance in March 09 or Dec 09 (12 months from which date)?
Option 2 – Have I read it correctly? Do you pay your deposit and the balance upfront to recieve the 5% discount or do you pay the balance upon completion? The first scenario exposes you to a high level of risk should the builder/developer not be able to fulfill their commitments eg insolvency, planning/occupation approval etc – what guarantees/securtiy is the developer providing to you (bank guarantee to the value of your investment, caveat over the property until settlement?)
Hi Scott,
Okay, I got that clarified.
Option 1 – 10% is paid in the first 3 days – 5% as a preliminary deposit and a further 5% when the Sale and Purchase Agreement is signed. (let's say 15 March). Then another 5% 3 months later (15 June) , and again 5% on 15 Sept. Total 20%. Then six months later on 15 March 2009, we pay the remaining 80%.
Option 2 – Sorry, the discount is 4% not 5%. 5% of $5.4M down when the preliminary contract is signed. And the remaining 95% to be paid within 30 days (so one month to arrange mortgage finance). The completion date of the property is 31 May. If the property is not ready for habitation on that date, then the developer pays the mortgage on a daily basis until the property is ready. So with this option we earn interest on all our GBP and NZD, except 5%, for only 30 days.
So what's the most economical option?
FYI, the developer is holding off selling at the moment because they know the US will drop its interest rate again next week. The $HK is pegged to the $US so will have to follow suit. We predict that on 20 March the interest on mortgages will drop to 2.6%, even though inflation is 3.8%. And our agent has just advised that the apartment we have bid $5.4M for may be offered to us at $5,550,000. We're living in very hot times over here!
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