When to overspend on a house

When you’re house hunting, the amount you can afford to spend is all-important. After all, you don’t want to end up house poor, or worse-still, unable to maintain your mortgage repayments should your situation change, or mortgage rates substantially increase.

In general, we’ll hardly ever encourage anyone to spend more on a home – in fact, the opposite is much more likely the case! However, in the following four situations, increasing the sum to be spent on a home may make good financial sense:

1. When the total costs are factored in

Sticking to your price range is a wise move, but when determining the range, it's important to consider all relevant costs. Staying under the initial budget might not be as smart as it first seems when overall and ongoing costs are included. To make this point clearer let’s think about the following examples:

• Due to changes in the way insurance is assessed, some residential areas across NZ such as Christchurch, Wellington, Dunedin, etc. (or just parts of those areas) are now very expensive to insure due to high risk of earthquakes or flooding, which should mean cheaper home values in some suburbs of these cities. In these places, spending a bit more on the upfront home price – for example, a few suburbs away from the high-risk areas – could save thousands in ongoing insurance premiums and obtain a home with lower expected impacts of a natural disaster.
• Your kids may currently be in private schools, but if you move to the right school zone, they could attend better quality public schools, saving you thousands each year.
• Especially for working couples, if one of you can live within walking or cycling distance of work you might be able to get rid of one car and all associated running costs. Taking it one step further, one couple we’re aware of recently moved from the suburbs to an inner-city apartment and got rid of both their cars! Even if you keep your current number of vehicles, if spending a little more on a home in a more convenient place saves you the time and petrol of a routine drive across town in bumper-to-bumper traffic for work or other activities, it might be worth it over the long-run.
• Homes advertised with taglines such as “fixer-upper” or “needs some TLC” or “has potential” or “needing some attention” are probably cheap for a reason – it’s going to be costly to renovate them.

2. When more income can be generated

Closely linked to the point above, ensure that you consider any income a new property could provide you. For instance, by moving to a larger home you may be able to add a lot of value by subdividing the land.

Alternatively, you could offer a granny flat for long-term rent, or offer it for shorter terms on a website such as Airbnb.

Boarders - a flatmate who pays you 'board' - can also increase your homebuying power by providing more funding to make mortgage repayments. Providing your lending doesn’t exceed 80% of the purchase price, most banks will currently accept up to two boarders when they assess serviceability and your borrowing power.

3. You can’t find anything

In today's market, there can be a lot of competition among buyers, especially in the lower price bracket. In those cases, it might make sense to increase your price range, if you can afford it.

4. When the increased amount is completely manageable

This is the most important point and must work together with any of the previous three paragraphs above. Naturally, you need to ensure that by increasing the purchase price the home is still affordable. This also means that by increasing your home buying budget you’re not actually ‘overspending’ at all.

Adding an extra $10,000 to your price point could make a big difference in the quality of home or area. On a 30-year loan a $10,000 increase to your lending might add less than $50 per month to your mortgage repayment.

Of course, as per the previous paragraph, it pays to check this thoroughly with a financial adviser - in this instance commonly referred to as a mortgage broker - to ensure serviceability and purchase price are satisfactory to the bank

The bottom line – when to overspend on a home

To summarise, here are the top four situations in which it’s okay to overspend on your home:

1. When all the costs are considered and calculated
2. When more income can be generated
3. You can’t find anything
4. When the increased amount is totally manageable – a must-have!

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