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Ask Paul: How do we balance a baby and a mortgage?

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Louise: My husband and I are 32, and currently earns $103,000.

I usually earn $106,000 but am currently on maternity leave. I hope to take off 18 months.

We live in our own two-bedroom house (a worker's cottage), purchased last year in Brisbane for $640,000.

ask paul balance baby and a mortgage

We have $507,000 left on the mortgage with $85,000 in our offset. Our home loan rate is 4.31%pa and we pay no mortgage fees. We have a combined $250,000 in superannuation. We own our two cars and have no other debts.

We expect to move to a larger house in five to seven years to accommodate a growing family. Therefore we plan to do some renovations to expand our home to three bedrooms and hopefully add value.

With this in mind, do you think we should switch to an interest-only loan, with a view to keeping the property as an investment when we move? Or are we better off keeping the mortgage as principal and interest, and selling the property instead?

Paul: Hi Louise. Phew, your situation is a pretty easy one for me to answer. With tight budgets and health issues, this month's questions have caused me to fret!

So why I am so relaxed?

Well, I have little doubt that your family income will be significantly higher in the years to come.

So due to a big increase in your future family income, I don't want you paying principal and interest.

Pay interest only and keep building the offset account. A house in Brisbane will be a good investment and I suspect you may want to keep it and rent it. So you want your mortgage to be as high as possible. You use your offset account to assist with the new home and then rent your current home with a large tax-deductible mortgage.

Renovations are just fine but I'd be using borrowed money to do that to maximise future deductible debt.

If you sell your current home to buy a new one. This will all be irrelevant but, with your family income set to increase dramatically in the years to come, I reckon you would be smart to give yourselves flexibility and choice by keeping the mortgage on the property at a maximum.

Best wishes for your new baby, and to your husband with his exams.

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Paul Clitheroe AM is a respected financial adviser and Money's founder and editorial adviser. He is chair of the Australian Government Financial Literacy Board, and author of several personal finance books. Click here to email Paul your money question. Unfortunately Paul cannot respond to questions posted in the comments section.
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