Dreaming big with property
Owning your own home has long been the Australian dream. Even if it means making a significant upfront investment, the long term gains are generally personally and financially rewarding.
According to the Australian Bureau of Statistics, the price of an average Australian home increased by about seven per cent a year between 1986 and 2013. In dollar terms, the average home has grown in value by 6.3 times over the last 27 years.i
Residential investment property returns have also been strong in recent decades. According to the 2014 Russell Investments/ASX Long-term Investing Report, annual pre-tax returns for Australian residential property investments were 6.1 per cent for the 10 years ended December 2013, and 9.9 per cent over 20 years.ii
Advantages of home ownership
While property prices will continue to have good years and bad going forward, history suggests that if held for at least ten years the return overall should be positive.
Not only has property delivered good returns for home owners and investors, but chances are, as an owner, you would have been able to put your own stamp on the property which can be extremely satisfying.
In order to reap the benefits of property investment, you may need to make some short-term financial sacrifices. Buying a home generally requires a significant deposit and a hefty mortgage, but with careful planning it need not mean a complete change of lifestyle.
When you buy a home to live in, rather than as an investment, your loan is not tax deductible. So, the quicker you repay your mortgage the more you save in interest and the sooner you can redirect income into investments.
Step up repayments
The first step towards paying off your home sooner is to understand your loan – how much you owe, how much you are paying in principal and interest and where are the repayments coming from.
The next steps may include: consolidating any existing debts to ensure you are paying the lowest interest rate possible; making fortnightly rather than monthly repayments to cut down on overall interest costs; and depositing your salary into a mortgage offset account to reduce the interest on your loan.
If you are able to take advantage of the current low interest rates to make more than the minimum monthly repayments you can potentially knock years off your loan. Just be careful you don’t redraw those funds except in an emergency or as part of a well-considered investment strategy.
Once you have built up some equity in your home, or even repaid the loan completely, you can use that equity to invest in other assets such as another property or shares
Borrowing to invest
Borrowing against the equity in your home will increase your overall debt. However, when you borrow for investment purposes you may be able to claim a tax deduction for certain expenses related to owning the investment, such as loan interest charges.
If you choose to invest in property, you may be able to claim depreciation on certain items. You may also be able to claim any rental losses against your taxable income, a strategy known as negative gearing.
In the long run, your property investments should not only increase in value but also provide a valuable source of income when you retire. In the meantime, you may even be able to use some of your rental income to help pay off your home loan sooner.
Remember though, there may also be times when your property is vacant or repairs need to be carried out so you need to factor this in to your plans.
Using the equity in property to invest with can be risky, but with personalised advice from your financial adviser you can develop a strategy to help you meet your financial goals.