Good morning all! We have this scenario and hoping to get some inspiration and wisdom from this very capable Forum.... We know a youngish couple buying their second PPOR and are exasperated in giving our well-intentioned advice. A bit short of vocabulary now..... They have very good income and only one child and one car. They bought a land and intend to build their dream home by maximising their borrowing capacity. We dont believe they have much cash due to their lifestyle. The house when finish would cost over $1.2M but we doubt it would fetch this price, just as a side-note. We have warned them of putting their eggs in one basket, that one shouldnt over-capitalise in PPOR, perhaps should split their money and get an IP or other investment; what if one fall sick/lose their job, or parents/other family members have issue, prepare for rainy days ..... Yes we know, the next option is to say nothing. But for now, hope you can share your thoughts. Thanks!
Was there an actual question? If it was along the lines of what you should say or do, the answer is probably "nothing". Lots of people have that sort of mentally. I'd say the bulk of the people I know. But my two main thoughts are that firstly, its not really my business what they want to do with their money, and secondly, its not like I intimately know their financial situation either, so maybe they can afford it. Shrug.
Sorry it probably wasnt so clear... We were looking for new words to talk to them. Do you think it is good to overcapitalise in PPOR? Would you do it yourself? Yes I did suspect the answer might be to leave them alone. But we fear they are jumping into fire. Had seen this happened to others. Over-capitalised and found out later the couldnt afford it.
It is good that you are concerned for your friends, but it really is their decision. The choice of a PPOR is a very personal thing, and everyone has different ideas, needs and wants. It does not mean they are right and you are wrong. Or vice versa. All the adverse scenarios you raise may or may not happen. After all, next week they may win lotto! You have given your advice. Whether they follow it or not is up to them. Marg
Indeed Marg, we are exasperated. We are double their age and can only tell them from our experience based on the number of years we existed on this earth.
Money doesn't buy you taste or smarts Its a ppor if that makes them happy then so be it. Just don't let them say "why are we in this predicament" down the track Who knows, if the area booms and their property is worth $2m in 5 years, then they are laughing all the way to the bank too!
What's your relationship to them? How do you know the house will/won't be worth $1.2M when finished? - Any lender is going to get a valuation done prior to building so that would confirm the finished value (assuming they're borrowing to do the build) They can cover themselves for loss of income or illness via insurance. Everyone has different wants and needs, depending on their appetite for risk. If they want to build their dream home and it's going to be worth $1.2 M today and they plan on staying there long term then what's the issue? They'll have a good asset
Well the current credit rules imposed by APRA on the banks will see them not qualifying to borrow more money than they can afford to repay. Responsible lending is the solution here. Have no fear. The @TheSackedWiggle will approve no doubt
Credit flow needs to be Idiot proofed to avoid collective insanity becoming a systemic financial risk.
Can you explain this a bit more? To my understanding over-capitalising is when you spend more on building/renovating a property than what it will be worth afterwards. So in this scenario your friends would have to spend more than $1.2 Million in order to 'over-capitalise' on the property. Unless you know their full financial situation I wouldn't be recommending anything, what worked for you might not work for them and vice versa.
Just because we are older does not mean we know better. My own adult children have made some decisions that I have not been happy with at the time, but experience has taught me to keep my mouth shut unless asked. If asked, I give my opinion/advice but the decision is not mine to make. In reality, those decisions I questioned have turned out far better than I expected. Marg
Yeah but you know what happens when you make something idiot-proof, don't you? They just invent a better class of idiot.
Reverse the situation. If your friends were to approach you and your partner with their views on something so intimate as your finances, how would you feel? It's a very personal thing and until asked for advice, you can't offer it up. I know you have good intentions but they won't see your intent, only that you are coming at them with your view on something that is kind of their business.
No I wouldn't overcapitalise - but it's not my place to lecture anyone else on what I believe either. I know many people who do such - including a real estate agent I worked with quite closely. She could see me making money with every deal I did (at the time) and we talked about what I was doing at length yet, instead of investing in other properties, she decided to massively overcapitalise her own home - which made her happy and was in her comfort zone. All you can do is voice your experience, in an un-lecturing manner, and let them make their own decisions ... and learn from their own mistakes (the hardest lessons are the best learnt). Just like I don't listen to anyone harping on at me about their differing views on money, religion or politics - I try not to nag at them either. I will give advice if asked. I will drop in suggestions. I will share my experiences (good and bad). But it is up to the listener as to whether they are ready to take any of it in
Thanks everyone for your sharing. Looks like this post has irked some people, and this is not our intention. We are totally taken by surprise with some of the responses. Before posting, it is already stated that we might not say anything more than what we already done.
cant see any of the posts here by any members as being irked by your comments, we all gave our advice/opinion, are you feeling like this because you didnt get the answer you were hoping for?
Exactly - my eldest stepdaughter came to me with questions about whether to finance their first house/land package PPOR thru the government system and they would take care of all the grants etc - or to go via a private broker and she'd have to do the legwork. We went thru all the pros and cons of each option (ie, government - less stress but higher interest rate ... private - lower interest rate but more paperwork) and then I left it up to her to decide what path she wanted to take. I was mildly surprised - but pleased - she went via the private broker. She is not only saving interested, but the brain implosion experience of organising everything required will stand her in good steed for future investments/purchases All you can do is put your "experience" on the table, discuss the various options in a logical manner (no personal opinions please) and let them decide for themselves based on the information they have. Everyone's comfort zone, and wants, and ability is different - whereas I couldn't imagine buying something already renovated - others would be shell shocked at the thought of having to renovate
