ep.004 – the mortgage dilemma

Hello, and welcome to happy fiday ? I am actually recording this on a Friday, that?s Friday with an r ? and it feels good! So today?s episode for me at least is really interesting. It?s been really exciting starting something new with this podcast, so please bear with me in the early stages as I stumble my way through. But one of the really liberating things about this podcast journey is that I get to put my ideas out there and you get to witness the real-life dilemmas my family is going through and maybe we can help each other along the way. So why is today?s episode so exciting for me, well there has been a big development this week, wifey or my Great Love as I like to call ? referencing the Sean and Catherine season of the US bachelor ? yes there is my first confession of this episode! Anyway, Leish, my wife, one of her favourite hobbies is to trawl through the property pages of the Trademe and Realestate websites ? she says it is just for fun, and to be fair she loves looking at houses anywhere in the country to educate herself on the market, pricing and what you can get for your money.

One thing about Leish is that she is very particular when it comes to living in her own house; everything has to be just right. One of the first and foremost things is the way the property faces, it has to be north-facing for that all-day sun, and a joint close second is character plus a garden that can provide fruit and veges. The character part is a test I always fall foul of as I have no taste and can?t tell what is meant to be nice or not, and I am often left hanging in a stunned silence if I lean over to Leish and say ahhh this one looks nice!

Well, this happened earlier this week, over a Facebook messenger message but with one difference, rather than a stunned silence Leish came back with a different property in a similar location which she absolutely loves the look of, and it ticks all of her boxes. The house is also conveniently closer to my new office, which as you may have heard from a previous episode is already a lot close than my old office and very importantly is less expensive than our current home which technically means we could reduce our time to being mortgage-free which was originally an important part of our particular FI journey. So what is the dilemma? Well firstly the house is on for auction, and the auction date is mid-October 2019 ? so if we want it, we may have to move fast. The Auckland market is a bit tricky at the moment, things tend to be selling below their 2017 CV, but really popular properties do have good competition because available housing stock is low. So there is no time to put our house on the market and then buy, plus it is probably not the right time to put our house on the market, as it is in a new coastal subdivision with a brand new village centre which is almost complete, so it is probably best for a wait and see position on the current house. So this means buying having a mortgage on two houses if we want to move into this new one.

So from a financial perspective, to continue on the road to FI, we need to work out what is best for our family, with the right balance of risk and emotional comfort. I worked out by putting the majority of our savings into both houses, we would need to increase our current mortgage of around $612,000 to around $1.13 million ? and we would own two houses with a combined CV of $1.835 million. So the first thing to test was, would the bank lend us the money ? fortunately we bank with three banks, ANZ, ASB and Westpac. As my salary is paid into ASB, I asked them to run some numbers based on just my salary and an estimated rental of $700 per week for our current home ? a couple of emails and a phone call later they are confident it shouldn?t a problem, and we could even go up to $1.3 million -which we won?t touch with a barge pole ? we are on an FI journey after all! So a quick look at the numbers and back to my FI spreadsheet with all our costs. Because we have been stuck on a 5.99% rate, our monthly repayment for the new increased mortgage would only increase by approximately $1000 allowing for some serious haggling over the currently listed rates as Bank of China has put in a very tempting 3.15% advertised rate at the time of producing this podcast. So a doomsday scenario where we couldn?t rent out the house would mean an extra $12,000 per year over our current expenditure, and as we are currently able to save between $50-$70,000 per year, we would be ok. The fact is the house is in a very nice location, and there are very few rentals available, and ours would be the cheapest rental, and the house is only five years old ? so the risk of extended vacancy is low. Another thing to consider is that the $700 a week although appears to cover the mortgage for this property alone, taking into account potential vacancy periods, repairs and maintenance and council rates, there is probably a small loss in cashflow.

I personally just need to feel comfortable with all of this as I have once been a reluctant landlord back in the UK. You see the problem back then was I bought my first property in 2005 only three years before the GFC – the old once bitten twice shy. You see, I had taken out a 100% mortgage, interest-only for the first three years, and by the time 2008 rolled around my salary had decreased from around 24,000 pounds per year to 18,000 pounds per year, so I decided to rent out my apartment and board at a friend?s house. I couldn?t even afford the bus to get to work, so I cycled 6 miles ? I am not a cyclist by any stretch of the imagination ? and this was in the steel city of Sheffield, famous for its hilly terrain ? it was not easy, especially during the winter months. I had a couple of nightmare tenants, but in the grand scheme of life looking back these weren?t real problems, and I have learned some valuable lessons, about finance, selection of housing and picking the right tenant. I ended up selling this property just before Leish, and I bought in 2014, it was a paper loss but had been tenanted covering a mortgage which ended up on a variable rate of 1.5% post GFC, so the tenants had paid off some of the equity, so I had a small nominal sum after the sale. In hindsight, this situation could have gone horribly wrong, had I not made significant humble decisions, especially during 2007, which will be a story for another time. I think I old on to how this could have gone wrong rather than looking to the future and utilising the valuable experience Leish and I have learnt on our property journeys, to manage our risk accordingly and keep us on our FI journey.

Anyway, so I have digressed a little, but you get the picture, from the conversation we have had as a couple and through talking to the bank, we have decided the best path for us is first and foremost actually see the new house in person ? that is probably sensible, right? So there is an open home in a couple of days, and I will report back on that. If we decide, it is the house for us; we will then need to convince the agent and the vendor that negotiation before the auction is the best idea for all of us. We still have to come up with a good strategy for that, and even though we both don?t want to lose the house in the current climate but we also don?t want to be overpaying and exposing ourselves to unnecessary risk. We think at this stage our strategy will be 6-12 month rentals and once the value of our rental is more than our outstanding mortgage we will consider selling and becoming mortgage-free ? this could be in as little as one year?s time, or it could be much more than that ? but after a lot of frank and open discussion as a family it won?t matter as we believe we have managed our risk sufficiently to deal with what the world could throw at us.

Now when I say as a family, I am very happy to report it has been as a whole family as we included little Stella in the conversation. It will mean a bus to school rather than being able to walk to her new college, but she is completely fine with that. Schooling was very important to Leish and I, and we have been so impressed with the introduction by the college and Stella?s interview with the principal, it will be such a good fit for her. We are so proud of Stella, who is maturing into a very bright and considerate young lady. She even out of the blue said she would like to see the local school near the new house to assess which option would be best for her. All in all, involving her in our decision making (without her actually making the final decision) should be teaching her some great life lessons.
So the theme of happy fiday is about a journey to contentment and using not just the numbers but factors outside of the maths, such as risk perception and emotional management to guide us on this journey. And this is why this episode is so exciting for me, as we are right in the middle of a huge potentially life-changing event, and we love to be able to share this with you, and hopefully, you have got some value out of it and food for thought. So until next time, happy fiday!

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