Opinion
I can afford a house, but the mortgage concerns me. Should I rent instead?
Paul Benson
Money contributorFollowing a recent separation, I have a lump of money from the sale of our home. I’d like to buy a new home but am worried about the potential for redundancy and my ability to meet the mortgage repayments on my own. I’m wondering if I should rent instead, so I can keep my lump sum of savings for possible emergencies/uncertainties in the future.
It’s certainly reasonable to be cautious about the amount you borrow and its serviceability. The challenge you face here is around opportunity cost and compounding.
Being worried about keeping up with mortgage repayments is a reasonable concern.Credit: Simon Letch
By using your sale proceeds to buy your next home, you would be exposed to the residential property market. While we cannot know how that will perform investment-wise, history suggests that with a 10-year-plus time frame, it’s highly likely to increase in value. This is important because it contributes to your long-term financial security.
If, instead, you rent and leave your sale proceeds in the bank, the purchasing power of your savings will erode. Whereas perhaps at present your savings might cover half a house (with you borrowing the rest), 10 years from now that same amount of money might buy you only a quarter of a house. The rate of growth on a residential property’s value is likely to outstrip the growth of your savings in the bank. The leveraging impact of a mortgage on the home magnifies this outcome.
Sitting on the sidelines and keeping your savings liquid for emergencies will cost you the opportunity to acquire a long-term growth asset.
You mentioned redundancy was your particular concern. Understand how you would look financially if that were to occur. Will you get a redundancy payout? If you’ve been with your employer a long time this could be a substantial amount of money, perhaps enough to give you time to look for another job, and if unsuccessful, put your property on the market before getting anywhere near defaulting on your loan.
As I canvassed last week in the discussion about rentvesting, Australia’s tax and financial system is very much biased towards homeownership, with the capital gains tax-free concession applying to primary residences as the most prominent element. If you can manage to get into a home in a financially prudent way, this is likely to give you the best long-term financial security.
My wife and I moved to Australia in the 1990s. We’re now nearing retirement and aiming to retire in three to five years’ time. We own our house in Australia outright and I have part-ownership of an inherited property in my birth country, worth about $350,000. I’d like to use this sum to support my retirement but I’m not sure how I should bring this money over in a tax-effective manner?
There’s no tax applicable to bring money into Australia, so your deciding factor would be the use to which you put it. Given that you are talking about retiring, I assume you’d be looking to put the funds into superannuation. If that’s so, you need to consider how much room you have within the concessional and non-concessional caps.
If you are not yet 60, you need to be comfortable with the fact that you will lose access to savings you place in superannuation until you reach this age and retire from the workforce.
You can still contribute to superannuation after you retire, so timing-wise perhaps you wait until retirement and then shift the funds, to retain access at all times.
Paul Benson is a certified financial planner and host of the Financial Autonomy podcast. Send your questions to: paul@financialautonomy.com.au
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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