Stretching Yourself to Buy a Home?
Simon and Deborah had a budget to buy a new home in Israel. They calculated how much they had for a down payment, they figured out how much of a mortgage they could afford and how much they would have leftover to enjoy the little luxuries of life, such as eating out, holidays and other leisure activities
They found two apartments, one was within their budget the second was around 100,000 NIS ($30,000 - £25000) more. But the second apartment was so much nicer, a larger balcony, an upgraded kitchen etc. The worked out the extra mortgage repayments. They would be stretching themselves but with some belt tightening, they could afford it.
Should they go for the more expensive apartment?
There is of course, no one size fits all answer, but below are the pros and cons that they had to consider:
Well start with the cons. Here are reasons to be cautious:
a) The mortgage repayments are too high – if you cannot afford the repayments, there isn’t even question. You cannot do it.
b) Too much belt tightening. There is a difference between stretching and overstretching – too much stress and worry isn’t helpful or healthy. If you’ll have little reserves of cash for leisure or emergencies and if you’ll be stressing at the end of each month as to whether you can make the repayments or not, then don’t do it. It’s not worth it.
c) If the two properties are similar, but one is recently refurbished and the other is more worn down, then you can raise they value of the cheaper apartment, by refurbishing it yourself gradually over time.
d) A larger property means more local taxes (arnona/rates) each year and higher running and maintenance costs.
e) Interest rates are unlikely to get any lower. It is likely that over the lifetime of your mortgage, the rates will go up, increasing your repayments.
f) If you’re not planning to move again, the growing price differential between the two properties (see below) is irrelevant.
g) The value of your apartment is likely to rise, but that increased equity won’t pay any bills.
All these reasons are good and valid, but here are still very good reasons for stretching yourself:
a) If you’re planning to move to that nicer apartment in 4-5 years, it’s worth getting it now:
(i) because the increase in value between the smaller and larger apartment is likely to grow by a larger amount than your mortgage repayments over that period. This means you’ll be paying a lot more for the upgrade in a few years.
(ii) as the gap widens, you might find that you can never quite re-mortgage high enough for that gap again
(iii) moving is expensive – purchase tax, legal fees, agent fees, moving costs, lost days of work
(iv) moving is stressful
b) Rising inflation reduces the cost of the debt. It means that your repayments become cheaper in real terms.
c) Most younger people in the early stages of career will see increases in income.
d) Lock in your mortgage repayments so that you’ll be less affected by interest rates.
e)Going a bit larger/better, means you’d be happy there for longer.
f) If things don’t work out, you can downsize. It’s easier to downsize than upsize
This is of course a big decision. At the end of the day, you really need to do what’s best for you. Some people will have no problems sleeping, while others will have sleepless nights. For some, it might be more about psychology than money. At the end of the day, you need a home to live in comfortably, but also a home to be emotionally comfortable.
Contact us at today at Israel Properties and we’ll help you find what you can afford.