A long held belief within the Australian psyche is that your family home is arguably the most significant financial investment you’ll ever make in your lifetime.
Ask some experts however, and they’ll suggest that due to the emotionally charged nature of selecting a place to call home, as opposed to an income-generating asset, your house is in fact a huge liability. Then there’s all that non-tax deductible mortgage debt!
I would argue however that buying your own home, at any stage in life, should be part of your overall economic game plan. Here’s why…
1. The family home attracts zero tax liability at point of sale, and incurs no land tax charges. I know of someone who recently purchased a property at auction, in a popular inner Melbourne suburb.
They paid $1.35 million for the house, which was purchased by the previous owners for $90,000 back in 1988, less than thirty years ago. The capital gain of $1.26 million those vendors walk away with at settlement will be tax-free. Not a bad little return I’d say.
2. With interest rates so accommodatingly low and housing credit going relatively cheap, present day homeowners are sitting on a potential pot of gold in the form of investable capital. Commonly known as equity.
As a homeowner, it’s a good idea to stay abreast of the value gains occurring in your neck of the woods. When you feel the time is right, i.e. When you have sufficient equity to draw on, take the opportunity to reinvest that capital gain for your future fund.
Just be wary of where you park your money though, as long favoured, low risk assets are just not generating worthwhile yields right now. An obvious alternative when you look at current markets is…dare I say it…real estate!
3. You know all that equity I mentioned above? Well, you can leverage it to invest in further high growth housing assets, or even whack a granny flat up in the backyard and collect a tidy weekly rent.
Now more than ever, buying a home should represent an integral part of your long-term investment strategy and objectives.
Obviously this means there are a few more things you’ll need to take some time mulling over during the purchasing decision, other than carpet colours and paint swatches.
You want the home to engage you emotionally of course. This is where you’ll enjoy life’s most intimate moments with friends and family after all, so the space has to make you feel comfortable.
Realistically speaking however, this is a very significant financial investment, so here are a few other things to keep in mind when you feel a tugging on those heartstrings…
1. Does it make financial sense? Can you afford to take on this commitment, or are you getting in over your head? Importantly, you need to avoid diving in too deep when it comes to servicing a property loan.
2. Does it suit your plans? Have you stopped to consider your financial journey and where it might lead in the future? Before buying a home it’s a good idea to set some realistic and achievable short and longer-term goals so you have some idea of where you want to take your life. Notice I said where you want to take your life? Not, ‘Where life takes you.’
The difference between the two is in your planning. Fail to plan and life could lead you up that creek without a paddle. Work your home purchase into your plans however, and your home will work for you as a viable long-term investment.
3. Will it provide for your financial future? If you fall in love with a home that’s likely to be a money pit and in turn, over-capitalise due to emotions influencing your negotiations, chances are the answer is ‘No!’
You’d be surprised how much the long-term cost of over-capitalising can be. Some people lose everything from making this fateful mistake. Always crunch the numbers as a priority and be prepared to walk away if they don’t stack up. Your future literally depends on getting this step right!
Your own home certainly doesn’t need to be a constraint to your future financial prosperity. On the contrary, if you buy well and apply some forethought, it can be something that gives you a boost up the proverbial property ladder.
Consider the many homeowners currently taking the opportunity to reduce their mortgages faster, contributing extra to their continually shrinking monthly repayments. Some are building pools of equity at a considerable rate, with the help of an incredibly buoyant market in certain locations.
And you know where those dividends are going? You guessed it…straight back into bricks and mortar! Because that’s where the money is!
About the Author
Since 2008, David Thomas has built a business aimed at servicing the needs of property investors, owner occupiers and small business owners. David is recognised as one of the top 10 independent mortgage brokerages in the country, David and his team have settled almost billions of dollars worth of residential and investment loans over the last decade.
Known for his straightforward, relatable style, David believes by educating people about property funding; they fare better in the market. By sharing his expertise openly, some of the people he educates will likely become his clients. It's a win-win approach.
David Thomas is a credit representative (Representative Number 506153) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237).