Author Topic: How to balance investing in shares & saving for a house  (Read 3239 times)

Nudelkopf

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How to balance investing in shares & saving for a house
« on: December 04, 2016, 03:37:08 PM »
I have a question for you MMMers about how people balance investing in shares, and then saving for a house deposit (for PPOR).

My partner & I are planning to buy a house in around 5 years time. The houses in the cities/suburbs we're looking at are around $400-450k. Who knows how that might change, but we'd still like to start some forward planning. We've currently got $130k in shares and $75k in cash, and at the moment we save approximately $75k per year. 

At what point do people stop investing in shares and start saving for a house deposit? Is there any point in selling any (or many!) shares in 5 years time to minimise the loan? Or should we stop investing in shares right now & save our cash for 5 years before buying a house?

(I hope this doesn't seem too like a vague-ish question without all our money stats as per most case studies, but I'd like to hear how others have balanced this shares/house deposit business. So far my googling & quizzing of real life friends hasn't results in much help. Most people in my life have bought their house first before investing in shares.)

Anatidae V

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Re: How to balance investing in shares & saving for a house
« Reply #1 on: December 04, 2016, 05:09:25 PM »
We have $15k in shares and $160k cash, because we thought we might buy a house this year. We only just started buying shares. For us, we wanted to have 20% deposit plus stamp duty fees in cash at the time purchase. That's the minimum we'd need to get a reasonable deal on a mortgage, and lets us put everything above that into shares. So we're really cash heavy right now, and are thinking of diverting some cash to shares and maybe reducing our cash amount to 15% deposit + stamp duty or something. You can decide how much mortgage you want and work backwards from the 5 year mark when you'd want to stop share purchase and start dumping in cash. Due to the large amount and short timeframe, I'd not try selling shares for the deposit in 5 years because you don't know what the market will be doing at the time.

HappierAtHome

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Re: How to balance investing in shares & saving for a house
« Reply #2 on: December 04, 2016, 07:11:20 PM »
We approached this slightly differently, as we knew our first priority would be paying off the mortgage (i.e. fully offsetting it) and that we would not invest in shares outside of super until that was done.

We ended up with about five years spent saving for our next house, though that wasn't planned in advance - personally I wanted to move much sooner! So a similar timeframe to yours. We had an existing mortgage with a redraw facility. We saved our 20% deposit and stamp duty in our "high interest" savings accounts, and anything over and above that went into the existing mortgage. (When we sold that place the profits went straight into the offset for the new place).

So our circumstances were different from yours in that way, plus we were buying a MUCH more expensive place (I will never admit here just how much we spent on our house - you can't make me!!) so we needed a much bigger deposit and stamp duty, albeit on a very high combined income.

In your shoes, I would save the house deposit and stamp duty, set them aside in a savings account, and then keep funnelling your savings into shares.

Worth thinking about what your financial priorities will be once you've bought the place: the Aussies on this forum helped me to understand why it was better to offset the mortgage before doing post-tax investing.

Anatidae V

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Re: How to balance investing in shares & saving for a house
« Reply #3 on: December 04, 2016, 10:43:07 PM »
Happier, can you explain the reasoning? I'm keen to know - guessing it's to do with tax?

HappierAtHome

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Re: How to balance investing in shares & saving for a house
« Reply #4 on: December 04, 2016, 11:17:53 PM »
Happier, can you explain the reasoning? I'm keen to know - guessing it's to do with tax?

I always struggle to explain it clearly, so hopefully someone who can articulate this stuff (Deborah?) will turn up soon :-)

Here's my attempt:

Interest rates are not fixed in Australia (beyond three-five years max, anyway) so you are not guaranteed a low mortgage payment, or one that you can predict over the medium-to-long-term, for the 30ish years you have a mortgage if you don't pay it off early.

If you pay off your mortgage or have it completely offset, you are not paying extra tax on the money you're no longer spending on your mortgage payments. So if your mortgage is $30k a year, when you make those payments each dollar is earned by you, your marginal tax rate is applied, then the dollar hits your bank account and you use it towards the $30k. If you pay off / offset your mortgage, each dollar is earned by you, your marginal tax rate is applied, then the dollar hits your bank account and it's *yours*. You invest it or spend it or whatever. So each dollar you earn is say 70c in your bank account, free and clear.

