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Home sweet home

If we ‘numbercrunched’ 40 years of working and contributed say 15% of your income to superannuation and buying investment properties, I reckon you would end up richer than buying the home you will live in.

That’s what I objectively think, but that doesn’t stop me telling young people to buy themselves a home!

This caring message to the young of Australia might be in conflict with my hardnosed beliefs of how you can make yourself richer, but I think it’s a more realistic piece of advice, given the way we are as human beings.

No sub-prime problem for Australia

I also want to fight the doomsday merchants who say the First Home Buyer Scheme will create a debt time bomb and a generation of young Aussies will become virtual sub-prime home loan refugees.

The sub-prime problem was a US invention where they have non-recourse home loans, which means if you want to walk away from your loan you can! It doesn’t work that way here.

Sure we have low-doc loans here, which have been invented for small business people who might earn more than their tax records show. But these are nothing like the most infamous sub-prime loan — the NINJA loan. This is where people with no income, no jobs and no assets accessed home loans when they were at low rates of interest which later reset at higher rates.

A different world

Anyone who has recently tried to get a loan from the banks, and I have recently, you know the lending criteria has really toughened up.

Given the big demand for home loans from first homebuyers and given the banks rediscovery of something they forgot about — risk assessment — I don’t worry about banks creating a debt time bomb.

Future of interest rates

OK, interest rates will rise but that won’t happen until probably late 2010. And taking on board what the IMF says about the drawn out downturn for the global economy, inflation won’t be an issue until 2011 or beyond.

All borrowers at the low point of the cycle should see if they can make repayments with a 3-4% increase. That makes sense right now with rates so low.

Lending officers at banks and mortgage brokers should be advising their clients that rates will rise in coming years and anyone who is precariously placed should consider fixed rates of interest for as long as possible.

Home advantages

Owning your home is tax attractive as there’s no capital gains tax and lots of smart Aussies have bought homes in up and coming areas and have renovated them wisely to see their value skyrocket. It also happens while you’re not paying rent to a landlord, effectively making him rich.

Anyone worried about interest rate rises should go to the home loan interest repayments calculators and see how their hip pocket could be smashed by a rise in interest rates. This should be basic for anyone signing up for a home loan.

I checked it out for a $500K home loan. At 5.64% over 25 years, the monthly repayments would be $3,113 or $718 a week. If rates went to 9%, the slug grows to $4,196 a month or $968 a week. That’s a $250 extra a week hit.

This should not be seen as a debt time bomb! It might mean someone gets a weekend job or the family cuts back their spending by $250 a week or could mean a job and a smaller cutback.

Take action

Most young people get into trouble because a bub has come along and income has fallen. This should be worked out when a loan is taken out.

Other reasons for debt disasters are a loss of a job, sickness or a divorce. When an unplanned event happens, many of us bury our heads in the sand and take no action until the ‘you know what’ hits the fan.

Making the switch

Some smart borrowers have gone to their lender and switched from a principal and interest home loan to an interest only loan. This can be great for a cash flow problem in paying off a house and can work if you are renovating to say sell off in five or so years.

On a $500K loan at 5.64% the repayments were $2,350 instead of $3,113, or $542 a week versus $718 a week.

All of these big repayments are tax deductible when they apply to a property you rent out, and that’s how some Aussies get rich. If they access a cheap rental property to live in or stick with the folks, they can enjoy the help of the taxman to own a great property or two.

However, this has to be done with planning to ensure a great result. Most Aussies can’t or won’t do the planning and won’t pay for help.

Good home habits

That’s why I like home ownership as it forces us to save for a great asset. It makes us grow up and get real about our spending as well as our appreciation for money.

Sure, some people over-borrow and face a debt time bomb, but most own great assets that give enormous pleasure and it can be there later in life as an asset if your super runs out or you live too long!

Published on: Thursday, April 23, 2009

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