Is Stretching Yourself Into A Big Mortgage Wise?
As a mortgage broker I often get the same queries again and again. This one about stretching into a big mortgage is a typical example.
'I have recently found a property which is probably around $100,000 out of our price range but I figure my earnings can only increase and interest rates are so low. My question is, is it insane to take on a big mortgage in this climate? We have a $200,000 income and that should rise in the coming years as the kids grow up. Purchasing this family home would give us a new mortgage of around $500,000 - we are middle aged and our current house is too small for the teenagers our children will turn into in three years' time. My belief is nobody retires these days, I'll still be working when I'm in my 70s, so what harm can a large mortgage do?'
Prospective buyers who find themselves head over heels for a home greatly outside of their budget commonly wonder if they'll be able to manage a larger mortgage.
Here's my opinion...
First of all I've never really been too afraid of debt, however I like to pay it off fast. I'm pretty responsible with money (zero consumer finance debts) but my house is still my pride and joy!
So my first seriously large mortgage was over $700,000 and the mortgage is still over $700,000 (too many renovations) but the property has doubled in value in that time. Seven years on there is no chance we could purchase our place now, so I'm happy we took that big step when we did. We made a conscious decision to buy a property that fitted our standard of living and family and boy did it stretch us! The thing is I'm not certain that 'trading up' is ever going to be all that wise.
With bigger mortgages, clients get increasingly nervous about interest rates. The easy way to solve this is to start your repayments based on a mortgage rate of 8.50%. By setting your repayments higher, you will in the beginning pay the mortgage off quicker. When mortgage rates ultimately rise your repayments will not need to adjust.
One of the other major concerns from home buyers is regarding to the number of years it will take to repay their mortgage. Over a duration of 20 years and with repayments based on 8.5 percent, the monthly repayments on a $500,000 mortgage would be $4,340. For a buyer with a total income of $200,000 they can expect to pay a reasonable 37 percent of their take home pay.
Were you to calculate those figures on a current mortgage rate of 7 percent, you'd pay off the mortgage four years earlier. And should you have children who leave home, you could potentially add an additional $1000 each month to your repayments and become a free-hold home owner even sooner.
Of course while you're focusing on life and work and paying off your debt, your property value and your earnings will both be increasing by no less than the rate of inflation. If you then choose to simply add half of your annual wage increases to your mortgage payments you could cut nine years off a 25 year mortgage.
The good news is that if you are looking at buying property in one of the main centers - particularly in Auckland - your property's value will rise at a much greater rate than inflation due to population growth and subsequent property demand. Just think about housing values and how they have continued to boom in places like Sydney and Melbourne.
Most of your other risks and fears can be decreased or banished altogether with insurance. Particularly make sure you have good Life and Income Protection policies. In your forties you have less time to dig yourself out of trouble if something goes wrong.
'I have recently found a property which is probably around $100,000 out of our price range but I figure my earnings can only increase and interest rates are so low. My question is, is it insane to take on a big mortgage in this climate? We have a $200,000 income and that should rise in the coming years as the kids grow up. Purchasing this family home would give us a new mortgage of around $500,000 - we are middle aged and our current house is too small for the teenagers our children will turn into in three years' time. My belief is nobody retires these days, I'll still be working when I'm in my 70s, so what harm can a large mortgage do?'
Prospective buyers who find themselves head over heels for a home greatly outside of their budget commonly wonder if they'll be able to manage a larger mortgage.
Here's my opinion...
First of all I've never really been too afraid of debt, however I like to pay it off fast. I'm pretty responsible with money (zero consumer finance debts) but my house is still my pride and joy!
So my first seriously large mortgage was over $700,000 and the mortgage is still over $700,000 (too many renovations) but the property has doubled in value in that time. Seven years on there is no chance we could purchase our place now, so I'm happy we took that big step when we did. We made a conscious decision to buy a property that fitted our standard of living and family and boy did it stretch us! The thing is I'm not certain that 'trading up' is ever going to be all that wise.
With bigger mortgages, clients get increasingly nervous about interest rates. The easy way to solve this is to start your repayments based on a mortgage rate of 8.50%. By setting your repayments higher, you will in the beginning pay the mortgage off quicker. When mortgage rates ultimately rise your repayments will not need to adjust.
One of the other major concerns from home buyers is regarding to the number of years it will take to repay their mortgage. Over a duration of 20 years and with repayments based on 8.5 percent, the monthly repayments on a $500,000 mortgage would be $4,340. For a buyer with a total income of $200,000 they can expect to pay a reasonable 37 percent of their take home pay.
Were you to calculate those figures on a current mortgage rate of 7 percent, you'd pay off the mortgage four years earlier. And should you have children who leave home, you could potentially add an additional $1000 each month to your repayments and become a free-hold home owner even sooner.
Of course while you're focusing on life and work and paying off your debt, your property value and your earnings will both be increasing by no less than the rate of inflation. If you then choose to simply add half of your annual wage increases to your mortgage payments you could cut nine years off a 25 year mortgage.
The good news is that if you are looking at buying property in one of the main centers - particularly in Auckland - your property's value will rise at a much greater rate than inflation due to population growth and subsequent property demand. Just think about housing values and how they have continued to boom in places like Sydney and Melbourne.
Most of your other risks and fears can be decreased or banished altogether with insurance. Particularly make sure you have good Life and Income Protection policies. In your forties you have less time to dig yourself out of trouble if something goes wrong.
Source...