Pay off debt or use as house deposit?

[P_D]

Hi all

First off please forgive my ignorance in these matters - both my partner and I have no idea when it comes to financial matters (our level of debt is a pretty big indication of this!!!)

Anyway, we're giving consideration to buying a house & land package in the Western Suburbs of Melbourne (average land cost being $165,000+ and the particular house that we have in mind being $193,000). We're well aware that we're in no position to do this straight away but would like to put things in place to buy up ASAP. I know it's tacky and built-up and full of cashed up bogans but eh, we're realistic. Ordinarily we'd give consideration to buying a unit closer to the city but we have three dogs and plan on having them for some time yet!

Anyway, together (although in my partner's name) we have $39,000 personal loan debt (we had individual personal loans and a joint car loan which we consolidated - another 6.5 years to go *sigh*).

Due to a death in the family he is set to inherit $52,000 (roughly) within the next few weeks. He's an adult apprentice set to finish at the end of this year - is currently on $500/week NET and we're guessing he'll get about $48,000K gross a year at the beginning of 2011. I unfortunately haven't worked in the last 7mths due to illness but things are looking up in that respect so am making plans to get a job ASAP. We're looking to start a family in the next 2 years or so anyway so need to consider that as well in terms of my ability to work full-time for some time.

Do we look at paying off the personal loan with the $52,000 cash and hang onto the remainder or pay off some and try consolidate into a mortgage or....?

As I said we have no idea of these matters and will see someone for financial advice - was just trying to gauge just how much a broker would laugh at us so we can be prepared for the humiliation

Thank you!

 

[DidakDelight]

Pay off your personal loan debts straight away. The interest will be inxs of 10% meaning youre wasting more than $3000 per year alone in interest.

In regards to buying your new home, use the loan calculator (How much can I borrow) on the following link

http://westpac.com.au/personal-banking/home-loans/tools-calculators-rates/

Based on your partners current income & given he has no other debts, the bank will lend him around $93,000.

Forecast how much he will earn in the future and how much you will earn and do some calculations. If your combined income is over $5000 per month and you have atleast 10% deposit saved up and have no other debts the nice man or lady at the bank is going to say congratulations you can borrow $350k to build that new home.

Now go and pay off that personal loan straight away and start saving for a deposit. Remember you'll both need to have been employed for atleast 6 months before they give you a loan.

 

[Pornstar]

Given your circumstances i would suggest holding off on buying a house for a good 6-8 years. If you get a loan before you have kids you will find it very difficult to make ends meet when you are at home looking after babies full time, living off one income. It will be incredibly stressful both financially and emotionally. You probably won't get a home loan after you have kids and are still on one income. Therefore, the best time to be looking at buying would be when your kids are at school and you can both work full time (or close to it) which will be in about 7-8 years. The main thing is you need to be able to afford the loan.

I'm sorry the news isn't better for you, but that's Australia nowdays; you can't start a family AND own a home. You pretty much have to choose between one or the other. Good luck!

 

[Simon_Nesbit]

Definitely clear the Personal Loan.

It's usually a bigger negative to what you can borrow than itself, regardless of the higher interest your paying on it.

Given your situation, a better way of getting into the market might be in the way of an investment property - but picking one that you would be happy to live in in the future - especially with family, it would be worth finding out public school zones, etc.

However, my read of the shorter term (<5 years) is there won't be substantial capital growth, so I would advise against over-capitalising (>80% generally) into the property. What that figure ends up being will depend on your current rent expenditure, etc.

To timeline it:

Pay off the personal loan. Divert the personal loan repayments into a new savings account (online savings offer good rates if you shop around). "Forget" this money - don't have access to it (card), or even view it (online statements, etc).

Wait until your husband is on full wage (48k). Wait until you are able to work full-time (or at least permanent part-time, etc). As your family incomes go up, add at least 25% (preferably 50%) of the increases into the savings account.

Don't get any personal loans. Pay off any credit cards within the month (or 55 day limit). Get your credit history in perfrect order.

Go to the bank (or these days online, they come to you). With his income (50k), and your income (say 25k), you can borrow enough to get your home (about 350k).

At this point, I'd try and limit borrowing to 80% LVR (literally 80% of what house is worth). This avoids paying insurance on the mortgage (very high cost funds) - in your case (spending 360k), you would need about 70k to avoid it.

How long to get to 70k? Well my best guess is you're paying about $200 a week off the personal loan, so there's 10k a year before you start. Can you wait 6 years? (probably not).

