Greetings everyone! I am new!

[Nanuq]

hi all! Ive decided to join this forum after reading a few threads. It seems like a friendly bunch here!

Im high 20s and getting ready to buy my first home with my fiance(wife soon) mid next year. My fiance and I would be able to afford something around 850k but dilema here is whether we should buy something at 500k and save 20k on the stamp duties. Imo, the trade off here is, with 850k property I would be able to buy in a better suburb and probably high capital growth potential, the 500k property market would be more sensitive to the interest rates and probably would generate less capital return in the long run.

what do you guys think?

 

[alexlee]

Hi, Nanuq,
When you say you can afford a $850k property, what do you mean? How much deposit do you have, how much do you plan to borrow and how much salary / income do you have to service the debt?

Why do you believe that a ‘better’ suburb will have better cg potential? And why would $850k properties be less sensitive than $500k to interest rates? You could argue multi-million dollar properties are less sensitive to interest rates because those buyers tend not to take out mortgages. IMHO $850k properties tend to be your mid-level execs who still take out big mortgages, or even worse exec wannabes who stretch their loans to the limit to buy in the 'nicer' suburbs.

Would you consider, say, buying a cheap home (say $500k) and an IP for $350k?
Alex

 

[skater]

Are you looking for a PPOR, or is it an investment? Please bear in mind that you are both young & it appears that you will have a huge mortgage. How will that affect you if one of you leaves work, maybe to start a family? What if interest rates rise? Unless your income is very substantial (& secure), I would think carefully about whether you would be getting in over your head.

Many of the investors here are carrying loans of a similar size (or larger), but because they are for IPs, have the rent from tenants to help pay the mortgages.

 

[GIDDO]

Hello Nanuq,

A lot of investors here (I am one) would have looked at their position over the past 2 years and structured their afffairs so as to cope ok with an interest rate rise and a further potential drop in property prices.

Servicability is what I am on about here.

I certainly do not want to be the first investor to drop off the twig when Int rates rise by a percent point and the value of my portfolio drops by say 20%.
It is absolutely critical for me that I have the capacity and the certainty of income to pay an extra 1 or even 2 percent.
After all, I do not wish to sell anything in a crashed market.

I am sure if this happens the banks would not be so free with their money as they have been recently.

If I was you I would structure my affairs so as to cope with even a 2% int rate rise.
I would also look at my income and certainty of same. Maybe put aside an emergency fund as a safety measure.
Sounds very doomsday I am sorry. But that is the way I would go with the size of the numbers you are talking about.
I am assuming you are taking a mortgage for a fair proportion of your purchase.

PS I would buy a cheaper ppor and invest the rest, or else wait for cheaper prices and then purchase a IP.

PPS Maybe I am projecting too many of my assuptions on to your question.
You may very well have the cash to pay for your PPOR and some spare as well!

 

[Nanuq]

thanks for your replies guys.
Yes you are right, I will need a massive mortgage to secure a 850k house. The mortgage would be about 600k and the fortnightly repayment will be 2k fortnightly at 7% of interest rate over 30yrs term. Our jobs are quite secure and they bring home close to 3k per fortnight with more upside potential over the coming years. A 650k mortgage does seems abit scary but my logic here is that we are still young and not looking to have kids in at least another 5 years time, our salary will out grow the interest rate over the next few years and it will help to accelerate our repayment. Does it sound like we are about to over commit ourself? I havent thought about the unlikely scenarios where the rates would go up 1 or 2 percent in the next 2 yrs.

A safer option here is, buy a 500k house, and pay it off to a level when the rent can cover the repayment. Move to a better property later on.

 

[kissfan]

A safer option here is, buy a 500k house, and pay it off to a level when the rent can cover the repayment. Move to a better property later on.

Hi Nanuq.

Still not clear here. Are you planning to rent this house out from day 1, i.e buy it as investment property or did you mean that you will buy it to live in and then at a later date, when you think that rents have moved enough to cover the remaining repayments, move in to a more expensive property.

Regards
Marty

 

[Nanuq]

Marty,
I will buy it to live in and then rent it out at a later date. So it will be owner occupied at first and then change to investment.

cheers

 

[lizzie]

so why do you "need" to start with such an expensive house?

you will find most at the forum here started with cheaper houses that could be renovated or "value added" in some manner. did such, sold, took the profit tax free as was principal place of residence (ppor), moved to another slightly better house that needed work, did such, sold, took profit etc.

if you followed this path you could find yourself in 5 years in your $850k house (at increased value) with little or no mortage and all the profits on your previous houses would be tax free.

by buying an expensive house first up you will be having to pay the mortgage in after tax dollars (i assume you're in the top bracket or near) with no tax breaks on the interest.

if you follow the first method of buying and moving up, you could then borrow out the equity in your final home (which could be substantial by that stage) as deposits for rental properties - and the interest paid on the entire amount then borrowed would be tax deductable.

i suggest you do some serious reading before buying anything ... peter spann, robert kiyosaki (rich dad poor dad) and jan somers and get into the right mind set from the start.

my 2c (or should that be 2mil) worth

 

[skater]

Agree with Lizzie. With only two people in the house, you only need a small house for your immediate needs. My view is that it is better to be safe than sorry.

