Ask Paul: How can I overcome my fear of debt and buy a home?
Paul: I'm a 45-year-old with no assets, not even a car. I have $40,000 in super and $300,000 in short-term savings.
One reason I'm scared about debt is that my professional work takes me around Australia. The work is casual and I can't get income protection. Fortunately, I have no debts or dependents.
Surprisingly, because I've been in the same job for a while banks say they will lend me $300,000. To stay safe I'm wondering how much I should use to buy a residence and/or shares?
Paul: Hang on, Paul, you have really serious assets; in fact, $340,000. I get what you say about debt: getting ill or injured outside work without income protection insurance means you are correct to be concerned.
But I really would like you to have a place to call home. I am not sure where that is but if you were able to buy a place for, say, $600,000, including stamp duty and costs, you would still have a nice buffer of $40,000 in case of a health issue. Equally, if you saw NSW as home, the new state government laws could see you paying no stamp duty on a home of this value.
The $300,000 mortgage would have interest payable at around 4%. Don't let your bank charge more than that. UBank, owned by NAB, is currently at about 3.7%, and I see plenty of others offering rates below 4%, so shop around.
But at 4% you would owe $12,000 a year in interest, which is quite manageable. As you work away from home, you may be able to let your property for short terms and earn a return close to this.
So I appreciate your caution. But time moves on and I would like you to own a home, and pay it off, during your working life.