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Couple aged 35
Two primary school children
Combined income €100k
Cash €100k
They could buy a home for €300k which would meet their needs.
Their forever home would cost about €700k
The bank will make an exception and lend them up to €400k so they could buy a €500k house.
Should they do so?
Option 1
Buy a €300k house with a comfortable mortgage of €200k.
Then trade up in 6 years to a house closer to better schools and work.
Mortgage cost €200k @ 2% over 25 years: €850 per month
Option 2
Buy a €500k house with a €400k mortgage
Mortgage cost €400k@ 3% over 25 years: €1,850 per month
Of course, there are options in between, but it's handy to look at the two extremes
The advantages of Option 1:
- A very comfortable mortgage
- A lower mortgage rate because of 66% LTV
- More capacity to maximise pension contributions or pay off mortgage faster
- Less impacted by rising mortgage rates
- More flexibility - e.g. to take a career break
The advantages of Option 2:
- A bigger/nicer/more convenient house immediately
- Avoids the cost, stress and risk of trading up in 6 years
Factors to consider
- Are the commuting costs lower with the more expensive house?
- Are the running costs of the more expensive house higher?
- Do you expect your incomes to rise over the coming years. A €400k mortgage on a €100k salary is very high, but it's a lot more comfortable if you expect your incomes to rise to €150k.
- How secure is your job or business? If you are self-employed and your income depends on the economy, it argues strongly for borrowing a lot less.
- How sure are you that the €500k house will be the right house for you? For example, if you might move to a different city with your job, then you probably should go for the cheaper house as there is no point in stretching yourself for a house which you may have to sell.