How to make it affordable
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:
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.
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.