Mid-20’s couple - first home buyers advice re mid-term strategy

We've been doing some thinking and have learned a lot from PropertyChat which you can see probably informed our approach below.

A brief background:

• Mid-20’s married couple in full-time professional jobs in the legal industry in Melb CBD early in our careers with potential for progression
• Combined income of $180k
• $125k deposit saved over 1.5 years (including taking full advantage of the First Home Super Saver Scheme)
• We have been pre-approved for a loan of up to $1m
• We currently live with one parent in a small house, with 2 pets and paying board and equal share of utilities.
• Don’t plan to have kids for another 4-5 years
• We are trying to be sensible and are torn between two broad options and have received conflicting advice from family and friends regarding:

1) Stretching ourselves for a longer-term house (7+ years) in the Northern/Western suburbs of Melbourne in the 550k - 650k range, paid off through P&I loan due to the land component. Would potentially utilise a debt recycling strategy to pay down the mortgage faster; or

2) Going for a smaller 2 bedroom townhouse (not apartment as we need at least a small backyard for the wee animals) in the 350k - 425k range, smaller mortgage and bigger balance in the offset.
Option 2 would be an IO loan with a mind to convert it to an IP in 3-4 years for tax deductibility.
Substantial savings in the offset for the deposit for the next home that’ll be purchased with kids in mind. Based on our conservative calculations, we should have most of the loan offset after around 4 years.

Our thoughts

We’ve been watching the Melbourne market in those price ranges for over 2 years and it doesn’t seem to be decreasing much, if at all in those price ranges due to a variety of factors (FHB territory, exemptions etc). Neither option would involve buying off the plan.

We certainly do not take for granted that we were able to cut costs by living with a parent but (bless them) we are at our wits end, so continuing to live with them is not an option. We are looking to buy for stability, wanting to do our own thing around the place and have our own space; we have attempted to enter the rental market in properties close to stations for work with no luck due to no rental history and the pets.

So we are going down the FHB route and are leaning towards options 2 based on flexibility and lower interest costs. Is there anything we are missing or is flawed in our thinking? What would you do in our situation? Cheers!

 

I'd go with the first option. This sounds more like the house you want and can live in for many years to come. It's also more likely to grow in value over the years and allow you to leverage into other things if that's part of your longer term goals.

The second option is more likely to only cost more in transaction costs if you try to upgrade. From an investment perspective it's okay, but not great. It has the potential to be a dead end.

 

Sounds like option 1.
If comparing similar suburbs & locations, I’d go the house.
Also FHB stamp duty exemption/reduction, you have a good deposit so have a head start on those with 5% deposit under the federal scheme
from Jan 1st.
$125k in 1.5 years we’ll done - keep smashing it and load up your offset as fast as you can while I/r are low. It keeps your options open for the future.
Good luck!