Ask Paul: When it is time to buy a bigger house?
AJ: I am 43 and recently married for the first time. My wife, Julie, is 10 years my junior and we are both schoolteachers in the public system. Our combined income is around $170,000 a year.
Before I got married, I bought the unit I was renting for about $300,000 and this is where we reside.
We try to put around $4000 towards the mortgage every month but still owe about $115,000. We have around $50,000 in our offset account.
We are in the market for a bigger home as we plan to start a family soon. We have looked at many houses in our area and have seen several that appeal to us in the mid-$500,000 range.
Is this beyond our means? Is it a good time to buy or should we pay off the unit first and wait for prices to drop? Obviously we may be living on a single salary for a few years in the near future. Thank you for your wisdom!
Paul: Hi AJ. Crikey, I love Money readers. "Thank you for your wisdom" is such a nice thing to say.
Let me put this in context. I am fortunate to have a bunch of university mates from the mid-1970s; we were at Baxter College at the University of NSW together. As is the way with old mates, they do keep you grounded. One of their favourites happens when someone comes to say "hi" to me at the pub.
Quite often this person ends up saying something along the lines of, "You make money issues sound simple". My mates think this is terrific.
Their response is well rehearsed: pretty much in unison they say that the reason I make money issues sound simple is "he is not very bright", followed by uproarious laughter.
So I do appreciate your confidence in whatever wisdom I may have and I'll do my best. First, congratulations on your marriage. You two are doing exactly the right thing and saving like crazy - $4000 a month is effectively one of your incomes.
This, plus the money in your offset account, will have you debt free in a bit over a year. But this is not critical. With your savings and equity, you are being really conservative looking at a house at around $550,000.
Assuming your current home is worth what you paid for it, you have equity plus savings of close to $250,000. A $550,000 house, plus stamp duty and costs, would take an outlay close to $600,000, so your mortgage would be some $350,000. Repayments would be about $2000 a month for 25 years (at 4.5%).
I appreciate you may well move to one income but maternity (or paternity) leave is quite generous and I would imagine that you would work out a plan for the primary carer to return to at least part-time work over time. So I think it makes a lot of sense to buy a bigger home now or at a time that suits you.
Prices may well fall in the short term but our population is growing quite rapidly and, unless you live in an area that has a falling population, poor job prospects or other negative features, buying a bigger home is a good idea.
Sure, it is important to look at your budget based on one income but with a single income of some $85,000, it seems to me that you are in a solid position to handle a $350,000 mortgage.
Compulsory super is also adding to your wealth; it is also likely to be invested at least partially in shares, giving you diversification.
Wisdom this may not be. But a plus of turning 60 is that I can look back on my own life. My wife Vicki and I were always concerned about debt, plus the costs of having three children. We bought a small semi-detached house as we had our first child. As the others came along we borrowed a heap of money to buy bigger homes.
I remember Vicki sleeping badly due to our sizeable mortgage but she seemed to relax when I explained that as the bank owned most of whichever house we were living in, there was not a lot of downside for us personally.
So my advice is to be stay reasonably conservative, plan carefully and go for it. I really wish you both all the best and a great life. I am sure someone has already said this but be brave, not fearful.