Ask Paul: Should we buy or rent to be near a good government school?
I live in Sydney with my wife and two young kids. I plan to buy a second home in the next two years, which I assume will cost between $900,000 and $1.2 million.
I'm looking to buy in a suburb with a good government school, otherwise I need to pay for a private school, which will cost about $20,000 a year.
Will it be a good plan to buy the second house and make the existing house an investment property? Or pay down the mortgage and close the home loan in, say, the next 10 years (and send the kids to private school)?
Or do we rent in a good suburb until the kids finish school and put the existing property up for rent and buy an apartment as an investment?
How should I proceed? - Vivek
Excellent question, Vivek. It's a common dilemma. It's also complex! Funnily enough, it's not the money part that's complicated. I know mortgage deductibility, capital gains tax and so on can be tricky, but these are not really the big issues here. So let's deal with them first.
Whether you pay down your mortgage or buy an investment property is just about risk and return. Hopefully, you are not paying any more than 3.5% on your mortgage. If you are, shop around and change.
But let's use that for our base case. Any money you put into your mortgage should be into an offset account. First, it gives you access to your money when needed.
Second, it means you are not paying down your mortgage. If you do turn your family home into an investment, you want the biggest loan on your current home, as the interest will be deductible if it becomes an investment property. You want the smallest possible loan on your new property because it will be non-deductible.
Now we return to the 3.5%. Every dollar you put into your offset account effectively earns 3.5%, but it does so pretty much risk free and tax free. For most taxpayers, that is equal to about 5% from an investment, as unless you can invest in a non-income- earning partner's name, you will pay tax on the return.
So the math is pretty simple. If you think you can earn 5% or more from any investment, it will produce a better outcome than paying down your mortgage.
But here's the rub! Paying down your mortgage is virtually risk free. Any investments will have risk attached. Mind you, history shows that decent shares and well-located property are doing better on average than 5%pa over the long term, but taking on more risk is a personal issue that links to your income, assets and time frame.
On a technical level, I suspect you would do best financially by gearing up on a new investment property, having your kids in a government school and investing the $20,000 a year saved on school fees. But that is not what life is about. We work to provide security and give our family the best opportunities.
Again, this is personal. Many of my friends went to excellent private schools and are good citizens and have done well. A lot of us went to government schools and - guess what? - we are good citizens and have done well.
But I feel education is critically important in these complex times. So if I were in your shoes my first focus would be on the best school for my kids. If that is private, fine. Make that decision first and then plan your next move into property.
If a particular government school is your preference, buy a house inside the school boundary and make it your home. The key thing is to put your family first and let your money follow the family decision. Obviously it would be better to have a bigger mortgage on the investment property, but the real issue here is giving your kids the best possible education.