If you can go back to work next year (25k) and your husband's salary goes up you'll get an extra 800 or so a week. Put half that (400) aside as well. More if you can.

Now we're up to 600 a week (30k a year).

So for the rest of this year you save ~200 (3000)
Next year you save ~600 (3000 + interest (150) + 30000)
2012 the same (3150 + 31500 + 30000) = 66000.

So if you 'live' to the same standard as you do now for the next 2.5 years, manage to find part-time work for yourself, and your husbands salary goes to 50k, you should have been able to save enough to avoid the insurance charges, and borrow 80% without any problem.

Plan on a 2013 purchase, and if you get there sooner, fantastic.

 

[DidakDelight]

Given your circumstances i would suggest holding off on buying a house for a good 6-8 years. If you get a loan before you have kids you will find it very difficult to make ends meet when you are at home looking after babies full time, living off one income. It will be incredibly stressful both financially and emotionally. You probably won't get a home loan after you have kids and are still on one income. Therefore, the best time to be looking at buying would be when your kids are at school and you can both work full time (or close to it) which will be in about 7-8 years. The main thing is you need to be able to afford the loan.

I'm sorry the news isn't better for you, but that's Australia nowdays; you can't start a family AND own a home. You pretty much have to choose between one or the other. Good luck!

Very wise words.

 

[P_D]

Thank you all so much for your words of advice - you've put it very simply and made it all seem so much more attainable (long-term, anyway). I just get so overwhelmed and intimidated by the financial jargon

It's no wonder you see so many grandparents out and about with their grandkids during the day - you'd have to be pretty damn financially comfortable to not have both parents go back to work...

I guess we'll just continue to stick it out with the renting game at $1151/month, and inject the $765 we were paying monthly on the loan into an e-saver account. Anything I earn i'm guessing we can split 50/50 into living costs/savings - after having not worked for 7mths we're well and truly used to cutting down on the finer things in life!!

Thanks again for all your advice

 

[Rancid_Beasties]

Pay off that loan first!

Pump all of the money you save from repayments into a usaver/isaver/high interest online account.

If you can put aside the $13,000 you will have after paying off the loan and $765 a month + whatever you might make when you go back to work + the additional money your partner will be making, then you could have a reasonable deposit saved by say mid 2012. Keep in mind that you will need a $72,000 deposit to borrow $358,000 if you want to avoid lenders mortgage insurance. To save that by mid 2012 you will need to set aside about $2,400 a month.

 

[year of the roo]

Rob a bank.

 

[Visions]

Definitely pay off the personal loan first.

Even if you wanted to use the money for a house deposit, the bank would most likely not allow you to borrow much (if at all) due to the personal loan.

 

[Power Raid]

Hi all

Do we look at paying off the personal loan with the $52,000 cash and hang onto the remainder or pay off some and try consolidate into a mortgage or....?

As I said we have no idea of these matters and will see someone for financial advice - was just trying to gauge just how much a broker would laugh at us so we can be prepared for the humiliation

Thank you!

Hi

I am a CA and a Corporate Advisor to large Mining Business and run a merchant bank. I don't know much about domestic finances other than running my own household and helping my family. So am no expert on your question.

My thoughts though -

Short term debts/ personal loans are sometimes required. As you know, they are expensive, crippling and enslave a large % of our population.

What ever you do......get rid of these loans ASAP (but do check if there are early repayment penalties - if so, pay all but $1 off to avoid the fees).

To give you an indication on some companies who provide these products; I spoke to a "Radio Rentals" director some years back and he laughed at their customer base, stating his products were for "MUGS".


ISSUE

But having $39k of debts and $52k of cash leaves you a little to be dangerous (tempting for holidays, cars etc) but probably not enough to buy a house ($13k is probably not enough deposit after fees).

My biggest concern is, you will spend the $13k and then decide you need a new car and find yourself back at debt.

I strongly recommend you speak to a few banks to understand what they can do for you. Your idea on debt consolidation is very clever!! If you can pay off your debts and buy an affordable home within 12 months would be great.

FINALLY

Never be afraid to be laughed at when seeking advice......lol. However, I am sure an advisor would never do that. But do be careful, advisors quite often provide advice which suits them (fees) and not you.


Good luck with you savings and your pathway to a new home!!

I think Rancid is quite knowledgeable on this subject. I agree with his summary.