Ask Paul: Should we renovate our home or invest?
Q. I am 33 and my husband is 35. We have a mortgage of $37,000 with $48,000 in an offset account and savings of $31,000.
Our house is valued at around $1.1 million and we have shares worth about $31,000.
We have two children, aged three and one. I work part time ($53,000) and my husband works full time ($125,000) with super of $37,000 and $85,000 respectively.
We recently started salary sacrificing $100 a week each into super.
We would like to extend our house in the next few years, at an approximate cost $400,000. In the long term we would like to have a passive income so we can retire comfortably at 60.
Should we invest in property and shares now so they are paid off when we retire and borrow most of the $400,000 or continue to save and pay off the renovation before looking longer term? - Lisa
A. Hi Lisa. You take me back in time to when Vicki and I had a three-year-old son and a one-year-old daughter, making it 1990. We had bought a house in the Sydney suburb of Artarmon, on a steep slope, so carrying the kids up the steps was better than going to a gym - and cheaper. Our mortgage had just hit 18.75% and property prices nationally collapsed.
Strangely, despite having to sell our nice car and buy a second-hand Ford Falcon for $6000, life was really enjoyable. With two youngsters, we did not go much further than the beach and our local park. Holidays were unaffordable. My now long-departed dad thought times were great, though. He had a term deposit paying 16%.
Anyway, that is not your problem but it is worth remembering that low rates will not be with us forever. The point of this piece of economic history is that, despite the tough recession, we also wanted to renovate.
There is always a silver lining, and the collapse in property prices meant builders were pretty desperate. You could ring a plumber, electrician or builder and they would turn up on time the same day! So as interest rates fell in 2001, we built an extension that made the house much nicer for our family.
Clearly you have a terrific capacity to save. As was our experience, with such young kids it is a great time to renovate your home so you can enjoy it in the decades ahead. If you borrow the $400,000, your repayments would be $20,000 or so a year. The extended house should be worth $1.5 million-plus, so your loan to value ratio (LVR) would be conservative.
My advice is simple. Given the age of your kids, I'd get the renovation done first. I am sure you know the old saying about renovations, in that they take "twice as long and three times the cost".
This was not our experience with our first renovation during the recession of 1990-92. But some years later, in a bigger house, as our third child had arrived and the economy was as strong as it is now, this renovation behaved exactly like many others: it took twice as long as planned and cost three times as much as we budgeted.
So my recommendation is to do the house, then plan your next move. A $400,000 renovation is a big deal. If you have to move out, it will involve a fair bit of expense. Even if you can stay in your home, two young kids amid the dust and noise is not a small deal.
I am not terribly fussed about you waiting to invest until you have paid off the loan. You have good cash flow and savings. Review your finances after doing the renovation - I think future investment can be looked at with more clarity then.
I would love to hear from you about your renovation experience so please drop me a note when it is done. One thing an old dinosaur like me can tell you is that your kids will grow faster than you can believe. Enjoy them!