By: Mark Bouris
Home ownership is a good foundation for building wealth.
Australians are always on the lookout for a good investment and an opportunity to make their income work harder.
But remember one of the best financial opportunities is the Aussie family home. Yes, you may have to take on a large debt to buy it, but the family home also becomes your biggest asset, which is why it accounted for 43 per cent of Australian household assets in 2014.
Before looking elsewhere for investment opportunities, first understand the advantages of owning property:
1. Tax
First, the family home forms the foundation of security for most Australians when borrowing for a home loan. There is no capital gains tax on your ‘primary place of residence’, after owning and residing for 12 months. So the growing equity in this property is yours to keep – something you can’t say about shares, managed funds and investment property.
Renovations can add value, but a swimming pool may not.
2. Equity
By repaying your mortgage and hopefully experiencing moderate capital growth in your property, you build equity – the value minus what is owed. With the right mortgage product, this equity can be drawn down for emergency finance, or it can be used as security on other loans. Equity can be controlled: many households repay more than the minimum amount to further grow their equity.
3. Investment property
Between 2002 and 2014 the share of households owning investment properties grew from 17 per cent to 21 per cent. Many of these owners of investment properties in some way used the equity in their family home to make the purchase, for instance using your equity to make the deposit or using cross-linked security on your primary place of residence to leverage equity to secure a new investment home purchase, allowing you to borrow up to 100 per cent of a purchase price plus costs and thus increasing negative gearing benefits.
4. Business
Equity in the family home can be used to finance a business, which creates wealth and income for the family and provides comfort to lenders who may be more liberal in rate discretions or risk if the family home supports the debt. Conversely, many small business owners prefer to “quarantine” the family home from the business and, in some cases, commercial loans can be established by financing debt against business assets thus releasing equity.
5. Renovations
If you are careful about what renovations you make on your house, you can increase the value of it. This is a long-term strategy and dependent on your location, but key renovations like extra rooms or bathrooms and kitchens can add immediate value, whereas something like a swimming pool may not. Renovations can also help cater for the growing family. Equity can be used to finance the renovations.
6. Security
Security as a form of wealth: not all wealth is monetary. There is also the security gained by paying off a mortgage and owning where you live. This is particularly evident if something happens to the family breadwinner.
7. Family planning
If your kids are trying to get into the property market, equity in your home can be used as a “family pledge” as security for their deposit. One major bank reports that as many as 10 per cent of its property loans make use of a family guarantee that provides a limited liability guarantee to cover a deposit.
8. Downsizing at retirement
When you retire, and the family home is too large, you can sell it, move to a smaller place and release funds for retirement investments.
Buying a house is a financial responsibility and for some it’s a burden. But it’s also a useful asset that can help you build more assets.
As always, ask an expert adviser.
Source: The Sydney Morning Herald
