Hey all!
(Sorry if this is a long winded post – better to include all the details I say!)
Long time reader, first (or fifth) time poster. Good to read all the helpful advice from so many people out there!
Anyway, here’s our situation – hopefully someone can suggest some ideas or provide a couple of hints or tell me we’re crazy.
My wife and I (both in our mid-20’s) live in a Brisbane CBD apartment. It’s great. It’s close to everything. We have some fantastic sound proofing too! We moved up from Sydney after buying an off-the-plan unit (2 bed, 2 bath, 85sqm, carpark, storage + upgraded fittings) back at the start of 2003. Furnished it completely for $6500. Moved into this unit (got the $7k grant!), making it our PPOR last December and started paying off our Very First Mortgage. Right now we’ve got a puppy (yes, our by-laws allow pets!), and we both want to buy some land out west of Brisbane and build a house on it. Then we’ll make that our PPOR and rent out our existing PPOR unfurnished for $400 pw. That way, the mortgage on our unit should only cost me < $100 a week to service.
The land we want to purchase costs $215k. The house we want to put on it costs $175k. Rates for the region are about $500/quarter. Strata is $15 a week. I figured additional costs for both these acquisitions to be about $7-$10k. Similar houses around the area we want to move to are in the high $400-$500k.
Here’s the Gory Details:
Original Purchase Price of unit: $336k
30 year Mortgage remaining: $248k (split into 3 year fixed at 6.74% on $168k, variable at 6.99% on the remainder). I can redraw on the variable portion, so basically all my earnings are being pumped into this part of the mortgage.Savings: $18k. We live off my wife’s wage, and I pay the bills and mortgage. (Sounds fair, ey?
)Equity: $86k – $130k, depending on a revised valuation of our unit.
Together, we clear about $1300 a week net.
From what I can gather, I can draw down on our existing equity to fund 20% of both land and house purchases, with the remainder in a loan, with total repayments for house/land about $600 a week in P&I.
We’ll make this new house our PPOR for a couple of years before moving back to Sydney (or to another investment somewhere else).
Does this sound like a reasonable investment?
Our we going above our heads here?
Should we purchase the land, pay it off interest only to minimise repayments and build a house on it a year later to increase equity in our unit?
Should we purchase the land and put the house on it as quickly as possible?
Should we stay put and try to pay as much of our existing mortgage off as possible? My wife is of the nature that “We can’t possibly have 2 mortgages!”. I believe that success comes from doing things differently.
Any help appreciated. Let me know if more detail(s) are needed!
Oh, and hope to see many of you at the upcoming Masterclass in Brisbane!
Cheers!
— MJ.
I am interested to know…
Why do you have to pay strate fees when you are buying a block of land?
Why do you have seperate savings when you have a non-deductible mortgage?
Why is your variable loan more expensive than your fixed loan?
Assuming you can service all debts, I would build the house asap. That way you will have another income much sooner to help pay off the loans. You should not be too worried about having enough equity if you are using a contractor with a fixed priced building contract to build your new home as lenders will lend against completion value.
Robert Bou-Hamdan
Mortgage AdviserQuote:Originally posted by The Mortgage Adviser:I am interested to know…
> Why do you have to pay strate fees when you are buying a block of land?
The land is part of a ‘community’ which helps pay for the landscaping and upkeep of things usually the council supposedly takes care of.
> Why do you have seperate savings when you have a non-deductible mortgage?
How do you mean non-deductible? I guess we originally planned on having my wife ‘save up’ for a deposit on our next house. That is, before I realised we could just used equity…
> Why is your variable loan more expensive than your fixed loan?
Originally the variable rate was 6.75%. Then it went up to 6.99% from the last interest rate rise. I pay about $500 per fortnight on fixed repayments versus $250 per fortnight on variable repayments. Go extra repayments!!
> Assuming you can service all debts, I would build the house asap. That way you will have another income much sooner to help pay off the loans. You should not be too worried about having enough equity if you are using a contractor with a fixed priced building contract to build your new home as lenders will lend against completion value.
Thanks for your advice!
— MJ.
Just regarding saving up for a new deposit, or anything else, when you have non-deductible debt like your home mortgage, you would be better served putting all the money into the loan if it has redraw or an offset account and the loan is interest only. This not only lets you save money but also reduces how much you are paying out in interest repayments and you still have full access to the funds as well as more flexibility when you move plus greater tax advantages.
A comparison of why not to have seperate savings when you have non-deductible debt is below…
Seperate Savings
$10,000 Savings
$100,000 Loan Amount
7% Interest Rate
$7,000 Annual Interest Only CostInterest is calculated on the $100,000 outstanding.
Savings Combined In Loan
$10,000 Offset Account Or Redraw
$100,000 Loan Amount
7% Interest Rate
$6,300 Annual Interest Only CostInterest is calculated on the $90,000 outstanding.
The above example just shows how simple structuring changes can save you a lot of money. As you can see, combining the savings will provide you with an additional $700 in savings.
Structuring the loan as interest only also does not prevent you from making extra payments without penalty. It is also advised that you make at least the equivalent of half the monthly principal and interest payment each fortnight to make even greater savings and huge reductions in the loan term.
I should also point out that if your savings were in a savings account earning you 6%, you would have to pay tax on this. If you put it in the offset account or redraw, it would save you 7% which is not taxed because it is not an income. If your tax rate was 50% (as an example), the 7% saving would equate to a 14% annual return on your savings.
Robert Bou-Hamdan
Mortgage AdviserQuote:Originally posted by The Mortgage Adviser:Just regarding saving up for a new deposit, or anything else, when you have non-deductible debt like your home mortgage, you would be better served putting all the money into the loan if it has redraw or an offset account and the loan is interest only.
This makes sense – the hurdle was trying to get my wife to understand how a savings account with 5.40% is less better off than an interest rate of 6.99%. Because 5.4 is less than 6.99!
— MJ.
Don’t forget… the ING 5.4% is taxable and the 6.99% interest expense saving is not. It is a huge turn around!!!
Tell her to read this thread. If she doesn’t change her mind, I am happy to have words with her!!!!
Robert Bou-Hamdan
Mortgage AdviserQuote:Originally posted by The Mortgage Adviser:Don’t forget… the ING 5.4% is taxable and the 6.99% interest expense saving is not. It is a huge turn around!!!
Indeed!
How did you figure ING?
I guess they’re the only institution that has rates at 5.4%…Tell her to read this thread. If she doesn’t change her mind, I am happy to have words with her!!!!
I tried. In the end, I read it out to her. Tomorrow her bank account is getting closed…heh.
— M.
Great! I hope it all works out for you both.
Robert Bou-Hamdan
Mortgage Adviser
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