Ask Paul: How do I rebuild my finances after divorce?
Should I buy a townhouse, an investment property, or borrow more to buy a house after a divorce?
Reader question
Hi Paul, I'm initiating a divorce and I need advice on how best to start over my living situation.
I am in my early 40s and my husband (soon to be ex) is late 40s.
We are in a decent financial position, owning our home. Once finances are divided, I should walk away with about $1.2 million in cash. Plus $350,000 in super. We have two young kids, ages five and three. I will have primary custody due to his work hours (60%-40% split).
I live on the southern end of the Gold Coast where house prices have increased drastically.
My question is, once I get the money, should I be safe and buy a two- or three-bedroom townhouse or unit for about $1,000,000 to live in, as well as buying a cheaper investment property for about $400,000 in a rural town? Or should I aim to borrow as much as I can and get a small, older house to live in?
I earn only about $37 per hour, three days per week, until my youngest is in school. So my borrowing power is very low.
However, I can increase work by one day per fortnight. And once everything has settled I will aim to get a second job working alternate weekends.
I'm not sure what is the most sensible thing to do. The rental market I feel is not an option. Or is it? - Annabelle
Paul's recommendation
As you say, Annabelle, you are in a decent financial position. It sounds to me like you have a lot of change ahead, so while I am delighted you are planning your future, I think it will take a bit of time to finalise your divorce, presumably sell your current home and start to implement your plan.
Money is a very personal thing, in particular when it comes to property, but in your shoes, I would be looking to sort a home to live in as a first priority. Renting for a period of time is one option, but it leaves you wondering how to invest the quite large amount of money you have. Also, being out of the property market in a high-growth area, such as where you live, is terrifying.
So I'd be focusing on your long-term home. With a good super balance, you can be relaxed about your finances in a couple of decades. Your super, plus additional contributions will grow over time and a home will be a solid investment.
I'd be aiming to buy a house, using your capital, but I would not be stretching yourself with too much debt. I'd leave the regional investment property alone at this stage of your life; I think you have enough going on.
Also, I don't see an investment property generating much cash for you in excess of interest and costs.
The other critical factor is your budget. I assume you will be getting financial support on an ongoing basis. It is important you do a budget looking at your costs as a single parent, and all sources of income. Any lender will require this. That will give you an amount you could borrow towards a house, but with a lot of change in your life, you would be wise not to over-borrow.
In summary, I would argue that a home for you and your children is your key objective. Once that is done you can, in your own time, consider other investment options.
Also, don't forget that a house in a good location is likely to improve in value more quickly than a townhouse, simply because you own more land. If it was sold in the future, your gains are also tax free. But, most importantly, a home would give you and your children stability for the future.
This is not an easy time for you and I wish you all the best.
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