How to make it af­ford­able

Money Magazine Australia - - ASK THE EXPERTS - STEVE GREATREX

Steve has worked in fi­nan­cial plan­ning for 30 years and founded the in­de­pen­dent fi­nan­cial plan­ning firm Wealth On Track in Ade­laide in 2009. He does not re­ceive com­mis­sions for any of the prod­ucts he rec­om­mends. wealthon­track.com.au

Clare and Michael, my wife and I also used to live in Or­ange. We have also owned acreage there, so we have done what you want to do. Here are a few things to think about:

Your loan

You have an off­set ac­count. Off­sets are a good idea if you plan to con­vert your home to an in­vest­ment prop­erty later. Your fixed-rate loan ex­pires in Jan­uary – con­sider leav­ing it vari­able. A fixed-rate loan may limit your choice of lenders as your cur­rent lender may charge you heavy break costs.

Shares

If your goal is to save for an­other prop­erty, shares may not be the best ve­hi­cle. In­stead save more cash in your off­set ac­count. If you did put the money in shares and the mar­ket fell, it may take a long time to re­cover your loss and this may de­lay the pur­chase of your farm.

Buy and build

You would like to buy a block of land so that you can de­sign a home that will suit your own needs. Also you have in­di­cated you are happy to leave the block empty while you save for the build. You would pre­fer to keep your cur­rent home as an in­vest­ment prop­erty.

If you spent $340,000 on a block of land (in­clud­ing stamp duty), that would in­crease your to­tal debt to around $608,000 (with you adding cash of $25,000). The two prop­er­ties you now own to­gether would be worth $760,000. So the loan to val­u­a­tion ra­tio would be 79% – un­der the im­por­tant 80% LVR ra­tio. This means that you would not have to pay ex­pen­sive lenders mort­gage in­sur­ance and you would en­joy lower in­ter­est rates.

So the main ques­tion will be one of af­ford­abil­ity. I have run the num­bers in the spread­sheet of one of the tough­est lenders in the coun­try – it ap­plies a de­fault in­ter­est rate of 8% to your to­tal debt. You are spend­ing $31,491 a year as a cou­ple (out­side debt ex­penses).

From 2020 Clare will work two days a week with an an­nual in­come of about $31,200. Once this fig­ure is in­cluded in the cal­cu­la­tions, ser­vice­abil­ity is good. Clare will also re­ceive 28 weeks of half pay on ma­ter­nity leave.

Your de­sired land would cost around $450,000 to $500,000. This would be too much at the mo­ment.

You could also con­sider buy­ing land with a live­able home on it and sell­ing your cur­rent home. You could buy a home with land for about $800,000 if you sold your cur­rent home.

This is $100,000 short of the value of your dream home. And you may need to un­der­take ren­o­va­tions to make the home as you would like it. But the ad­van­tages are: •

You will have the home that you want now (or will have af­ter ren­o­va­tions). •

You will not be ser­vic­ing a sec­ond loan for an ex­tended pe­riod (and the as­set will not be pro­duc­ing in­come).

Con­sider talk­ing to a mort­gage bro­ker. They can show you the widest choice of lenders and will prob­a­bly save you money on your cur­rent loan.

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