Ask Paul: Should we take out a $600,000 mortgage?


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Q. I'm 30 and earning $88,000pa; my partner is 33 and earning $104,000.

I bought a two-bedroom apartment two years ago for $450,000 (with a $100,000 deposit); now it's worth $500,000. I have the mortgage down to $268,000 (due to $65,000 in an offset account) as we make higher repayments.

We plan to start a family in the next one or two years and need a bigger house. Ultimately, we'd want to keep our apartment. (It's in an amazing spot, very close to the beach and a train station, and we could always get renters in, currently for about $400pw.)

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We would buy another place with three bedrooms. Units in the areas we want to live in are going for about $700,000-$800,000.

We are thinking of several options:

1. Rent out our place and rent a bigger house for us.

2. Sell our place to help with a larger deposit but pretty much lose any profits that would come our way in a few years by holding onto it. (We don't want to do this.)

3. Rent out our place with rent almost covering the full mortgage repayments (negatively geared), and take all our available cash out (about $70,000 in cash, $20,000 in shares, $60,000 equity loan) as a deposit on a unit ($700,000 unit plus stamp duty with a $150,000 deposit would mean a loan of about $600,000, with repayments of about $3000 a month).

4. Take existing cash and buy a cheaper house (say $500,000-$600,000) further away to also rent out to help grow our portfolio while renting where we want to live.

We would love some guidance. - Elizabeth

A. You have given me plenty of information, Elizabeth, which helps me a lot.

I want to see you own your new home. This eliminates option 1.

I don't like your final option. I think you should live where you want to live and closer-in properties generally grow in value faster.

You don't want to do option 2, so between the two of us it looks like we are focusing on renting your unit and buying. It all gets down to how your budget looks with $3000 a month in repayments.

If this is OK, and I think it will be given your joint income, you should go for it.

Do run your numbers with a higher rate of interest - at some stage the rates should go up - but on a loan of around $600,000 I don't see this being an issue. In fact, while I don't want it to drive you into a higher level of debt, I think you could comfortably stretch to a higher loan.

Your safety margin is enhanced by the equity in your original apartment.

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Paul Clitheroe AM is founder and editorial adviser of Money magazine. He is one of Australia's leading financial voices, responsible for bringing financial insight to Australians through personal finance books, the Money TV show, and this publication, which he established in 1999. Paul is the chair of the Australian Government Financial Literacy Board and is chairman of InvestSMART Financial Services. He is the chair of Financial Literacy at Macquarie University where he is also a Professor with the School of Business and Economics. Click here to ask Paul your money question. Unfortunately Paul cannot respond to questions posted in the comments section. Please view our disclaimer here.
April 13, 2019 10.58am

Is it important to mention the Capital Gains Tax that should be considered when changing from owner-occupied to rental?