How much should you spend on your first PPOR?

Your first principal place of residence (PPOR) may be one of your most valuable assets, and the temptation can be to try and get your “dream” PPOR at the first attempt.

One of the reasons your PPOR can be such a valuable asset is that it is a capital gains tax (CGT) free asset, but you can only have one such asset at a time, and as such there is no rush to get that dream PPOR straight away – you have a lifetime to do this!

Furthermore, your first PPOR is in most cases unlikely to be your final, long-term PPOR; research has shown that people move houses on average every seven years!

We suggest in general that people buy a PPOR that suits their current and immediate needs, not one that could potentially cater for two teenagers, a large backyard for them to play, and a dog and cat straight away which may be years away.

A PPOR that suits your needs today and perhaps in the short-term, say in the next 3-4 years, where you can forsee your general life heading in.

As opposed to say the next 5-7 years, where your future path and direction may be less certain and predictable.

You should avoid overcommitting to large amounts of non-deductible debt on your first PPOR purchase, and buy something that is affordable for you to service (and if you are a double income household, affordable on one person’s income rather than both) and still enjoy life.

This could mean that if you are single, buying a small and practical 2 bed apartment, villa or townhouse, or if you are a young couple together buying a 2 or 3 bed apartment, townhouse or villa.

Then, as your circumstances and needs change, gradually upgrade to a larger PPOR that suits your future needs.

This is a “step-ladder” approach to getting your dream PPOR over a longer period, ie. say over 10-15 years rather than immediately or within a few short years.

Having said all of the above though, there is another pathway, and that is to buy as much and as big a PPOR as you can possibly afford and the banks will lend you money for.

This is a more risky pathway that will potentially require more sacrifices and delayed gratification for a few years, but can also be potentially more rewarding if you buy the right PPOR at the right time and house prices increase quickly over a few short years.

If house prices increase say 20-30%, the absolute dollar value increase will be much higher on a higher value property than a lower value property – all else being equal.

A few good years of capital growth like this along with some debt reduction could leave you in a position with a substantial amount of equity.

In this situation you could potentially “downsize” to a more modestly priced property in a more affordable suburb and potentially be debt free or with a very low debt, which is a great step towards achieving “financial freedom”.

These are two different pathways in purchasing your first PPOR, and although we prefer the first, we think either is acceptable depending on your personal financial situation and circumstances.

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