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Should I Buy a House?

Updated: Mar 11

Clients looking to grow their wealth sometimes ask us whether they should buy a house. Our advice depends on their short, medium and long term goals.

House purchase lending requirements

Banks require a 20-40% deposit to buy a house, and this figure varies depending on whether you are going to live in the house (20% required) or rent it out (40% required). This deposit can come from cash or equity, however bear in mind you need to be able to service the debt if you are relying on equity. For example:

House purchase price $600,000 – you put in $240,000 of cash and get a bank loan of $360,000. The loan repayments would be ~$2,400 per month*.

House purchase price $600,000 – you put in no cash and get a bank loan of $600,000. The loan repayments would be ~$4,000 per month*.

With the second example, you would need to contribute a significant amount of this from your own cashflow as rental income would not cover this, thereby reducing your savings for other business ventures.

Bank lending requirements

When banks consider lending requirements, they assess your whole lending situation. If you want to buy cows or a farm, they also take into account the loan you have over the house. This usually negatively impacts how much they will lend you for the cows or farm. Even though you have an asset worth $600,000 (assuming house prices haven’t changed), you have a loan against this asset.

For example, you own a rental property worth $600,000 and want to go sharemilking which requires $300,000. The bank will lend 60% of the house value and 50%** of the sharemilking investment which totals $510,000 of lending. You already have a bank loan of $360,000 over the house, therefore the bank will only lend $150,000 for the sharemilking venture. Therefore, you need $150,000 of cash to go sharemilking. In this situation, the amount of cash you needed at your disposal is $390,000 ($240,000 for house deposit and $150,000 for sharemilking).

If you don’t buy the house, the amount of cash you need at your disposal is $150,000 for sharemilking.

You can see if you hadn’t purchased the house, you would still have that $240,000 of cash that you put into the house deposit to go towards sharemilking. If you are wanting to go sharemilking in a couple of years, that’s a lot of money to save up in a short space of time.  

The same example can be used for progressing from sharemilking to farm ownership, except that the cash required is a lot more.

Factors when considering buying a house

The first factor is how short is your time frame for wanting to progress from contract milking to sharemilking, or sharemilking to farm ownership. If it’s only a few years, our advice is not to buy a house and focus on saving as much as possible.

If your timeframe is longer, say 10 years, then buying a house may be a good way to grow your wealth.

If you are happy staying at the level you are, and want to invest in assets in order to save for retirement, then buying a house may be a good option, however you are best to consult a financial advisor.

Another important factor is your household income. Your partner may have a high paying job, and you spend very little on drawings, and so are able to support a house loan (with all the other costs that go with it such as rates, insurance, repairs) as well as save for your goal of sharemilking or farm ownership.

A third factor is the brightline rules. Currently, property that is not your main home and that is sold within 10 years of purchase will be taxed on the capital gain. National are proposing to reduce the Brightline period to 2 years, however that has yet to pass government.

A fourth factor is house price variation. Over the last 30 years house prices have increase an average ~6% per year but have fluctuated considerably within that period. For example, if you purchased a house in 2021 which was the height of the market and had to sell now to free up cash to go sharemilking or buy a farm, you would likely be selling for ~20% lower than what you bought it for.

Our advice?

Our advice would be to work out where you want to be and in what time frame, and work backwards from there as to how much you need saved up and what your estimated annual income will be. If there’s a short fall, you may consider extending your time frame, or getting a second job to increase your income.

If you take one thing away from reading this article, the most important would be to realise that if you are investing in a house, this is taking away money that could go towards business ventures, so you need to clarify what your main goal is and base a plan around that.

*Based on a 30-year mortgage at 7.05% interest rate

**This percentage can vary slightly, but as a general guideline we have used 50%

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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