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Property: Rent, buy or invest?

Buying a home has been heralded as the way to get ahead for generations of Australians. But with housing affordability a rising concern for would-be first home buyers and their parents, many younger Australians are beginning to weigh up whether it’s better to buy, rent or invest in residential property.

Despite record low interest rates, getting a foot on the property ladder has become increasingly difficult.

Against this backdrop, it’s hardly surprising that the proportion of first home buyers has fallen to less than 14% of all home buyers, the lowest level in more than a decade.ii

As the numbers of first home buyers fall, many younger Australians are focusing on buying an investment property instead. A recent survey by Mortgage Choice found 50.8% of investors who purchased a first investment property were 34 or younger, up from just 33.8% three years ago.iii

So which is best – buy, rent or invest?
Home sweet home

One of the best arguments for buying a home is that it forces you to save. Most of us find it difficult to save money today for long-term goals, but that is what paying the mortgage forces us to do. The pay-off is eventual ownership of an asset that enjoys favourable tax treatment when you sell or when seeking eligibility for the age pension and other means-tested benefits in retirement.

Unlike rents, which rise along with the cost of living, mortgage payments are fixed to the initial cost of the property and tend to fall relative to rents for similar properties over time.

Buying also provides the security of being your own landlord and the flexibility to renovate. After building up equity in your home you may choose to borrow against it to kick-start an investment portfolio.

On the downside, saving for a home deposit and transaction costs is a major hurdle for first timers. Ongoing costs for rates, maintenance and insurance can also be significant. While mortgage interest rates are currently at record lows, buyers also need to factor in the possibility of higher rates over the term of the loan.
When renting makes sense

Renting has the potential to free up money to invest in assets with a higher return than residential property. For this strategy to work, your rent must be less than you would otherwise spend on mortgage repayments. You also need the discipline to invest the savings if you want to get ahead.

Renting rather than buying can be a profitable strategy when other asset classes provide higher returns. Yet over the past 10 years residential property has been the best-performing asset class with an average annual return of 8% a year compared with 5.5% for Australian shares. iv

While this is no guarantee of future performance, it helps explain why many would-be first home buyers are taking a new approach to the old rent or buy equation.
The middle way

First time buyers often find they can’t afford to buy in an area where they want to live. So to get a foot on the property ladder they continue living in rental accommodation – or at home with Mum and Dad – and purchasing an investment property.

The advantage of this strategy is that your tenants help pay off the mortgage. And unlike a home you live in, costs such as mortgage interest, repairs, rates and insurance are tax deductible.

At the end of the day, the decision to buy, rent or invest will depend on your personal financial situation, the state of the housing and rental markets, the returns available on other investments and lifestyle. The important thing is to have a long-term housing strategy that won’t disadvantage you in later life.

If you or your children are weighing up whether to buy, rent or invest in property, give us a call on 03 5434 7690 to discuss the options in the context of your overall investment strategy.

 
ABS Housing Finance Australia, May 2016, 5609.0
ii Mortgage Choice, 2016 Investor Survey,17 June 2016
iii ASX Russell Investments 2016 Long-term Investing Report

Fast track your home loan

With interest rates on the rise, now is the time to look at ways to fast track your mortgage. After all, the sooner you pay off your mortgage, the less you will pay in interest.

That’s probably why nine out of ten Australian mortgage holders told a recent finder.com.au survey that they try to pay back their mortgage ahead of time.i

So what are the ways you can fast track your mortgage and minimise your interest payments?
Increase your repayments

The most popular strategy is to make extra payments. Rather than paying your designated monthly repayment, why not pay more? Not only does this reduce your interest charges but if rates should rise you will be able to absorb the increase.

You can also make extra payments if you get a windfall or a bonus at work. But if you have chosen a fixed home loan, you may find you can’t make extra payments, so check with your lender.

More frequent payments are also a good strategy. Instead of paying your mortgage off monthly, pay half the monthly amount each fortnight. After all, there are only 12 months in a year, but 26 fortnights, so you effectively end up paying an extra month each year.

Most home loans are structured so you pay mostly interest in the first five to eight years without making any inroads into the principal. If you can manage to pay some principal off too during that period, then you can cut the interest you’ll pay on an average 25-year loan.

Consider an offset account

An offset account can also prove useful. With your salary going into your mortgage account, the principal will drop and that means you will pay less interest. For instance, if you had a 100% offset account with $30,000, on a home loan of $400,000, you would see interest only calculated on a balance of $370,000 instead of $400,000.

If you’re looking at a honeymoon rate on a new home loan, do your homework and make sure that the rate you pay at the end of the honeymoon period is not substantially higher. If that is the case, it could eliminate any gains you may have made in that first year of lower rates. But be aware that switching to a cheaper loan might incur a high exit fee.

It’s always a good idea to review your home loan annually to make sure it’s still working for you. For instance, do you really need all the bells and whistles that are on offer? Often, you’ll be paying for these extras through higher interest rates.

Negotiate a better deal

If you are unhappy with your current rates, then talk with your existing lender to see if you can negotiate a better deal. But make sure you do your homework first and check out what other lenders are offering so that you are in a better negotiating position with your current lender. Most lenders would rather hold on to existing clients than lose them to a competitor.

When negotiating your home loan, you might be able to access a package from the lender giving you some beneficial extras such as discounted home insurance, fee-free credit cards or fee-free transaction accounts. Or you might be able to waive the fees associated with the loan.

When you initially take out a loan, consider making your payment before the due date. That way you are always ahead of the game.

With interest rates expected to rise in 2017, this may be a good time to consider fixing part of your loan to cushion yourself against future rises.

If you want to make sure that you are doing all you can to minimise interest payments on your loan and fast-track your mortgage, call us to discuss the financial strategies that might work best for you.

Checklist

  • Make extra repayments
  • Pay more frequently
  • Use an offset account
  • Review your mortgage annually

i ‘Aussies go above and beyond to pay down home loan sooner’, Nov 2016, finder.com.au