Big mortgage is a big risk

Q My husband and I are in our late 30s with two children in early primary school. We have a combined before-tax income of $160,000. My husband earns $118,000 of this as I work part-time.

We have a mortgage of $350,000 on our home, which we purchased for $490,000 in 2010 (valued at about $550,000 by the bank around two years ago). We pay this off at $1300 a fortnight.

We would like to know the best way to invest our money, and how to best reduce my husband’s tax. We would love to upgrade our home, within the same area, but also hold onto our current property for investment purposes as it is a small, solid, four-bedroom brick home in a good area.

We do not live a lavish lifestyle but I feel we should be doing more with our money for our family’s future. We really don’t know where to start.

Well, Jo, I am very pleased you bought a home before the boom in our major cities. This gives you equity and more options. The key number for me, though, is how much you can save. I can see you are paying more into your mort- gage than you have to, but it really matters how much extra you can save. Given the value of your current home, I would think an upgrade would have to cost over $750,000. Funding this while keeping your current home looks like a risky plan to me. It would mean a huge mortgage at a time when interest rates are likely to go up.

So it seems to me that if you want to upgrade now, a prudent plan is to sell and buy. Even so, your new mortgage is likely to be over $500,000. So right now I think your best plan is to check your budget and pour your savings into your mortgage. Incidentally, this really should go into an offset account, meaning you can use this to fund a new home in time to come. You will want to have a big mortgage on your current home, which then becomes deductible as an investment property, and the lowest possible mortgage on your new home, which is not tax deductible.

You could, depending on your savings capacity, consider buying another property and rent it. This could allow you to own a home you would move into in time to come, and also provide tax advantages due to negative gearing. A chat with your accountant would be important before you do anything.