Buying your first home comes with one of the most common dilemmas for buyers: should you stretch your budget to buy the most expensive home you can afford in hopes of capital growth ? Or should you go for a more affordable option, allowing you to mitigate risks and potentially invest your money elsewhere?
As with most financial decisions, there’s no one-size-fits-all answer. What works for one person might not work for another, and the right choice really depends on your circumstances. In this article, we’ll dive into the key factors to consider and help guide you toward the option that fits your life best. Rather than offering cut-and-dried advice, we’ll ask a series of questions to help you reflect on your finances, goals, and comfort with risk.
Questions to ask yourself when figuring out how much to spend
Would you rather have financial freedom or a dream home?
This is a fundamental question. Do you prioritise financial flexibility – having the ability to invest, travel, or pursue other goals – or is owning your dream home the ultimate goal? Understanding what matters most to you will help clarify your decision.
What is your risk tolerance?
Risk tolerance is about how you handle the ups and downs of an investment. A more expensive home might offer greater potential for capital growth, especially if it’s in a high-demand area. However, the property market can be unpredictable. Values may not grow as fast – or at all – leaving you with a hefty mortgage and little return.
If you’re comfortable taking risks for the possibility of higher rewards, a more expensive home may suit you. But if the thought of fluctuating property values makes you uneasy, you may prefer a less expensive home that offers more financial security.
Do you have financial buffers?
Consider whether you have other investments or financial safety nets, like shares or a solid superannuation balance . A more expensive property can limit your cash flow, making it harder to invest elsewhere. If you don’t have a solid backup plan, opting for a cheaper home might allow you to diversify your investments and reduce your risk.
On the other hand, if you have financial cushions to fall back on, you might feel more comfortable stretching your budget for a larger mortgage.
Will you need to dip into your emergency funds?
Your emergency fund is crucial for covering unexpected costs, like a job loss or medical expenses. If buying a more expensive home means using up your emergency savings for the down payment, consider whether it’s worth the risk. Maintaining a financial safety net can help you reduce stress, especially in the early years of home ownership.
What lifestyle sacrifices are you willing to make?
A larger home often comes with higher mortgage payments, which may require cutting back on dining out, holidays, or other luxuries. Think about what you’re willing to sacrifice. Would you prefer to live frugally for the chance to build wealth through property ? Or is maintaining your current lifestyle just as important as homeownership?
Being honest about these trade-offs will help you decide whether a more expensive home aligns with your priorities.
Can you comfortably service a larger mortgage?
Affording a more expensive home isn’t just about the upfront costs. You need to consider whether you can manage the long-term mortgage repayments. While lenders may approve you for a larger loan, make sure you’re comfortable with those payments based on your income and future financial plans.
How would an interest rate increase affect your mortgage repayments?
Interest rates can fluctuate, and a rise could significantly impact your monthly repayments. Can you afford a larger mortgage if rates go up? Be sure to factor this in, especially when taking on a bigger mortgage.
What are the additional costs beyond the mortgage?
A more expensive home doesn’t just mean higher mortgage repayments. You could face higher costs for maintenance, rates, insurance, and possibly renovations. Be sure to factor in these additional expenses when weighing your options. A cheaper home could potentially help reduce your overall financial burden.
How long do you plan to stay in this home?
Your time horizon matters. If you plan to stay in the home for many years, stretching your budget might be worth it for long-term capital growth. If you’re unsure how long you’ll stay, a more affordable option may be more appealing. Job changes, family plans, or lifestyle shifts could impact your decision. A cheaper home can offer flexibility without locking you into a large financial commitment.
How important is location to you?
Location can be a major factor in both quality of life and long-term capital growth. Paying more for a home in a prime location could offer benefits like shorter commutes, better schools, and access to amenities. Consider whether those advantages justify the higher price tag.
Are you buying for your current lifestyle or your future lifestyle?
It’s important to think about your future needs. Are you purchasing for your current situation, or are you anticipating changes such as starting a family or working from home? A more expensive home may be better suited to future needs, but only if you’re confident those changes will happen.
How does the potential for capital growth compare to other investments?
Would your money grow faster through other types of investments, such as shares or ETFs ? If the property market is uncertain, a cheaper home might allow you to explore other wealth-building opportunities, spreading your risk across different assets. However, it's always important to keep in mind that no-one can truly forecast how investments will perform in the future.
Pros and cons of each option
Now that you’ve considered key questions, let’s look at the pros and cons of spending more versus less on your first home.
The case for spending more
- Potential for higher capital growth : A more expensive home in a desirable area may appreciate faster, potentially providing long-term financial benefits. However, again, capital growth is never guaranteed
- Higher quality of life : A larger home or one in a prime location could offer a better lifestyle, such as shorter commutes or access to amenities
- Building equity for the future : If you plan to stay in the home for many years, a more expensive property could pay off by building substantial equity over time
The case for spending less
- Reduced financial stress : A cheaper home generally comes with lower mortgage payments, reducing monthly financial pressure and allowing you to invest elsewhere
- Increased financial flexibility : With lower mortgage repayments , you may have more freedom to adapt to life changes, such as starting a family or switching careers
- Ability to diversify investments : Spending less on a home frees up cash to invest in other assets, like shares or bonds , helping you spread risk and grow wealth through multiple channels
No one can predict the future
At the end of the day, no one can predict how the property market or interest rates will behave. It’s essential to weigh your personal circumstances, risk tolerance, and financial goals before making a decision.
And remember, this article doesn't know anything about your personal situation. Speak to a financial adviser for tailored guidance before making any big financial decisions.
Whether you choose to stretch your budget for a more expensive home or opt for something more affordable, it’s all about finding the balance that works best for you.
Until next time, happy investing!