If you are investing instead of paying off your mortgage, you're paying tax twice: when you earn the dollar through your salary / paid work, and then when it produces dividends and/or increases in value as a share or whatever. So you earn it, your marginal tax rate is applied, it hits your bank account, you invest it, and your marginal tax rate is applied again to the profit.

The argument in favour of investing rather than paying off the mortgage is that the sharemarket will provide greater returns than the interest rate on your mortgage. However, the mortgage rate is variable and could go up, there's a guaranteed tax-free outcome with paying off the mortgage, and if you invest rather than pay it down you're paying more tax while you save for FIRE than if you pay off the mortgage first. That's my understanding in a nutshell.

I believe that many Aussies here (including marty, I'm pretty sure) are offsetting their PPOR for these reasons - though I bet they can explain the maths and logic better than I can.

marty998

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Re: How to balance investing in shares & saving for a house
« Reply #5 on: December 04, 2016, 11:51:50 PM »

I believe that many Aussies here (including marty, I'm pretty sure) are offsetting their PPOR for these reasons - though I bet they can explain the maths and logic better than I can.

I have my place fully offset because one day I will sweep the funds out for a deposit on the next place  and keep this one as an investment property (with a $250k loan where interest is now deductible).

If instead I had paid off the loan, I'd have no investment property debt and a whole lot of painful non-deductible PPOR debt on the new place. A pretty crappy outcome.

Nudel - your situation is different. If you and your partner are happy enough to be together till death do you part etc etc, in your shoes I would buy now, and not in 5 years time.

You can keep your existing living arrangements (you renting?), and rent out the purchased place to a tenant until you want to move in.

This way you can start tearing strips off the mortgage using the tenant's money as well as having a nice tax benefit with a probable negative gear after depreciation and capital works deductions are factored in.

Happy house hunting :)


HappierAtHome

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Re: How to balance investing in shares & saving for a house
« Reply #6 on: December 05, 2016, 12:06:55 AM »

I believe that many Aussies here (including marty, I'm pretty sure) are offsetting their PPOR for these reasons - though I bet they can explain the maths and logic better than I can.

I have my place fully offset because one day I will sweep the funds out for a deposit on the next place  and keep this one as an investment property (with a $250k loan where interest is now deductible).

If instead I had paid off the loan, I'd have no investment property debt and a whole lot of painful non-deductible PPOR debt on the new place. A pretty crappy outcome.

Was my logic vaguely right, at least? :-)

Anatidae V

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Re: How to balance investing in shares & saving for a house
« Reply #7 on: December 05, 2016, 12:36:43 AM »
So Marty, for someone who has the deposit but hasn't bought yet, you'd recommend buying the future PPOR now?

I need to go run some complicated numbers.

Nudelkopf

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Re: How to balance investing in shares & saving for a house
« Reply #8 on: December 05, 2016, 01:01:03 AM »
Thanks guys, you've given be a bit to think about. But pretty much the suggestions are to perhaps stop buying shares & keep saving the cash until we're ready to buy?

deborah

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Re: How to balance investing in shares & saving for a house
« Reply #9 on: December 05, 2016, 01:38:07 AM »
My take is different to Marty's. His is reasonable, but I wouldn't do it.

When I was young, my parents moved very often - my siblings and I all went to more than one primary school per year of schooling. And several places where we lived were my parents' "forever" house. Somewhere, I have seen that people tend to move houses in Australia an average of every 5 years. If you look at how much it costs to buy and sell a house, even with the enormous capital gains that housing has been having, most people are just treading water, and not gaining anything because they move house too often.

If you are ABSOLUTELY SURE you are buying your forever house AND you haven't fallen in love with features that tenants will wreck (the box hedges in the garden?), Marty's idea is good. Remember, that when you buy a house, it has been done up and is beautifully presented for sale. When you get it back from tenants, they have lived in it, and haven't done it up to move out of it, so it will look worse no matter how wonderful they are.

The other thing is that when you are buying an investment property you are after something that will give you good returns. You are not necessarily after the same thing in a PPOR, so you might buy something that isn't easy to rent and therefore has very low rental return. When I first bought a house, I bought a wreck and fixed it up myself over the years (eventually I knocked down the skillion at the back and had an extension built to replace it). This was not a place I could or would rent out - any tenants would have had continuous problems with the kitchen and the bathroom, for example. I bought a lot cheaper than I would have otherwise, spent money on it whenever I had a windfall or had saved up enough. And I lived in it for a long time. This worked well for me as I learnt how to fix things, and I ended up with a wonderful house that I still miss, which was worth an enormous amount more when I sold it. But wouldn't have fit into Marty's idea.

