You hear the reports of interest rates now at 50 year lows, property markets showing signs of life, and you’re asking yourself: Am I missing out?
Blogger: Anton Hamer, Plan Assist Property Team
Firstly, realise you are not the first person to ask this important life changing question. In fact 70% of Australians own their own home and I am sure most of them have one golden reason that made them buy. They haven’t spent years analysing or weighing up the pros and cons. In fact, they could have decided to buy based on a whim. Maybe it was the desire to paint the walls a certain colour or buy in “the” street to keep up with the Joneses. To help answer the question, you were curious and so you starting asking the people you know…
It usually starts with parents, friends who are renting, friends who have just bought, your hairdresser, a real estate agent at the local open home. And then to expand your think tank, you raise the subject at a friend’s BBQ or work function that has a few wealthy looking people.
And of course, the more people you ask, the more unusual answers:
* “Back in the early 90s, I paid 18% pa interest rate on my home. Glad I still bought though.”
* “I bought in the boom and property prices fell. I lost a lot of money, I would keep renting if I were you."
* “I remember the day we paid off our home, never borrowed another cent again. Rent is dead money.”
* “We were young and dad helped us buy next door and we are still stuck next to him. Wish we could move around like you.”
And you quickly realise that all the answers you hear are the answers for other people, not for you. Everyone has their own agenda, their own set of wants and desires and hopefully you can bump into that person that is the same as you, which is not likely to happen anytime soon.
And then the light bulb goes on. I should get proper advice and talk to an accountant. Yes, they know about money. So you visit your family accountant and ask the question: Should I buy or rent?
And soundly, your accountant lets you know all about tax:
* Tax free capital gains on your own home,
* It’s a great way of forced saving, making you pay off an asset quicker,
* It serves two purposes, wealth building and covers accommodation for your family.
However, the accountant encourages you to get out a pad of paper because there are a few things to still check out:
* Cash flow is not as great in your early mortgage years. You can’t get tax deductions like investment property, so you are using 'after tax dollars'.
* Welcome to rate paying, council, water and strata levies, insurances and taxes, maintenance costs, and sales agent fees when you sell.
* Mortgage costs are generally your biggest expense. Don’t expect interest rates to stay at these record low levels.
They also suggest a financial planner could help you too. So you talk to the local financial planner and they discuss:
* Great way to build a portfolio of assets. Start with your home and build from there.
* Is one house purchase enough to retire on? What is your desired level of income at retirement?
* Sometimes shares can be a better way to grow assets with more liquidity.
And they talk about leveraging against assets, and encourage you to talk to a mortgage broker about what you can achieve. The mortgage broker discusses:
* If wealth is what you want, maybe consider an investment property. You can borrow more with extra rental income.
* You need a lot of savings as a deposit which could take you years to save.
* You may need to pay Stamp Duty, close to 4% of the purchase price.
* Your repayments for the next 30 years are this much. We should get a pre-approval from the bank.
And you think….Wait, did you say 30 years? I never thought about paying off a loan in the year 2045!
Once you are over the shock, a few smart people in the industry ask: Have you got a buyer’s agent to help you find and negotiate a property?
So you call them up and the buyer’s agent asks you:
* What area? Price range?
* How many beds? Are you thinking about children? What style of house, open plan? Big garden or modest unit to start with?
* Do you like cafes and shops nearby?
* Where do you work, need public transport?
* Land is where you can create added value by building. Do you want to add dwellings on your property in the future? Zoning.
And before your head explodes with all the choices, you ask yourself the original simple question: Should I buy or rent?
Well, the decision between buying and renting relies on what you want to achieve now and well into the future; your lifestyle, your personal goals as well as your financial goals. It relies on your current income and your future incomes, your current savings, your appetite for investing and more importantly how you want to live. Some people simply want to buy a home to paint the wall and put up a picture hook on it, and that’s enough reason to spend the next 30 years paying off a $600,000 block of land with 4 walls and roof, they call their home.
There is no single yes or no answer to the question, just a number of factors which could sway you to commit to buy or to stay flexible and rent.
The best thing you can do to start to answer this question is, know what you want, ask the experts, and invest responsibly.