A few years ago I conducted some research for a book I was writing and was surprised to discover that the top two things we want from our money are freedom and options. The reason I was surprised is because I expected ‘owning my own home’ would top the list but it seems while that’s important (it was number three), above that sat the freedom to have options.
The reason I was taken aback by the findings, is because for many of us, while we might be giving lip service to wanting freedom and options, how we’re behaving with our money tells quite a different story.
Perhaps it’s because home ownership is such a deeply ingrained part of our culture. Perhaps it’s because many of us feel home ownership is a rite of passage and we haven’t truly grown up if we don’t own our own home. Or perhaps it’s because we believe home ownership fills the need to provide a safe and secure place for our family. Whatever the reason, I’m finding that our behaviour when it comes to bricks and mortar is in opposition to our strong desire for freedom and options.
That’s because more and more, as a financial adviser, I’m seeing couples who are seeking a mortgage of over a million dollars to secure the home of their dreams. Which, with interest rates as they are, can mean that mortgage repayments, in some suburbs at least, are very similar to the rent being paid. But too often I’m hearing arguments that interest rates will stay low for years and even decades to come and property prices will only continue to rise, which are dangerous suppositions to hold as truths.
Instead, if we truly believe that freedom and options are to be valued, yet can’t fight against our primeval need to own bricks and mortar, then perhaps we should consider an alternative to owning our own home which can give you all three things: freedom, options plus house ownership. Currently, the federal Labor party are suggesting that this option be removed for existing houses, but if the laws remain unchanged, this can still be a viable alternative which allows you to have your cake and eat it too.
So if you crave freedom and options but are fighting against the need to put down roots and buy your own home, here are a few reasons why you might consider an alternative.
1. Negative Gearing. The current tax law allows you to claim the shortfall between interest, expenses and income earned on a rental property on your tax return. This essentially means that the refund (or tax saving) received is reducing the cost of ownership. If you buy your own home, none of these costs are deductible and unless you take in a boarder, there’s no-one helping you pay the rent.
2. Spreading the risk. Our home is often our most valuable single asset which for many of us, means that most of our wealth is tied up in it. The problem arises when the size of our mortgage means the ability to diversify our risk is diminished. We simply can’t afford to invest in other assets such as investment properties, shares or paying extra into super because, thanks to a seven-figure mortgage, the price of living is too high. Instead of sinking all our funds (and available borrowings) into one large mortgage, it may make more sense to buy a couple of cheaper investments across different suburbs or different asset classes and therefore spread the risk.
4. Rent can be cheaper. In some suburbs, particularly if there are a glut of apartments being built, renting can actually be cheaper than the cost of owning the apartment. In that case, while you may emotionally want to own your own home, it simply makes more sense to not purchase an asset where there is an oversupply and potentially a smaller chance of capital growth.
5. Freedom to move. If we truly say we want freedom and options – the ability to have a sabbatical, for one parent only to work full time, to send our kids to private school, donate our time to charity or travel regularly – then committing to a large mortgage is potentially going to rob us of that. Instead, by choosing to rent and instead invest in rental property you still have an asset class that is bricks and mortar but you have the ability to upsize or downsize your rental accommodation according to your other life goals.
Home ownership is still viewed in our country as something that all Australians should and, in fact, must aspire to. And for some of us when we do the maths it may still make great financial sense. However I do believe the mood is changing, particularly as the size of a mortgage in some suburbs and capital cities increases to seven figures. Instead, with a bit of creativity and certainly the courage to swim against the tide, you may find that home ownership simply isn’t the right fit for you, allowing you to look for bricks and mortar in investments other than the home you might possibly live in.