So to me, waiting for 5 years is an excellent idea.

Happier is right that the best place to put a deposit is in the mortgage offset account, because the interest isn't taxed like every other investment (you're not getting interest - you're paying a loan).

But apart from that, I don't really know any good place to put it. Even high interest bank accounts aren't really very good. Term deposits used to be a lot better than high interest accounts, and I kept money in them when I was buying things - finding the sweet spot deposit whenever my money was about to mature. For instance, sometimes a 5 month deposit gave you better interest rates than 12 months, or any other length of time, so that was the sweet spot. But in this low interest economy, I think that term deposits aren't giving the value they used to. If you didn't want the money for 10 years you might go for insurance bonds or shares or other investments, but 5 years is a tricky time period. You might want to investigate if there are any managed funds around specifically for a short period - they used to be around, but I haven't heard about them for a while.

This is why I didn't respond to this when I first saw it - I just don't have the answers.

marty998

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Re: How to balance investing in shares & saving for a house
« Reply #10 on: December 05, 2016, 02:56:31 AM »
Yeah logic largely right Ms Happier.

I paid mine down for piece of mind reasons more than anything else to be honest. It was totally not the optimum outcome investing wise, but I'm 100% happy with the choice I made.


marty998

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Re: How to balance investing in shares & saving for a house
« Reply #11 on: December 05, 2016, 02:58:41 AM »
Thanks guys, you've given be a bit to think about. But pretty much the suggestions are to perhaps stop buying shares & keep saving the cash until we're ready to buy?

If you are going to wait 5 years, it's almost long enough to ride out any downs and ups that might happen on the stockmarket.

You could do amazingly well out of it...$70k a year x 5 + existing $200k + dividends/returns... wow.

HappierAtHome

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Re: How to balance investing in shares & saving for a house
« Reply #12 on: December 05, 2016, 09:44:35 PM »
So Marty, for someone who has the deposit but hasn't bought yet, you'd recommend buying the future PPOR now?

I need to go run some complicated numbers.

Aside from what Deborah said... I'm not sure there's a diplomatic way to say this, but you and your DH change your mind about whether to buy or rent very frequently. I wouldn't buy until I had been SURE I wanted to buy and SURE about the area I wanted to buy in for at least six months (costs of buying/selling are huge!). Plus, aren't you talking about relocating to [town outside of Perth] within about ten years?

FWIW our beliefs about what we wanted to buy when we started saving our deposit versus what ended up being correct for us by the time we actually bought were SO DIFFERENT. It was good to really work on exactly what we wanted and why for years before biting the bullet.

Anatidae V

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Re: How to balance investing in shares & saving for a house
« Reply #13 on: December 05, 2016, 10:04:30 PM »
So Marty, for someone who has the deposit but hasn't bought yet, you'd recommend buying the future PPOR now?

I need to go run some complicated numbers.

Aside from what Deborah said... I'm not sure there's a diplomatic way to say this, but you and your DH change your mind about whether to buy or rent very frequently. I wouldn't buy until I had been SURE I wanted to buy and SURE about the area I wanted to buy in for at least six months (costs of buying/selling are huge!). Plus, aren't you talking about relocating to [town outside of Perth] within about ten years?

FWIW our beliefs about what we wanted to buy when we started saving our deposit versus what ended up being correct for us by the time we actually bought were SO DIFFERENT. It was good to really work on exactly what we wanted and why for years before biting the bullet.
You mean we are highly wishy washy on a topic where one should be absolutely certain before doing anything? :D And buying now could be one of the most awkward mistakes of our lives? Yes, that is quite true. I can see benefits in renting and in owning for us. We're keen on the idea of moving to [town outside Perth], but I really don't know if we'd do that in 10 years or 20 years. Most of all, I don't feel comfortable with leaving such a large amount of money in cash for a possibly completely undetermined amount of time.

Edit to add: pile of cash #mustachpeopleproblems
« Last Edit: December 05, 2016, 10:12:37 PM by Anatidae V »

deborah

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Re: How to balance investing in shares & saving for a house
« Reply #14 on: December 05, 2016, 11:34:34 PM »
So Marty, for someone who has the deposit but hasn't bought yet, you'd recommend buying the future PPOR now?

I need to go run some complicated numbers.

