NSW How much should our budget for a house be?

Hi all

I'm trying to get some feedback from posters here.

We're a married couple in our late 30s, with one toddler.

We've been budgeting $1.8M for a 3 bedroom home in the leafy north of Sydney/ northern beaches region.

Problem is houses that meet our search criteria for 1.8M are hard to come by. We are quite picky - we want privacy away from busy roads, modern style (open plan) living, double garage, pool preferred but not a requirement.

I wonder about what my budget should be, because when I attend inspections for houses that are asking north of $2M, I see lots of young families of a similar age to ours, and I can't help but wonder if I should increase my budget to the $2M+ range..

A quick run-down of our finances:
- currently just over $1M in the bank (currently off-setting two investment properties which are slightly negatively geared, generating 3-5K losses per year)
- my annual pre-tax income is around 240K, my wife's 170K
- no real ongoing expenses, but childcare costs about 32K per year currently

So are we selling ourselves short to have set a $1.8M budget, only wanting to borrow 800K (+ stamp duty) with our income and financial position?

My first property bought 10 years ago, I borrowed 3x my annual pre-tax income. Things are a little different now.

Any opinions would be appreciated.

 

You're really asking what your borrowing capacity it. From what you've described it's probalby not a problem, but there's a bit to unpack but not enough detail to give you an answer with any real confidence. To answer your question you really need to have a detailed discussion with a mortgage broker.

 

In all honesty, if you're finding yourself asking that question and with what we're seeing on the ground my answer would be yes, you'll need to increase your budget. Keep in mind that the million offsetting your IPs will effectively make your purchase 100% debt (tax benefits for the remaining IP debt aside which will become more negatively geared once that cash is removed from offset) so make sure you do your numbers carefully.

You have high incomes and with interest rates the way they are the payments won't be too much more, however we are seeing more and more people buy on payment amount, not price. You should and must take into account future rate rises, changing life situation or anything else that might threaten your cash flow scenario in future years. As an example, make sure you have income protection, trauma cover or a combination of both. The last thing you want to be doing is having to firesale property if you're relying on both incomes for servicablity and one of you gets sick.

- Andrew

 

How much are houses that you want being sold for?

are you willing to pay that price? And would you be willing to borrow the amount needed?

 

It's all well & good to say that you wish to pay $1.8mil for a property in your selected area, but if they are selling for more than this, you have no alternative other than to pay more (if you have the serviceability), unless you are prepared to adjust your expectations. If prices have moved above your comfort level, you may have to change location, or build quality and/or size, or land size. Maybe a fixer-upper, if you're comfortable with that.

 

Sorry reading all that just makes me thankful to live in Brisbane.

You are wealthy and have high income. You can likely borrow enough to get your $2 million house if you want that. Sounds depressing though as you should be very comfortable.

 

There are houses we want that have sold for 1.7-1.9M range as recently as last month or two. Currently none on the market that we like.

Problem is limited stock, and I need to avoid a FOMO-led impulse buying of a house that doesn't meet our requirements, but also avoid waiting too long (we are ready to buy now but happy to keep looking for 6-9 months if required) and having to pay more if prices go up as they are predicted to.

 

Yeah I know, I could have a great house in Brisbane where my dollar would go much further.

But my income is tied to Sydney though, so I can't take my income to QLD and enjoy the cheaper houses there.

 

When you bought your past properties, did you pay the rock bottom price? Or does it just look cheap in retrospect? If you are going to live there for a while, is even a 5% difference all that much long term? Given that your income and borrowing capacity means its not too much of a stretch.

waiting for the right house is fine, but waiting for the right house at the price you want to pay, in a rising market.......

Waiting works in a slow market. Last time was 2018. But ask yourself why you didnt buy in 2018.

 

We bought in the upper north shore last year. Depending how far up the train line your ~$1.8m maybe ok or not nearly enough. Only you can make that judgement.

However, being in a similar position as you and similar age, my suggestion would be optimise for the location first (e.g. away from noisy roads, school catchment and walk to rail were our requirements). You can fix the property to your liking at a future date. I think unfortunately to buy in these areas with an entry level budget you have to make compromises.

If you can up your budget now and get what you want then consider doing it. The market picked up late last year and will continue moving this year.

 

Investing into PPOR is usually an emotional decision not purely based on numbers game, so it really depends what you want and what you are willing to compromise if your budget doesn't allow it.
If ideal place doesn't exist perhaps chose a location first then do up the place and put a pool after?
We chose the location then did the upgrades, this worked really well in Lower North Shore suburbs, many are now renovation or rebuilding too.
Also remember PPOR loan is non-deductible debt, but no capital gain as yet too!

 

I would look at the houses that fit your criteria and what they have sold for and then add at least 10%. Because this is the increase that has happened in the past few months.

 

maybe i missed it, but i haven't seen anything about when you want to pay it off..

my first question is: when do you want to have it paid off?

you are borrowing XX amount of money?

you earn ~160k per year and your wife about ~120k, great work, that's ~260k per year, minus your 32k childcare, that makes you with about ~230k left. What are your other living expenses? Let's say ~80k living expenses, that leaves you with ~150k disposable income (providing you both stay employed).

so back to the question... how long do you want to have the mortgage? ... well divide the amount of years by your disposable income (in reality , take off 20% of that disposable income as you will always spend more).


so basing off that $1m mortgage loan, divided by $150k ... that's about 8 years.

Are you happy to pay it off in 8 years?

 

We didn't buy in 2018 as we were still living in our PPOR - which we recently sold to free up the cash for the next purchase.

You're right about the risks of waiting in a rising market, but we can't buy whatever is out there which don't suit our requirements. Increasing our budget is probably the way to go. The 1.8M budget was set because we were quite comfortable with it.

 

I'm comparing to houses sold early to mid December. Not sure I'd agree prices have jumped 10% in the past 7- 8 weeks..

 

I would say a minimum 5% but expect another 5% in the coming month or so. You are buying into a rising market that will likely exceed your expecations. My area has gone up 10% since late November.

 

We don't have a firm goal in terms of how quickly we want to pay it off.

In our previous PPOR which was an apartment, we were saving around 100K per year. I do wish to pay it off in under 10 years, and the calculations are based on low interest rates which many predict won't shift up so maybe it's doable..

 

Yes we have narrowed it down to 4 neighbouring suburbs. Currently only about four 3 bedroom houses in total on the market, none of them remotely close to what we want, some of them significantly under budget as well.

So it's down to stock, and I'm predicting the stamp duty changes when implemented should free up stock due to the removal of a huge stamp duty as a deterrent to selling and buying. But who knows when that will happen, and how much prices will be up by then..

 

1.8M budget means borrowing around 900K (including stamp duty), and we were comfortable with that, to the point where if our incomes dropped by 30% we would still be able to afford the repayments. Mostly it's about not wanting to borrow $1M, which is more of a psychological barrier and one that induces a little anxiety, given we already have close to 900K in investment loans, which are soon to lose their offset.