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By Amy Hamilton Chadwick
You may feel the temptation to buy a bigger house, but are you just buying yourself a bigger headache? Amy Hamilton Chadwick weighs up the alternatives.
Feeling trapped is a stressful place to be, which is why it can help to sit down and brainstorm your options.
If you’re buying your first house, moving to a bigger one, or renovating the one you’re in, one of your first questions will be ‘How much can I borrow?’ But perhaps a better question is ‘How much should I borrow?’
Banks will lend up to five times your household income, and being offered a hefty mortgage feels like a seal of approval: you can afford it! Maybe you can, but borrowing a major chunk of cash comes with potential costs and benefits beyond the interest repayments alone.
On the downside, having a large mortgage can ramp up your stress levels, keep you locked in a job you hate, or put a serious dent in your lifestyle.
‘Mortgage stress’ is defined as more than 30 per cent of your household income being spent on housing costs; at least 10 per cent of Kiwis are in this situation. And 11.1 per cent are spending 40 per cent or more of their total household income on housing.
On the upside, though, borrowing can upgrade your space, location, or school zone, grow your wealth, and help you secure your retirement. So how do you weigh up these factors when you’re considering taking on more debt?
What are your goals?
“It’s about juggling goals,” says Deborah Carlyon, AFA/CFP and director of Stuart and Carlyon.
“There’s nothing wrong with paying off your loan over a long timeframe to buy a house, because otherwise you’d be paying rent forever. But you need to think about your other goals: educating your kids, going on holidays, changing career, saving for retirement.
“That helps you consider whether you can afford to trade up.”
More house or more life? Think about what you really need and take a long-term view.
Don’t fall into the trap of assuming you need two bathrooms and two living spaces – making decisions based on resale value can be short-sighted when it’s a family home, says Carlyon.
“If you’re going to have a have a lot of space, think about how you could make money off it later. Maybe you could take in a boarder, or rent it out.”
Taking on a large loan isn’t necessarily bad, especially if you’ve come up with a plan to deal with it – and your partner is on board.
However, financial stress can put enormous pressure on a relationship if you’re pulling in different directions. If only one partner is working, that person may feel a heavy financial responsibility for the whole family.
Don’t feel trapped
Feeling trapped for any reason is a stressful place to be, says Carlyon, which is why it can help to sit down and brainstorm your options before committing to a big loan.
“Have honest discussions, brainstorm ideas – however unpalatable – and make a plan. It doesn’t have to be a complicated plan! Make an active decision out of it, rather than feeling cornered. Then you feel back in control.”
A large loan will usually mean sacrifices in your lifestyle, but could you sacrifice something else instead?
It could be compromising on the quality of the house you buy or build, suggests David Boyle, Group Manager Education for the Commission for Financial Capability. Maybe it’s a compromise in location or size.
Do your sums
No matter what the bank’s calculator says, you need to take responsibility for your borrowing and do your own sums, says Boyle.
When you consider how much to borrow, factor in the extra costs of maintenance, rates, and insurance. You’ll need loss of income insurance and life insurance, just in case the worst should happen.
And do the same calculations based on higher interest rates: if you’re stretched to the max, higher repayments could become crippling.
“You’ve got to be able to enjoy the journey a little bit,” says Boyle. “That’s why there’s been a cascade of Aucklanders into the regions.
“Meeting everyone’s needs without financial stress can cause a lot of challenges, so if that means moving, maybe you need to move.”
Debt is a tool – one you can use to construct a better future, but one that also has the potential to cause damage.
Go in with your eyes wide open, have a plan, and you can make your debt work for you, instead of the other way around.
· Around one in ten New Zealand households (11.1 per cent) are spending 40 per cent or more of their total household income on housing.
· It’s estimated that 4 per cent of all borrowers and 5 per cent of recent borrowers could not meet their essential expenses (they’d be under ‘severe stress’) if mortgage rates went up to 7 per cent. Another 2 per cent of borrowers (7 per cent of recent borrowers) would be under ‘mild stress’.
· New Zealand households now have an average debt-to-income ratio of 168 per cent, higher than the previous pre-Global Financial Crisis peak of 159 per cent.
· Last year, 16 per cent of owner-occupiers were paying interest only on their mortgages.
Average New Zealand mortage debt