Ask Paul: I can't afford my $6000 a month mortgage

Dear Paul,

I'm 35 and work in an industry that is relatively unstable and inconsistent.

I've recently been divorced and decided to settle on an off-the-plan inner-city apartment despite only having one income now.  

My loan is $900,000 and the repayments are large at $6000 a month. I'm really burnt out and worried that my capacity to service this loan is in jeopardy. I have no family to draw on for financial help.

At the time, I worked with brokers to put myself in a position to settle, which wouldn't be the case if I were to ask for a similar loan now. There were also concessions on stamp duty, as it was a new build. 

I felt this was a good opportunity to secure a nice apartment in inner Melbourne, but I'm worried that I may have made a bad investment or just put myself in a position of constant struggle for years to come. 

If I was to sell now, I would lose a significant amount of money, and renting it out as an investment property wouldn't cover the mortgage at this stage.  

Should I just call it a loss, sell and move on or fight to keep it? I'm wondering what the potential benefits may be if I kept pushing to hold onto it.  

My work in the film industry is complicated and very project dependent. Sometimes I earn very well and other times I go weeks without a pay cheque.  

I run everything through my business, which is complicated occasionally, and I have many liabilities and running expenses associated with it.  

I have close to $40,000 in super and only started making regular contributions in the past four years.   I don't have a car or personal loans, or any shares.  

I guess the biggest adjustment has been going down to a single income and trying to secure an asset for my future, and knowing whether I have made the wisest decisions.  

It was an emotional time going through the separation and I feel some of my decisions were clouded, but I did my best to try to secure some sense of a future. - Tobias

You have a heck of a lot on your plate, Tobias.

I have a daughter who is a film writer living in Melbourne, so I do understand a little how unstable and inconsistent the industry is.

Moving towards settlement on a property, a divorce, along with irregular pay cheques are a lot for you to handle.

Taking stock

Let's take stock.

You have some long-term money in super, which is potentially available under hardship provisions, but let's try to leave this alone at present. It does provide a nice base to build on for the future.

While I realise you'll need to pay rent for a home for yourself, I imagine that, if rented, the property might return around 3%, so let's call that $30,000.

With a new inner-city apartment, I imagine there would be a lift and pleasant common areas, so my guess is your quarterly strata fees would be around 20% of your rent, so a potential net rent of about $24,000.

As you say, that is well short of the $6000 a month in repayments. The 'loss' of $4000 a month will be deductible and, in a new apartment, a depreciation report that you can have done will give you further tax breaks.

The value of these tax breaks depends on your taxable income.

From July 1, tax rates are 30% between $45,001 and $135,000, 37% between $135,001 and $190,000 then 45% above $190,001. The Medicare levy, which is 2% for most taxpayers, is added to this.

So, the 'value' of the tax loss on your apartment is linked to what you earn.

I am sure that when you decided to settle, this decision was strongly based on your earnings, meaning that over the past few years they must have been well over $6000 a month.

The positive news is that if, for example, you were earning more than $135,000, the losses on the property would lead to a 39% tax break, including the Medicare levy. In this instance, the real cost to support your property would be closer to $30,000 a year.

The reason I am banging on about rent, strata fees, depreciation and tax breaks is that you need to know the true holding costs.

If, after you set these out, the property is not affordable, you are at a crunch point. If you can't afford it, you can't afford it, so it has to go.

Tax makes it harder

But I am hopeful this is not the case.

The Melbourne property market has had a rough time and all sorts of new taxes have been imposed on investors, such as land tax above a threshold of $50,000.

This is a pretty stiff number. In NSW, for example, investors get a tax-free threshold on land value of $1,075,000 in the next financial year.

If your apartment is in a large complex, where land values for each apartment are quite low, it seems to me that you are likely to have some land tax due.

$50,000 is a very low threshold, so it is no surprise to anyone that Victorian property investors are often looking for future investments outside Victoria.

Affordability is something you will need to calculate.

I know how hard this is when you work in the film industry, but I imagine that you would have a pretty good understanding of your work and cashflow in 2025 and hopefully for 2026.

President Donald Trump is threatening 100% tariffs on films made outside the US and this is obviously a reason for even more instability, but give this calculation your best shot.

The value of holding on

Next, we look at why holding the property is likely to be worthwhile.

In Melbourne, I am not surprised that you are likely to sell at a loss at present.

Again, you should try to quantify that. If the view of experts was that the market would continue to decline, then it could well be the case that you should sell, take your loss and move on.

Despite the taxes on investors and a solid supply of new apartments, it is difficult to make a case that the Melbourne market keeps going backwards.

Population growth, plus location, are the key to a property's future growth potential. I reckon you have nailed location.

Melbourne is a cracking city and the inner city is buzzing, so let's give that a tick.

Metropolitan Melbourne is forecast to grow from 5.1 million people in 2023 to 8 million by 2051. The inner-city has all the features people love: public transport, health services, entertainment, art, culture, recreation,access to work, schools and health services. So, let's put a tick on that, too.

The cost of building goes ever up and that will flow into prices, or developers will not build. I think we have a fair argument for battling on to hold this property if you can.

But I don't want you to stress yourself into an early grave. At age 35, you have many decades in front of you to create wealth. If the numbers don't work and the property has to go, that is okay.

You will recover financially over time.

So, there is good evidence for holding  on, but not at the cost of your health.

I do wish you all the best with whatever decision you make. Always remember that, at 35, you have ample recovery time.

Get stories like this in our newsletters.