The following is a contribution from a reader.
Across your working life, you will have the opportunity to put your hard earned cash into investment strategies that you expect will grow your wealth. These include investing in assets such as shares, bonds, superannuation or property. Generally, people pass up the chance in invest in shares, bonds or super because they do not understand the game the same way as they do property.
In addition, home ownership is one of the few forms of investment that gives a feeling physical security. You live in the asset and the roof over your head protects you and your family.
While this security is a great incentive to invest in property, if you a looking to make a quick buck, you must remember that, in most cases, home ownership is a long term investment. This means that a home owner needs to keep the property for around five years before it will begin to build up any real post-tax wealth.
Indeed, long-term home ownership is a smart move for most Australians because once they have made a sizable dent in the mortgage or paid the house off, they can use the asset to help fund a more comfortable retirement.
Buying versus Renting
That said, there is an argument that, even over a long-term period, renting will make you wealthier than buying a home. The logic runs that if you lived off cheaper rent and invested what you saved from not having a mortgage on assets that appreciate faster than property, such as shares, you will be better off. While this is a possible outcome, there are two problems with this strategy.
Firstly, while renting will indeed give you more disposal income, it is highly unlikely that a renter will consistently invest this money in a high yielding asset over a long period. Most of us keep making the repayments on our mortgage because if we don’t pay, we lose our home. A tenant though, does not have the same strong incentive driving them to make committed payments and is unlikely to stick with this investment strategy consistently over a 25 year period (the length of a mortgage).
Secondly, rents rarely go backwards and naturally rise over the years. On the flipside, your mortgage repayments will always fall as you pay them down(and eventually stop altogether), leaving the home owner in a better and more secure financial position later in life.
What To Look For In A Home
Home ownership is definitely the most popular investment choice for those after security. However, the rate of wealth that will accumulate from property often depends on the type of property that is purchased.
When looking to buy a house, choose a home that satisfies two criteria – it should firstly suit the buyer’s personal needs, and secondly, it should also contain characteristics that will be popular with future home owners. Most people do not live in same home all their life, and therefore the home needs to be attractive to potential buyers when it comes on the market. Look for homes that have features which all buyers want/need.
- having parking
- in presentable condition
- close to amenities e.g; public transport and schools
- in an area geared for growth
What To Look For In A Home Loan
In addition to the physical aspects of a property, a good home loan can further enhance wealth. When shopping around for a home loan that suits your personal circumstances, consider a loan with these attributes:
- flexibility on exiting and switching loans
- consistently competitive interest rates
- low or no application fees
- low or no ongoing fees
- ability to make additional payments
Remember that the more features a home loan has, the more expensive it is likely to be, so only take a home loan with an offset facility or redraw facility if you intend to use them.
Research is so important when it comes to choosing the right mortgage and if all the rates and features are causing you to have a headache, don’t be afraid to enlist the help of a mortgage broker, such as those at Mortgage Choice or Aussie. Over 40 per cent of Australians use a mortgage broker to find a home loan and their services are usually free so it makes sense to seek their professional advice.
This post was made possible by Mortgage Choice.