Opportunity cost

Question from Shelley updated on 13th April 2012:

I live in Wellington and wish to buy a property to live in. I own a property in Christchurch that I rent out with about 18 months to pay the mortgage off. What are the merits of (A) selling the rental property and using the money as a deposit on a new home or (B) topping up the mortgage on the rental property and keeping it?

Our expert Kris Pedersen responded:

You need to do some research in regards to where you think your capital is best spent. If you are optimistic on the Christchurch property market (as many are) then you may decide that retaining the property is a good option whereas if you are concerned about the volatility created by the earthquakes plus potential interest rate rises then you may prefer to have lower debt levels. What you really need to compare is opportunity cost. I have copied the following off Wikipedia which explains this well: Opportunity cost is the difference between the net value of the path which was chosen and the net value of the best alternative which was not chosen. While the costs and benefits of the path not taken will never be realised it can still be treated as a real expense. In your case you will need to make some assumptions based around where you think Christchurch property values and rents will go and where interest rates are likely to go. From there you can decide what is best for you based on your financial and lifestyle goals.

Kris Pedersen of Kris Pedersen Mortgages is a commentator on property and finance. His team sources top finance strategies. www.krispedersen.co.nz

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