Making the 20-Year Housing Decision: How to think about it

Introduction: The Mid-Life Housing Dilemma

When purchasing a home with approximately 20 working years left, homebuyers face a profound dilemma: commit to a “forever home” in a less-preferred location that can be fully paid off by retirement, or purchase a more desirable property that may only be partially paid off when working years end. This decision encompasses financial considerations, lifestyle preferences, emotional well-being, and retirement planning—all interconnected factors that demand careful analysis.

For Victorian homebuyers utilizing the Home Buyer Fund, this choice becomes even more nuanced. The shared equity arrangement offers greater purchasing power but adds complexity to the long-term financial equation. This article examines both approaches—buying a less desirable “forever home” versus purchasing in a preferred location with the intention to sell later—providing a comprehensive framework for making this life-changing decision.

Understanding the Victorian Home Buyer Fund

The Victorian Home Buyer Fund (HBF) operates as a shared equity scheme where the Victorian Government contributes up to 25% of a property’s purchase price in exchange for an equivalent share in the property. This arrangement reduces the initial deposit required and lowers ongoing mortgage payments, making homeownership more accessible.

However, this assistance comes with considerations that affect long-term planning:

1. Shared appreciation: When selling the property, you must repay the government’s proportion of the current value, not just the initial contribution.
2. Buying out: You can gradually purchase the government’s share as your financial situation improves.
3. Property type restrictions: The fund has specific property value caps and location requirements.

For someone with 20 working years remaining, this shared equity arrangement can provide access to more desirable locations but might complicate full ownership goals by retirement if the government’s portion remains unpaid.

Financial Analysis: The 20-Year Mortgage Comparison

Let’s examine the potential financial outcomes of both approaches over a 20-year period:

Scenario 1: Less Desirable Location – Full Ownership

• Property: 2-bedroom house in outer suburb
• Purchase price: $550,000
• Government contribution: $137,500 (25%)
• Your mortgage: $412,500
• Monthly repayment (3.5% interest): Approximately $2,400
• Outcome after 20 years: Fully paid mortgage, government portion potentially repaid

Scenario 2: Preferred Location – Partial Ownership

• Property: 1-bedroom apartment in desired area
• Purchase price: $600,000
• Government contribution: $150,000 (25%)
• Your mortgage: $450,000
• Monthly repayment (3.5% interest): Approximately $2,600
• Outcome after 20 years: Fully paid mortgage, government portion likely still owed

The financial difference between these scenarios may seem modest on a monthly basis (about $200), but the long-term implications differ significantly. In Scenario 1, you potentially achieve full ownership by retirement, while Scenario 2 may still carry the shared equity component.

Property Appreciation: Apartments vs. Houses

A critical consideration is how different property types appreciate over time:

1-Bedroom Apartments:

• Typically appreciate at slower rates (approximately 3-4% annually in Melbourne)
• More susceptible to market oversupply
• Often experience higher owner corporation fees that increase over time
• Limited scope for value-adding renovations
• More vulnerable to economic downturns

Houses in Outer Areas:

• Generally appreciate at higher rates (approximately 5-7% annually)
• Land component drives most of the value increase
• Greater potential for value-adding improvements
• More resilient during market fluctuations
• Often have lower ongoing costs relative to value

Historical data suggests that while a one-bedroom apartment in a desirable area might offer superior lifestyle benefits, it’s unlikely to match the capital appreciation of a house, even in a less prestigious location. This growth differential compounds over 20 years, potentially creating a significant equity gap at retirement.

The Overlooked Value of Location Satisfaction

Financial considerations, while important, don’t capture the full picture. Living in a location you genuinely enjoy offers substantial benefits:

1. Mental wellbeing: Research indicates housing satisfaction significantly impacts overall life satisfaction and mental health.
2. Social connection: Preferred locations often align with proximity to social networks, reducing isolation risk as you age.
3. Lifestyle amenities: Access to preferred services, entertainment, and natural environments enhances daily quality of life.
4. Commuting time: Less time spent commuting means more time for leisure, social activities, and health-promoting behaviors.
5. Daily enjoyment: The cumulative effect of daily satisfaction with your surroundings over 20 years represents a substantial life quality factor.

A 2018 study from the University of Melbourne found that housing dissatisfaction was associated with poorer mental health outcomes, with the effect strengthening over time. This suggests that the psychological cost of living somewhere you don’t want to be for 20 years could be substantial and may even affect physical health outcomes.

Retirement Housing Needs: A Different Equation

Another critical factor is how housing needs typically evolve with age:

1. Size requirements change: Many retirees prefer smaller, more manageable spaces as they age.
2. Accessibility becomes crucial: Single-level living, absence of stairs, and proximity to services gain importance.
3. Maintenance burden: Large properties can become physically and financially demanding to maintain.
4. Location priorities shift: Proximity to healthcare, family support, and community services often supersedes other location preferences.
5. Financial flexibility: Having equity that can be released for aged care or other needs provides security.