Aside from what Deborah said... I'm not sure there's a diplomatic way to say this, but you and your DH change your mind about whether to buy or rent very frequently. I wouldn't buy until I had been SURE I wanted to buy and SURE about the area I wanted to buy in for at least six months (costs of buying/selling are huge!). Plus, aren't you talking about relocating to [town outside of Perth] within about ten years?

FWIW our beliefs about what we wanted to buy when we started saving our deposit versus what ended up being correct for us by the time we actually bought were SO DIFFERENT. It was good to really work on exactly what we wanted and why for years before biting the bullet.
You mean we are highly wishy washy on a topic where one should be absolutely certain before doing anything? :D And buying now could be one of the most awkward mistakes of our lives? Yes, that is quite true. I can see benefits in renting and in owning for us. We're keen on the idea of moving to [town outside Perth], but I really don't know if we'd do that in 10 years or 20 years. Most of all, I don't feel comfortable with leaving such a large amount of money in cash for a possibly completely undetermined amount of time.

Edit to add: pile of cash #mustachpeopleproblems
Make up your minds to rent for 10 years, and put it into shares.

marty998

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Re: How to balance investing in shares & saving for a house
« Reply #15 on: December 06, 2016, 03:14:33 AM »
So Marty, for someone who has the deposit but hasn't bought yet, you'd recommend buying the future PPOR now?

I need to go run some complicated numbers.

Aside from what Deborah said... I'm not sure there's a diplomatic way to say this, but you and your DH change your mind about whether to buy or rent very frequently. I wouldn't buy until I had been SURE I wanted to buy and SURE about the area I wanted to buy in for at least six months (costs of buying/selling are huge!). Plus, aren't you talking about relocating to [town outside of Perth] within about ten years?

FWIW our beliefs about what we wanted to buy when we started saving our deposit versus what ended up being correct for us by the time we actually bought were SO DIFFERENT. It was good to really work on exactly what we wanted and why for years before biting the bullet.
You mean we are highly wishy washy on a topic where one should be absolutely certain before doing anything? :D And buying now could be one of the most awkward mistakes of our lives? Yes, that is quite true. I can see benefits in renting and in owning for us. We're keen on the idea of moving to [town outside Perth], but I really don't know if we'd do that in 10 years or 20 years. Most of all, I don't feel comfortable with leaving such a large amount of money in cash for a possibly completely undetermined amount of time.

Edit to add: pile of cash #mustachpeopleproblems

The urge to nest is not strong in this one yet Happier :P Maybe revisit the discussion at 8 months and she'll be like "my Puggle deserves a freaking CASTLE! I have to go buy one now!"

:D :D :D

I will say 2 things

1) you will never be sure you made the right decision to buy until after you move in. Until then umming and ahhing will be a daily routine. Said from personal experience.
2) if you are planning to move to dream town "sometime in 10-20 years", there will be a hell of a lot of water under the bridge between now and then. There's absolutely no guarantee the town you want to move to will maintain it's desirability in 20 years time - it's a generation down the track and you may be underestimating what you can achieve in that length of time.

11ducks

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Re: How to balance investing in shares & saving for a house
« Reply #16 on: December 06, 2016, 04:08:21 AM »
Puggles are fricking adorable.

Nudelkopf

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Re: How to balance investing in shares & saving for a house
« Reply #17 on: December 06, 2016, 06:45:13 PM »
We're keen on the idea of moving to [town outside Perth], but I really don't know if we'd do that in 10 years or 20 years. Most of all, I don't feel comfortable with leaving such a large amount of money in cash for a possibly completely undetermined amount of time.

Edit to add: pile of cash #mustachpeopleproblems
This is kind of me at the moment too. I have a vague idea about where I'd like to buy, but haven't done much research. I think I'd feel a bit useless saving cash for 5-or years... and then deciding not to buy anyway. 

Is there any sense in just keeping approx. 20% deposit in cash (I.e the $70k we already have plus $x), and then invest the rest in shares til we're ready to buy. And then stop buying shares & sock it away in the offset account? Or would it be smarter to work backwards (as suggested before), & say, only stop buying shares when we're a year or so out from buying, and save the deposit in the last 18 months (or whatever it works out to be). Does that make any sense?

Also, that puggle!

deborah

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Re: How to balance investing in shares & saving for a house
« Reply #18 on: December 06, 2016, 09:52:06 PM »
Sounds good.