 

[DCA]

thanks for your replies guys.
Yes you are right, I will need a massive mortgage to secure a 850k house. The mortgage would be about 600k and the fortnightly repayment will be 2k fortnightly at 7% of interest rate over 30yrs term. Our jobs are quite secure and they bring home close to 3k per fortnight with more upside potential over the coming years. A 650k mortgage does seems abit scary but my logic here is that we are still young and not looking to have kids in at least another 5 years time, our salary will out grow the interest rate over the next few years and it will help to accelerate our repayment. Does it sound like we are about to over commit ourself? I havent thought about the unlikely scenarios where the rates would go up 1 or 2 percent in the next 2 yrs.

A safer option here is, buy a 500k house, and pay it off to a level when the rent can cover the repayment. Move to a better property later on.

If you bring home 3K a fornight and repay 2K on the mortgade you probably going to have trouble down the track. Can you afford to keep 600K mortgade if rate rise by 2% ?
$500 a week on living expense may not be enough ... let break this down

$70 in petrol
$20 a week in rate
$100 a week in food
$50 in water and electricity
$50 factor in for maintainance on the home
$50 for your baby and stuff like clothes and toys and things.

what about childcare ? another $200 a week?

you dont have much for margin of safety, be safe than sorry
live Frugally, buy something cheap and have small mortgage.

only tax and deadth are certainty, no one job is safe so factor that in what would you do if are are out of work for 6 months?

 

[alexlee]

thanks for your replies guys.
Yes you are right, I will need a massive mortgage to secure a 850k house. The mortgage would be about 600k and the fortnightly repayment will be 2k fortnightly at 7% of interest rate over 30yrs term. Our jobs are quite secure and they bring home close to 3k per fortnight with more upside potential over the coming years. A 650k mortgage does seems abit scary but my logic here is that we are still young and not looking to have kids in at least another 5 years time, our salary will out grow the interest rate over the next few years and it will help to accelerate our repayment. Does it sound like we are about to over commit ourself? I havent thought about the unlikely scenarios where the rates would go up 1 or 2 percent in the next 2 yrs.

A safer option here is, buy a 500k house, and pay it off to a level when the rent can cover the repayment. Move to a better property later on.

Nanuq, has the rate rise today changed your opinion that interest rate rises of 1-2% in the future is unlikely? The RBA will keep raising interest rates until the economy tanks, and when the economy tanks employment and property prices will both fall.

I'm about the same age as you (I'm 29) and our age group has spent our entire careers in a booming economy with rising pay the almost no unemployment. Ask those who were working in the early 90's and you'll get an idea of what can happen in a recession, regardless of what your job is. The longer this current boom lasts, the worse the recession will be. I don’t believe in perpetual booms, even if the long term trend is up. In my opinion the BRICs will eventually grow into super economies but with hiccups (recessions) along the way.

You're talking about committing yourself to 2/3 of your net income (not including things like council rates, insurance, utilities, etc.) based on both of you working, no kids and low interest rates at the height of a goldilocks economy. I think you’re using perfect scenario assumptions here. What if you decide to have kids a little earlier? I didn’t even think about settling down last year, but now I’m starting to think about it. A recession will kill off pay rises. A 1% interest rate rise will translate to $6k a year, which is another 8% of your net pay.

So yes, I think you’re over-committing.
Alex

 

[skater]

What if you decide to have kids a little earlier? I didn’t even think about settling down last year, but now I’m starting to think about it. A recession will kill off pay rises. A 1% interest rate rise will translate to $6k a year, which is another 8% of your net pay.

So yes, I think you’re over-committing.
Alex

Kids can sometimes turn up unexpectedly too.

When I bought my first home I didn't believe that anything could go wrong. About 18 mths into the mortgage, interest rates hit 17.5% & I had just stopped working as No 1 daughter decided to make her presence several years earlier than planed. Next hubby was retrenched.

I was close to your age when this happened. Do you think it can't happen again? I hope it doesn't, but you never can tell (unless you have a reliable crystal ball, which by the way I don't have).

You're young, on a good income with the world at your feet. Be careful!

 

[alexlee]

Yes you are right, I will need a massive mortgage to secure a 850k house. The mortgage would be about 600k and the fortnightly repayment will be 2k fortnightly at 7% of interest rate over 30yrs term.

