buying biggest house you can afford

Discussion in 'Mortgages and buying and selling homes' started by Gordanus, Nov 22, 2004.

  1. Gordanus

    Gordanus Guest

    It was said on this forum about a year ago that buying the most expensive house you could afford as a first time buyer was ludicrous. This has been niggling me as I cannot see why. Can any experts tells me? (Leaving aside the practicality that most of us can only buy a first house at all at a stretch)
  2. ClubMan

    ClubMan Frequent Poster

    I don't really understand the question but I would be more inclined to look at it from another point of view - buyers should buy the house that best suits their needs and which they can most comfortably afford rather than attempting to buy the "biggest" one or the one that requires them to maximise their borrowing potential. I remember being told by one of our secondary school teachers that one should always borrow as much as possible and buy the biggest/most expensive house that one could stretch to and even then I disagreed with him. This is just my opinion though - not any sort of expert one or hard and fast rule!
  3. It makes sense to buy a property which is going to be large enough to accomodate you and any existing/planned family for the foreseeable future as the cost of moving house is relatively expensive. For example if it were a choice between a one bed apartment and a three bed semi for a couple who had agreed to start a family then the latter would be the logical, if more expensive, choice.

    I don't know if that's what the original poster was getting at but that's my two cent's worth!

  4. rainyday

    rainyday Guest

    It makes sense to overstretch slightly up-front to avoid having to trade up in 2-4 years time, particularly for a couple planning to start a family.
  5. EAMONN66

    EAMONN66 Guest

    in a rising market or if the inflation rate are high it makes absolute sense to max out your borrowings. just ask anyone who was eating beans on toast ten years ago. they are the people who are now getting equity releases to buy villas in spain. the trick or luck is in predicting the market.
  6. The maths of this theory is that if you can afford to buy a house for 400,000 when you only need a 300,000 house and property values increase by 10% you've made a bigger profit on the 400,000 house than the 300,000.

    So you keep trading up over the years to the biggest house you can afford and then when you retire, trade down to the home you actually need and pocket the investment gain without paying any Capital Gains Tax.

    That's the theory. Like many investment theories, it's not without potential risks. For it to work, the rises in property values have to be sufficient to continually keep ahead of the additional costs you incur with your transactions along the way. How happy are we all that this can be relied on going forward?
  7. ClubMan

    ClubMan Frequent Poster

    While it's worth remembering that a person's PPR is part of that person's overall wealth/investment portfolio (something that people often forget) I'm not sure that taking such a narrow view of the investment potential of a PPR is necessarily realistic or pragmatic. I still stick to my view that one should buy the most appropriate house that suits one's needs (now and in the forseeable future) and is within one's budget. I don't really see the justification for undertaking otherwise unnecessary debt - there's always other ways to spend or invest the slack, if any.
  8. "I don't really see the justification for undertaking otherwise unnecessary debt."

    Personally, it's not a path I'm greatly a fan of, or actually following myself. But I can see the justification for it.

    As you know, there's an increasing number of geared property (and indeed geared equity) investments out there. This is really just another one, with higher levels of gearing available, lower interest rates available and no Capital Gains Tax on exit.

    If someone could happily live in a €300,000 house with a 90% mortgage, but can afford to, and does buy a €400,000 house with a 90% mortgage, effectively they're buying a highly geared investment of €100,000 in Irish residential property for a stake of €10,000. Interest rates on the borrowing will be very low and no CGT on exit.

    As I said, not my own cup of tea, but I would hold it in higher esteem than some of the other geared investments on the market today. An awful lot depends on your personal view of the long-term prospects of Irish residential property and your appetite for risk, because everone (I hope) knows that gearing multiplies downside risk as well as upside.
  9. ClubMan

    ClubMan Frequent Poster

    Fair enough - I get your point now.
  10. sunnyday

    sunnyday Guest

    As pointed out, gearing also multiplies possible risk. However, in the case of a PPR, this should be less of a worry. Unless you need to sell during a downturn and at a point where the house is worth less than you've paid for it, the loss does not materialise, and so is irrelevent. If you can hold onto it until prices rise again, you still reap the rewards of being geared. Timing therefore is the key. I'd personally see little or no risk embarking on this strategy now if I was happy in the knowledge that I wouldn't be selling for at least 10 years. IMHO that would be long enough to come out the other side of any potential property collapse/adjustment in the near future.
  11. rainyday

    rainyday Guest

    I'd be cautious about treating my home simply as an investment. It is really is about having a roof over my head, and my family's heads. None of us really know if we are going have the same job, or the same decent well-paying job in 6 months time, or 3 years time. Most of us will, but all of us wont.

    Don't take on a huge additional mortgage which leaves us in danger of facing the repo man if you happened to find yourself unemployed for a year or two.
  12. Tommy

    Tommy Guest

    Many people in the relatively prosperous 1970s built or bought the largest and/or most luxurious house they could afford and later on found that their mortgage committments meant that they couldn't afford to cover their children's educational costs.
  13. TirOileain

    TirOileain Guest

    Yes, but these days it's different, many will not be able to afford the children
  14. oysterman

    oysterman Guest

    "Many people in the relatively prosperous 1970s built or bought the largest and/or most luxurious house they could afford and later on found that their mortgage commitments meant that they couldn't afford to cover their children's educational costs."

    Can't get my head around this, Tommy.

    Was it not the case that the persistently high level of inflation in the economy (all prices), and the consequent sharp rise in nominal wage levels, very quickly drove down the real burden of mortgage repayments?

    The lesson for today is that, if we believe that inflation is likely to take off again, we should surely all get mortgaged up to the hilt. The real problem for today's housebuyer is that inflation seems to be confined to housing (which is not compensated for by wage rises) - thus the erosion of one's mortgage burden is very slow. If this remains the case, this generation of families will have to deal with education costs while their mortgage outgoings are still a very high proportion of their income.

    (Please don't interpret any of the above as a conviction that the disjunction of property and general prices in the economy will be sustained. The residential property price crash is coming.)
  15. TirOileain

    TirOileain Guest

    And with high inflation, won't interest rates rise and those "up to the hilt" lose their houses?
  16. nogser

    nogser Guest


    When considering your prospective purchase you have to take into account your future plans/needs. Trading up is an expensive activity.

  17. oysterman

    oysterman Guest


    Real interest rates (nominal interest rate minus inflation) tend to be negative in times of high price inflation so the interest burden tends to fall. In any event, with a declining balance owed, the passing of time reduces the risk to the homeowner caused by rising interest rates. However, nobody is predicting a prolonged period of serious inflation like in the 70's so the point is moot anyway.
  18. TirOileain

    TirOileain Guest

    Hi oysterman,

    So let's say inflation goes up to 10% next year. We'll say nominal interest rates are 8%.

    Today a 200,000 (20 yr) loan @ 3% is about 1120 pm
    A 200,000 (20 yr) loan @ 8% is about 1697 pm

    Your (presumed) 10% increase in wages affords you an easy jump to 1120 + 10% which is 1232 pm. But where do you get the other ~460 from?

    Unfortunately the size of your monthly repayments does not increase proportionally with your wage increase.
  19. Tommy

    Tommy Guest

    History shows clearly that periods of inflation regularly mean economic stagnation or recession, caused (among other things) by the tendency of borrowers to struggle to finance debts and the tendency of lenders to apply strict and conservative restrictions on new lending.
  20. Once Bitten

    Once Bitten Guest

    ... unless you earn more than your outstanding mortgage !