This evolution suggests that the “forever home” purchased in mid-life may not actually be suitable for later retirement years, potentially necessitating another move regardless of which option is chosen now.

The “Buy, Partially Pay, Then Sell” Strategy

This approach involves:

1. Purchasing a smaller property in your preferred location
2. Building partial equity over 20 years
3. Selling at retirement to release equity
4. Purchasing a retirement-appropriate dwelling

Advantages:

• Higher quality of life during your active years
• Flexibility to adapt to changing retirement needs
• Potentially lower maintenance and running costs throughout
• Ability to realize any capital gains before retirement

Disadvantages:

• Potentially incomplete mortgage repayment by retirement
• Transaction costs associated with selling and buying again
• Uncertainty about future property market conditions
• Possible difficulty finding suitable retirement housing

This strategy tends to work best for those who value current lifestyle quality and maintain other strong retirement savings vehicles beyond property.

The “Forever Home” Approach

This strategy involves:

1. Purchasing a larger property in a less preferred but more affordable location
2. Focusing on complete repayment before retirement
3. Potentially adapting the property for aging in place
4. Maintaining the option to downsize if needed

Advantages:

• Potentially stronger capital growth over 20 years
• Elimination of housing costs in retirement
• Avoidance of market risks at retirement age
• Option to release equity through downsizing if needed

Disadvantages:

• Reduced lifestyle satisfaction during working years
• Higher maintenance costs throughout ownership
• Less flexibility to adapt to changing needs
• Potentially unnecessary space in later years

This approach typically appeals to those prioritizing financial security in retirement above current lifestyle preferences.

Risk Assessment: What Could Go Wrong?

Both strategies carry distinct risks that warrant consideration:

Preferred Location Strategy Risks:

• Apartment oversupply reducing capital growth
• Inability to afford suitable retirement housing after selling
• Rising owner corporation fees eroding equity
• Difficulty obtaining finance for another purchase in retirement
• Market downturn coinciding with intended selling time

Forever Home Strategy Risks:

• Declining satisfaction and potential regret over location choice
• Neighborhood deterioration affecting property value
• Health issues making the property unsuitable earlier than expected
• Larger property becoming a maintenance burden
• Difficulty selling a larger property in a changing market

The preferred location strategy generally carries more financial risk, while the forever home approach tends to have greater lifestyle satisfaction risks.

Decision Framework: Finding Your Answer

To determine which approach better suits your situation, consider these questions:

1. Financial resilience: Beyond property, how strong are your other retirement savings vehicles?
2. Lifestyle priorities: How significant is location to your daily happiness and wellbeing?
3. Health outlook: Do you anticipate any conditions that might affect housing needs sooner than retirement?
4. Social connections: How important is proximity to your social network?
5. Work arrangements: Could remote work options make a less desirable location more tolerable?
6. Property potential: Which property type offers better improvement potential?
7. Retirement vision: What type of housing do you envision needing in retirement?
8. Risk tolerance: Are you comfortable with the financial uncertainty of selling and buying again?
9. Adaptability: How easily do you adjust to new environments?
10. Exit strategy: What options would you have if circumstances change unexpectedly?

This assessment should be weighted according to your personal values, as the “right” answer varies significantly between individuals.

Practical Compromise Strategies

For many buyers, hybrid approaches may offer the best solution:

1. The “stepping stone” approach: Purchase a smaller property in a moderately desirable location with strong growth potential, aiming to trade up over time.
2. The “renovator’s strategy: Buy in a less desirable but improving area with renovation potential to build equity faster.
3. The “commuter compromise: Choose a location that balances desirability with affordability by accepting a slightly longer commute.
4. The “partial payment plan: Deliberately plan to have a manageable mortgage remaining at retirement that can be covered by downsizing.
5. The “dual purpose property: Select a property that could potentially be subdivided or partially rented to generate retirement income.

Conclusion: Personal Values Drive the Right Decision

The choice between buying a forever home in a less desirable location or living where you want with a plan to sell later isn’t simply financial—it’s fundamentally about values. Financial analysis provides important guidance, but the final decision hinges on what you value most: current lifestyle quality or future financial security.

Given the unpredictability of both housing markets and personal circumstances over a 20-year horizon, the ideal approach may include elements of flexibility. Properties that offer adaptation potential, strong resale appeal, and manageable costs provide options regardless of how your situation evolves.

Remember that housing is both an investment and a home. While financial optimization matters, the daily experience of where you live for 20 years represents approximately 7,300 days of your life—a consideration that deserves significant weight in your decision.

For most people with 20 working years remaining, the wisest path combines prudent financial planning with acknowledgment of emotional wellbeing, creating a strategy that balances tomorrow’s security with today’s satisfaction. This might mean choosing a middle-ground location, a property with strong investment characteristics in an area you find acceptable, or committing to additional retirement savings to offset a decision that prioritizes current lifestyle.

Whatever you decide, ensure the choice aligns with your personal definition of a well-lived life—both for the next two decades and beyond.