Agony Aunt: School zone poses a housing dilemma

Dear Janine,

We have a son starting high school next year and we need to move because we are out of zone for the school.

For the last five years we have rented a nice place in Wellington (I moved for work and love my job). The rent costs us $500 a week and the landlord hasn't put it up. We have looked at 'in zone' rented properties and they cost up to $850 per week. 

We own a mortgage-free home in another city and earn $650 per week in rent from it. We really want to retire in this house, but won't leave Wellington for many years yet. If we buy in-zone, the bank will lend us $550,000, which (at today's rates) is around $800 per week. We have around $100,000 in savings.

What is the most prudent thing to do? Pay up to $850 per week in rent or take another mortgage on? It is fair to say that we are missing not having our own garden and all the other good things that house ownership brings. We are a little emotional about the decision and an impartial opinion would be appreciated.

ANSWER:

While some people will be tutting at the snobbery of parents who have school zoning concerns, you can't put a price on a great education.    

Decades before joining the devil in the fire-pit of finance, I was swept into the world of secondary education.  A trainee teacher is a target for devils as well. If you're a 15-year-old boy, of course you're going to light fags, flick ash and sneer, at the economics teacher trying to teach bush-bashing on school camp. You're also going to steal the seat off my mountain bike and giggle yourself silly as I ride off with a seat-pole in a precarious position. 

Even my own husband still laughs like a madman over the sight of me stand-up-peddling 5 km from Linwood High School to St Albans with aching legs and a face like thunder.

But jokes aside, I saw first-hand the lost opportunities of kids in the wrong environment. Schools improve, reputations change and some kids thrive anywhere. But many don't and are just lost. So phooey to the snob-factor. Congratulations on caring and being prepared to take a financial hit to solve the problem. You are lucky to be flexible enough to make a genuine move and not resort to zone-cheating. 

PRIVATE SCHOOL PRICES 

Renting or buying a house in-zone, is not the only way to skin the cat. Have you considered staying put and opting for a private school? It's possibly neutral on your wallet. If you end up paying $850 rent, you'll be forking out $350 extra a week. That's a massive $18,200 a year, or $91,000 for the five years of secondary school. With private schools charging fees around $15,000 a year, you are in a very interesting situation. 

Of course there are other issues to weigh up; transport to school and the extra expenses on top of base fees, just to name a couple. Also, how will your personal views on private education influence you? Parents who grew up in the 1960s and 70s are often uncomfortable with the sense of elitism, when we all did perfectly well at the local Co-Ed. All I can say is it's not about our generation. It's about your son and whether the environment would suit him.    

These days, private schools are getting more negotiable, with rolls slipping in a tough economic climate.  They seem to dress up their discounts as '25 per cent scholarships'. But this is the commercial world and even if your son didn't qualify, you should still ask for that discount in the first year or two.

If you decide private schooling is a worthwhile alternative, you don't need to throw away the idea of owning a home in Wellington. Without worrying about zoning, you could look at a cheaper suburb, borrowing only $350,000 and keeping the repayments to $500 a week, so your position is unchanged. You could choose a house that would rent well, when you move back to your original city.   

RENT OR OWN?

If a good state school is favoured, there are a few things to weigh up when renting or buying in-zone.

1. Tax efficiency; see an accountant. If you have a mortgage, it may be better to have it secured over the rental property you own in another city, so interest and rent offset.

2. It's usually wise to use your $100,000 deposit, but some people will waste away the lower repayments, or won't save diligently once the mortgage is paid.

3. Buying a home with a $550,000 mortgage, over 25 years at a rate of 5.5 per cent a year, will give repayments of around $780 a week or $40,500 a year. It seems in-zone rents are around the same price, as you talk about paying up to $850 each week. By the time you add in rates, insurance and maintenance, the two will be level. After five years, when your son finishes school, you will have paid $202,000 in interest plus principal. You will create around $58,000 of equity and the possibility of small capital gains (assumes static interest rates so don't bank on this).

4. You will need to find an in-zone rental for $560 a week and save $220 a week in order to balance out the equity you will create by owning a home (over five years). It sounds like a tall order. Plus, house prices would need to stand still. The website http://www.consumer.org.nz/ has a calculator that weighs up rent vs buying, incorporating inflation and adding in interest on your deposit. I've not included those factors.

5. Given your healthy finances, weigh up a shorter mortgage. Increasing the payments up to $1200 a week will cut the term to 12 years and knock an impressive $260,000 off the interest bill.

Home ownership is emotional. If it wasn't, why are prices driven so high on non-existent fundamentals? If we were all economists, we'd have an affordable housing market. The market is driven by either nesting-hormones or those who think they're a property developer with a tax-free hot flush.

For some people the most prudent option will be the most cost effective. But to my mind, as long as it's affordable and has some slack in there for rising interest rates or rents, go with what makes you happy.

Janine Starks is a financial commentator with expertise in banking, personal finance and funds management. Opinions in this column represent her personal views. They are general in nature and are not a recommendation, opinion or guidance to any individuals in relation to acquiring or disposing of a financial product. Readers should not rely on these opinions and should always seek specific independent financial advice appropriate to their own individual circumstances.