Ask An Advisor

Hello and welcome back to Ask An Advisor.

There’s been a lot to discuss here at EM HQ. If you missed Monday’s episode, we spoke about Bryce buying a house, why investors are shorting junk food & how Amazon and Google could be broken up.

Time is running out…

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Simply share your unique link below, and ensure whoever you refer verifies their email. You only need two referrals to be eligible!

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Have a great day!

- Bryce and Alec

The week’s question

“This question comes from a 24 y/o who has boomer parents that stereotypically love the Australian housing market. I have ~90k saved up from years of working at Maccas, bartending etc, and I’ve dabbled in buying index ETFs and I quite like it. My parents want me to buy an investment property in Sydney but I don’t want to commit to the long-term mortgage and associated baggage, especially because I’m currently studying my PhD (this isn’t a flex, I’m trying to say that I’m on a low income at the moment). Essentially, my question is how do I tell my parents that I want to start properly DCA’ing into index ETFs / VDHG instead of buying into the Sydney housing market?”

- Sam, Sydney

This week’s advice

This week’s advisor is Patrick Malcolm, from GFM Wealth Advisory.

This is his response to Sam:

Firstly, congratulations on what you have achieved so far with your savings. It is a great effort.

The best way to approach your parents is to explain what you have detailed in your question: That it would be tough for you to purchase a property as you don’t want the financial commitment while studying for your PhD.

Practically, it would be difficult for you to purchase a property in Sydney with the deposit you have accumulated, as disheartening as that may seem!

Generally speaking, it is best to have accumulated a 20% deposit plus funds for Transfer Duty; however, some lenders offer home loans to borrowers with low deposits. Generally, a home loan of up to 95% of the property value is the most a lender will provide. These loans are riskier for the lender, so they mitigate the risk by charging Lenders Mortgage Insurance (LMI). LMI helps protect the lender if you can no longer repay your loan.

LMI can be expensive. It can be paid upfront or sometimes added to your loan balance.

With $90,000, you could purchase a property in Sydney for $700,000 and cover a 5% deposit, the Transfer Duty and estimated LMI of around $30,000. According to the latest CoreLogic Home Value Index, released in August 2023, the median price of a house in Sydney is $1,333,985. The median price of a unit in Sydney is $817,059.

It is important to note that while paying LMI can get you on the property ladder earlier, there are significant risks:

• You could have difficulty refinancing with low equity: If you buy a home with a 5% deposit, you’ll have 5% equity until the property value changes or you start paying down the loan. You will find it difficult to refinance your loan until you have more equity. You may be able to refinance but will have to pay LMI again until you have at least 20% equity.

• There is also an increased risk of negative equity: If the property’s value declines, you risk going into negative equity as your LVR is already high.

This is even before discussing loan repayments, which would be $3,971 per month ($47,652 per annum) on a $665,000 loan assuming an interest rate of 5.94% p.a. This is before the additional ongoing costs such as insurance, rates and other property maintenance.

The important thing is to make sure you commit to your investing plan. I don’t think this will be a problem for you, given that you have already accumulated a large amount of savings. A mortgage can be a forced savings plan, and the costs make it expensive to get in and out of the market, often making property an excellent long-term investment. However, with discipline, this can also be applied to investing in the share market.

I wish you the very best of luck with your PhD. Education is also a great investment!

Cheers

Patrick

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About Patrick Malcolm

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