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Ask Paul: Can we afford a $300,000 renovation?

ask paul clitheroe can we afford to borrow to renovate renovation

Q. I am 37 and earn $120,000pa before tax. My wife works part-time and earns 30,000-$40,000pa. We have two kids, a boy aged 7 and a girl aged 3.

Our house, in the inner suburbs of Brisbane, is valued at about $780,000. Including an offset of $116,000, we owe $200,000.

Our loan is a mix of interest only and P&I. Extra money goes in the offset against the interest only loan and we pay extra on the P&I.

We have a $50,000 loan invested through the InvestSMART platform, with monthly $400 additions. This is currently worth $100,000. We have no other debts.

We have renovated upstairs (deck/kitchen with CBD views) and want to finish off the bottom by adding two bedrooms (so the kids no longer have to share), rumpus, bathroom, laundry, etc. The renovation will cost about $300,000.

I may change jobs soon and I am thinking about future school fees. Can we can afford the reno now? I am reluctant to use the offset and then add $200,000 to our mortgage. – Dom

Dom pictured with his young son. Photo: Supplied.

A. Hi Dom. I remember this stage of life, though it does fade as I rapidly head for 64.

With the benefit of hindsight, it is really interesting how life and money move through distinct stages.

During school it was all about earning a bit of money, firstly picking oranges and then, when I hit 18, working in a pub.

My uni years were great fun. I was pretty poor, but it did not feel like it. Beer was only 33c for a schooner and my pushbike was cheap to maintain.

Then it was the first “real” job, back in 1979. My salary was $13,000 and I had so much money I didn’t know what to do with it … until I got married and along came a mortgage.

Then I was at your stage, making progress with the mortgage, but children were coming along and we also had the issues with space for our three kids, not to mention school fees.

You will be pleased to hear that with careful control of your money, as you are doing now, in about 20 years another stage comes along.

This one is a cracker. For me it is like being back at uni, only I have more money. With adult kids, no mortgage and money invested, you can plan for this stage of relative freedom. It is terrific!

At just 37, you are tracking well. Your mortgage is under control; you are saving on a regular basis; you and your wife will be building up super; and you have every reason to be optimistic about the future.

Now to your conundrum. I really understand how hard you have both worked to get money into the offset account.

I have to leave it to you to do a long-term financial forecast and a budget, but my sense is that, yes, you can afford to use the $116,000 in your offset and borrow another $184,000 to get the $300,000 you need.

The repayments on $200,000 would be around $10,000 a year and the fact that you add $400 to your investments and are building your offset account shows me you can afford this. But the variables I do not know are your potential change in jobs and school fees.

School fees are quite predictable, and you can build those into your budget. But the change in jobs is a big deal.

I presume you would only change for the same or a greater salary, but if there is to be much of a delay between leaving and starting a new job I would be cautious. More debt and job uncertainty do not appeal to me at all.

This issue only you and your wife can work out and plan for. One thing I know about life is that it goes by really quickly. Your family will get most enjoyment out of the renovations right now, while the kids are young and at home.

It saddens me to see people playing it really safe and extending as the kids leave home. So I have no doubt that if I was in your shoes I would be trying to make the renovation happen sooner rather than later.

You mention CBD views. From this I suspect your house is in a good location with the prospect of long-term capital growth. So it seems reasonable to argue that the $300,000 you spend is not wasted money. In fact, it should increase the value of your home by that amount or a bit more.

So we have a “balance sheet shuffle” where your asset value is unchanged, or maybe a bit better.

The big issue, though, is that the more valuable asset, your home, does not produce income. You and your wife do that.

I’d be looking to make this renovation happen, but I would want to be very sure that the new job on an equivalent or higher salary was certain. You can plan for all the cash flow issues such as school fees.

Anyway, I wish you all the best for the potential new job and hopefully a beautifully renovated house.

Written by Paul Clitheroe

Paul Clitheroe

Paul Clitheroe AM is a respected financial adviser and Money’s chairman and chief commentator. He is chair of the Australian Government Financial Literacy Board, and author of several personal finance books. Ask Paul your money question.

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