Some friends of mine are wanting to purchase their first home. They have 4 kids and are what you’d call battlers.
If I were them, I’d continue renting but purchase an investment house in a cheaper location. In ten yrs they would have equity for the deposit on their dream home. However they have set their sights on the great australian dream.
I was wondering if they should get an interest only loan for the PPOR. Now I know everyone says you should pay off asap your home but I was thinking that if they bought a house now for 300k and only ever paid interest, in thirty years time they would still owe 30grand but the house would be worth 1.2m. At that point they could downgrade to a unit worth 90grand and have no mortgage.
The thing is that with four kids to raise they could certainly use every cent in their pockets they can lay their hands on.
woddayarekkon?
Originally posted by Milly:Some friends of mine are wanting to purchase their first home. They have 4 kids and are what you’d call battlers.
If I were them, I’d continue renting but purchase an investment house in a cheaper location. In ten yrs they would have equity for the deposit on their dream home. However they have set their sights on the great australian dream.
I was wondering if they should get an interest only loan for the PPOR. Now I know everyone says you should pay off asap your home but I was thinking that if they bought a house now for 300k and only ever paid interest, in thirty years time they would still owe 30grand but the house would be worth 1.2m. At that point they could downgrade to a unit worth 90grand and have no mortgage.
The thing is that with four kids to raise they could certainly use every cent in their pockets they can lay their hands on.
woddayarekkon?
You assume the house will be worth 1.2m.
‘Battlers’ always seem to have a flock of kids – there’s a link there.
If they are ‘battling’ (do you mean struggling?) now, buying a negatively geared I.P (’cause that’s what it is likely to be) will take more of their income than they have available now. That is very risky.
They will need to find a bank that will
(a) lend them the money at all
(b) lend them an I.O loan over a long period.
The strategy you suggested is good, if they can support the extra drain on the cashflow an I.P will usually create.
They will need to get a ‘financial statement’ organised to take to the bank, and the bank will work out what they can afford to do.
For a start, they need to find the cheapest place to rent they can, clear all credit card and car loan (and whatever else) debt.
Then they must learn to pay CASH for all their consumer items.
That is THE hardest thing for most people in this consumer debt addicted society to do.
You may need to help them with their ‘financial statement’ as well before visiting any bank. If they can’t show the bank that they are in control of their finances (it sounds like they aren’t) then they will be hard pressed to find a bank which will let them take on more debt, even though it is the right kind.Cheers,
Marc.
[email protected]If they are battlers (ie just getting by) make sure you factor in significant interest rate rises. I know of a case where in order to get into the market, IO was chossen as it was cheaper on a monthly basis. The problem occurs when rates rise and those that are close to the mark cant cope. The other way to look at PI is as forced savings. If things get tough in the future, the loan may be able to revert to IO and the extra payed with drawn. As always this is dependant on circumstance.
Tell them good luck, and remember it is OK to use stepping stones to the dream home rather than have the dream home turn into a nigtmare first up.
Cheers
Tammy
You must be logged in to reply to this topic. If you don't have an account, you can register here.
