Finance - When to buy a property

When to buy a property

Mar 21

Written by: admin
3/21/2008

Real Estate investment - buying properties

Many countries encourage residents to become owners of their homes and lands by regulating, among others, tax-deductible interest payments from loans.

The cost of the loan becomes therefore:

C = P x I x (1 - T), where:

C = Cost of the loan
P = amount of loan (Principal)
I = Interest rate
T = Income Tax rate

For example, if the yearly interest for a loan of 100,000 EUR is 5% while the income tax rate is 35%, the resulting cost would be:

100,000 * 0.05 * (1-0.35) = 3,750 EUR each year, instead of 5,000 EUR.

In reality there is a limit to the deductible amount (and that can be based on various criteria fixed by government, such as the extension of the family), but during times where interest rates are low a large amount of interests, if not all can be deducted.

Therefore it may seem more attractive to buy properties when interest rates are low.
However, during such times prices of property tend to be higher than normal and that’s due by the simple fact there is more and cheaper money made available by the banks and other credit institutions.

Conversely, during high inflation periods prices of property are generally not increasing or even decreasing as builders and sellers have more difficult time finding buyers who have access to their credit facility.

Another important factor to take into account is whether the interest rate is negotiated at fix or variable rates. Fix rate loans are more expensive than corresponding variable rates because the interest risk exposure is beard by the lender.

The ideal case is to borrow at variable rate during decreasing inflation trends, thus buying property that will increase its market value while having contracted a relatively low principal and reducing over time the interest payments.

How to know when such ideal times occur? One can read (and interpret!) the forward rate market (e.g., http://www.marketprices.ft.com/markets/currencies/international) or ask the consultants featured on this Guide!

Incidentally, if you do not have a financial calculator, feel free to use our Loan Calculator and scope your scenarios.
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franco@financialconsultantsguide.com

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When to buy a property