We hear a lot in the news about mortgage stress, with Australia having one of the world's most expensive housing markets. But many people - including doctors themselves - are surprised to find out that even well paid medicos can end up overcommitted and struggling to meet their home repayments.
You've finished your training, time to buy a house?
The number one thing that our clients ask when they finish their training is 'how much can I spend on a house?'. After many years in training, living on a registrar's wage, and often with a young family, it's understandable that many newly qualified doctors put buying a home at the top of their to-do list. It's part of the great Australian dream.
Unfortunately, that dream can turn into a nightmare if you aren't careful. It's very easy to look at some of your colleagues in big houses and be tempted to set a big budget and buy the dream home. But, if you don't do your homework, you could find yourself struggling to make repayments. We see this more often than you might imagine.
Can you really afford that luxury home?
We work with our clients to develop a realistic budget for their home purchase. We start by looking at your income, and determining how stable it is. Will it increase in the future? If so, by how much and how certain of this are you? In the case of doctors going into private practice, we often suggest delaying their house purchase until they have established a pattern with their income, so they can buy with confidence.
Once we have an idea of income, we then need to have a good understanding of your current and future expenditure. For example, will your children go to private school? Do you have any other big expenditure plans? Or do you have current commitments that will cease in the near future?
Using realistic income and expenditure estimates, we then combine these to project current and future cash flow over a number of years. Often we find clients have done a rough one-year cash flow at the current interest rate, but have not thought much beyond this. By financially modelling future years we can clearly see changes in surplus cash. We can then model different purchase scenarios, including looking at the effect of increased interest rates. We also show on a year by year basis the home loan being repaid.
Two stories from our practice help to highlight some of the issues you need to consider with our help.
One husband and wife came to us looking to buy a million dollar home, confident that they could make the repayments on their joint income as doctors. When they looked into it more carefully, though, they realised the kinds of homes they were looking at were more like $1.4 million. When we worked through their life goals, it also became clear that they wanted to start a family and the wife wanted to work part-time after their children were born. Once I showed them the effects of their decreased income in future years, and possible interest rate rises, they realised their budget was well under their estimate.
Another client came to us looking to purchase a $1.2 million home. Had he been in his mid-30s, I would have confirmed that this was a reasonable decision. But, after lengthy training, he was actually in his 40s. I used financial modelling to show him that he would need to work at full capacity to 65 to pay off a mortgage of that size. With this scenario in front of him, he opted for a less expensive property.
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|Tags: Financial planning Mortgages|
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