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From: Sergey Golovin
Here is some little exercise folks.
Let say average salary this days in Oz. $34K? (According to Statistics).
Average house price all across the land $180K?
It does not matter, do not worry of exact numbers, let say those are the figures.
Let say that average block with $34K income buys $180K property and he/she was lucky enough to borrow whole amount $180K to buy it.
As we are all know house price doubles every 10 years.
Let assume that salary will double as well, very unlikely, but never mind, lets give to it him he deserved it.
Now, saying all that lets have look on final figure in 20 years time –
1. Salary 10 years $34K x 2 = $68K and next 10 total 20 years $68K x 2 (doubles again) = $136K. Lucky man. Salary quadrupled.
2. The house - $180K x 2 = $360K and another 10 (20 total) years $360K x 2 = $720K.
If that person borrowed $180K as we mentioned earlier in 20 years time he/she will pay double of the amount borrowed (as you can see from repayments charts) - $180K (principal) + $200K (interest) = $380K total paid at the end of year 20 (bit more then double, well, close enough).
In theory it should quadruple as well but it did not. It is only doubled.
Question is – How do banks make their money? Obviously it is very profitable business – lend money. But how do they get around that hurdle?
Folks, I am puzzled. Would be interesting to hear from someone more on that topic.
Regards
Serge G.
Here is some little exercise folks.
Let say average salary this days in Oz. $34K? (According to Statistics).
Average house price all across the land $180K?
It does not matter, do not worry of exact numbers, let say those are the figures.
Let say that average block with $34K income buys $180K property and he/she was lucky enough to borrow whole amount $180K to buy it.
As we are all know house price doubles every 10 years.
Let assume that salary will double as well, very unlikely, but never mind, lets give to it him he deserved it.
Now, saying all that lets have look on final figure in 20 years time –
1. Salary 10 years $34K x 2 = $68K and next 10 total 20 years $68K x 2 (doubles again) = $136K. Lucky man. Salary quadrupled.
2. The house - $180K x 2 = $360K and another 10 (20 total) years $360K x 2 = $720K.
If that person borrowed $180K as we mentioned earlier in 20 years time he/she will pay double of the amount borrowed (as you can see from repayments charts) - $180K (principal) + $200K (interest) = $380K total paid at the end of year 20 (bit more then double, well, close enough).
In theory it should quadruple as well but it did not. It is only doubled.
Question is – How do banks make their money? Obviously it is very profitable business – lend money. But how do they get around that hurdle?
Folks, I am puzzled. Would be interesting to hear from someone more on that topic.
Regards
Serge G.
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