There is a worrying trend amongst some homeowners to use their family homes (usually their most significant – if not only – asset) like a large debit card.
Why borrow more?
In some circumstances this is perfectly acceptable. If you have a low LVR or, better still, no debt and a clear way to repay the additional borrowings then no problem.
However, if your LVR is nudging 80% then I would think twice about borrowing more against my house at a time that is widely believed to be at the top of the housing market (in Sydney and Melbourne).
So why borrow more?
Particularly if your reasons for borrowing are not essential. You know, things like the following items:
- A new car to replace the one that is only four or five years old. Perhaps think about leasing.
- An overseas holiday. Really?
- A renovation – unless you’ve just had triplets and you live in a one bedroom house.
- School Fees – controversial I know. But what good is a private education – which furnishes your precious children the exact curriculum as a public education – if all you have to show for it is lifelong debt. I know, I’ve sent one son to a private school and one son currently in public. It means I can afford to take him to the US with me (as I did a few weeks ago) and I will also be taking him to Europe with us in a few months.
- A new boat. Some boat owners will tell you that you only have two good days during your boat ownership. The day you buy it and the day you sell it.
- Jewelry. I know there are some couples that will insist on that 3 carat VVSI diamond pendant to go with the 2 carat diamond ring. But if you’re overextending yourself financially, think again.
Now, you may think I’m making the above up. But we receive enquiries from potential borrowers to borrow for the above items.
In most cases, we can (and do) get approval to extend their borrowing capacity but whether or not it is a wise choice is left entirely up to the borrower. We can warn, we can show them numbers we can even demonstrate how not borrowing more will mean they can repay their debt quicker. But at the end of the day, the lure of the big shiny baubles is too much for some.
So, why shouldn’t you borrow more against your home for luxury items?
Here’s a very short list of reasons why you shouldn’t:
- You would be borrowing at the top of the housing cycle (this is an educated guess). Which means there is a very real chance that the value of your home may fall. In some cases, that will mean that your borrowings may eventually exceed the value of your home.
- You would be borrowing at 30 years (the term of your home loan) for an asset that may only last a few years (or less). This is just bad finance.
- Borrowing against your home can be habit forming. It’s good while it lasts but sooner or later you will have to repay every cent that you borrow. You need to ask yourself if your current income will be able to achieve that.
- You may lose your income. Either through job loss or fluctuating market conditions (for the self employed). How do you then repay the outstanding mortgage?
- You may have purchased a depreciating asset (like a car) and when you sell it you only recover 50% of the value. The other 50% is added to your mortgage (to be repaid over 30 years).
Having said all the above, if you’re looking to extend your borrowing for any of the above or other reasons talk to us. Sure, we’ll get you the loan, but at least you’ll be entering into the transaction armed with all of the facts. After all, we’re not here to simply agree with you.
Note that if the loan is unsuitable for you, it is not legal for us to even contemplate seeking approval.