It's not so much the amount of your mortgage that's worrying. Many of the members (including me) here have mortgages > $600k. There’s a huge difference between having $600k loans on IPs where the rent pays most of the interest, all expenses are deductible and depreciation increases your cashflow, and a PPOR where nothing is deductible, you don’t get rent or depreciation.

I’m not saying one is better than the other, but just be aware that there are BIG differences between the two. Property has to be analysed in terms of what you do with it, in the same way as $100k sitting in shares is not the same as $100k sitting under your mattress.
Alex

 

[coffee]

Nanuq,

Two people only need one room to sleep in, one room for vegging around a TV plus a kitchen/bathroom. Save & Invest the rest of your spare cash into buying assets.

Your just starting out ? plz dont over committ yourself.

Welcome to the SS ship, sit back and read past post from this great community.

Geoff

 

[Nanuq]

Alexlee, Lizzie I was kind of expecting the rate rise this morning. Although people say, and I think rate rise of 1-2% in the near future is very unlikely, but who knows whats goig to happen tomorrow. I have been lucky in my investments and career so far (touchwood), and that “it will never happen to me” could lead me to the danger zone.
Maybe I should read some unlucky people’s stories that would moderate my optimism.

Here are two options available to me.
1) Borrow 600k PPOR, all capital gain will be exempt, but I cannot benefit from negative gearing and rental income.
2) Borrow 300k PPOR and 300K on IP, less exemption on CGT and benefit from neg gearing on the IP.

Let’s assume all of the properties I have bought appreciate by 20% in the next 5 years.
In scenario1, I will be able to pocket 160k if I decide to sell, whereas in scenario2, 100K on the PPOR, and 60K on IP but subject to CGT. I need to do more maths on how much neg gearing can save me.

Skater, having an unexpected kid is my worst nightmare at this stage…I always go for double protection

 

[Trogdor]

Skater, having an unexpected kid is my worst nightmare at this stage…I always go for double protection

TOO MUCH INFORMATION!!!!

 

[alexlee]

Nanuq,
All your numbers assume property goes up in the next 5 years. Buying your first PPOR, in the $850k range, I can almost guarantee you'll pay too much (getting emotional and not knowing all the tricks). Paying 10 – 15% above market would not be a surprise for a first-time buyer of a PPOR, especially if you’re armed with a high bank approval (i.e. you like the house and you can ‘afford’ to buy it – you’re not really looking at the value of the house).

You'll probably find something that yields 3% (from what I've seen of the $850k price range in Sydney). The chances of making 20% in 5 years on that basis is low, in my opinion.

Let's hope your fiance doesn't change her mind about waiting 5 years for kids. If your fiance is anywhere near your age, her views on kids are going to change much faster than yours (biological clock: you can have kids at 40, she probably can't).

Personally, at this stage of the economic cycle I'd be more worried about the downside. What leads you to believe interest rates won't go up 1-2%? Oil prices are at historic highs. Interest rates are going up world-wide. The Australian economy has been growing for 15 years: the recession in 2001 was so shallow only because the RBA went crazy cutting interest rates, causing the property bubble we see now (especially in Sydney).

Either the economy slows (maybe a recession?) or the RBA is going to keep raising interest rates until it does. McFarlane has shown he’s willing to ignore the government and business community to fight inflation. I think he’s willing to send the economy into recession if that’s what it takes.

History tells us that monetary policy tends to overshoot (as in the 90's recession, or the 2001 interest decreases in the US and Australia leading to property bubbles). The next overshoot is more likely to be down than up. If interest rates go up and your pay stalls because of a slowing economy…. You don’t have much of a safety net. You might be able to get a LOC to tie you over, but if so you'd better set it up when you buy the place.

What do you do for a living, by the way? The reason I ask is that in a recession previously high-paying jobs disappear or take savage pay cuts. I know that my own profession (bank accounting) has been going really well for the junior guys. On the other hand, I remember what it was like looking for a banking job in London in early 2001 (NASDAQ 2000!!!!) Tons of experienced people washing around: I ended up just taking a normal accounting job.
Alex

 

[lizzie]

Let’s assume all of the properties I have bought appreciate by 20% in the next 5 years.
In scenario1, I will be able to pocket 160k if I decide to sell, whereas in scenario2, 100K on the PPOR, and 60K on IP but subject to CGT. I need to do more maths on how much neg gearing can save me.

don't forget to also add in the rent you will recieve - say $300/wk = $78,000 over 5 years.

you only have to pay capital gains if you sell ... so don't sell your ip or have it set up in a trust structure so that you can choose who recieves the cg ... reno your ppor and sell that to upgrade.