A bigger house means bigger costs. Work out the true cost of your trade-up
I feel more claustrophobic outside than I do inside, was a remark made to me by a woman I met last week.
She and her husband were thinking of moving property and she wanted to know from a financial perspective if it was the right thing to do or not.
The trigger for this, was a lack of space in their 3 bed-semi-detached 1,400 sq ft home. They had three children aged 13, 10 and 8, and whilst they liked the house, it’s location and their neighbours, it did feel as if it was getting smaller by the day.
And it was that lack of space and privacy that was their issue. But was it a big enough reason from a financial perspective for them to consider and justify moving, and taking on a bigger mortgage, with bigger monthly repayments and being a lot older before their new mortgage would be paid off in full?
The balance outstanding on their existing mortgage was c. €175,000 and there were only 8 years left of a tracker, before they were mortgage free. If they moved, the type and size of property they wanted to move to, would mean they would have to take on a mortgage of €500,000 over a 20-year period.
It's difficult to measure how better they would feel in a bigger house, with more space and privacy. Would their level of happiness and quality of life increase sufficiently to justify the change to their financial situation?
It’s hard to know, but there have been many studies carried out which suggest about two thirds of us would like to live in a bigger property. And people feel like this for a variety of reasons, some of which are absolutely valid and out of necessity, and others maybe not so. Some people, buy as a big a property as they can afford but it might make very little financial sense for them to do so.
Because the cost of buying a property doesn't stop with the purchase price, there are many other costs that will increase because of the extra square footage. For example, home insurance premiums will increase, as will your property tax, the cost of furnishing and heating the property, and the annual maintenance and renovations will increase as well.
That isn't to put you off buying a bigger property, it's simply to know what the financial impact of doing so is. What are the on-going costs and what impact will they have on your future finances as well e.g. will the increase in mortgage payments come at the expense of reduced pension contributions or your ability to go on holiday each year?
Once you know what the consequences are, you can then make a decision knowing full well, that the reason or reasons why you want to move are justified and outweigh the financial consequences of your move.
And this is exactly what I did, with this couple who were looking at moving. I wanted to take the emotion out of their decision-making process. Forget, about not having as much privacy for a moment, set aside thinking the kids need more room to have their friends over etc. Let's look at the cold hard financial facts of the move.
So, what did this extra 1,000 square footage of space mean to them from a financial perspective, if they did move? And I think looking at the cost under different headings was the best way I could show them, so there would be no financial surprises if they decided to move.
Over a 20-year period, the additional 1,000 square feet of space was going to cost them an extra €12,000 on purchasing and selling costs; €15,000 on additional furnishings; €195,590 in mortgage interest payments; €18,000 in property tax; €12,470 in mortgage protection costs; €25,160 in energy and home heating costs; €37,640 in maintenance and €14,640 in home insurance costs
That extra space this couple were considering moving for, which is about the size of two average sized garages, was going to end up costing them €330,500.
Up until now they had no idea what this number was. They couldn’t think this way, and the majority, of people don’t. But, you need to, and you want to get this decision right, because if you don't, it could turn out to be a very expensive mistake. So, you have, to make sure you think this through and get it right.
I don't want to put people off moving to a bigger property, if the reasons they want to move are important to them and trump the financial cost. Money isn't everything, but it is an important consideration and one to be aware of, and it does have to form part of the decision-making process, that’s all. .”
Liam Croke is MD of Harmonics Financial Ltd,
based in Plassey. He can be contacted at firstname.lastname@example.org or www.harmonics.ie