How does your own home impact your property portfolio?
The location of your “great Australian dream” can dramatically alter your wealth-building activities and as such, you must take this into account when developing your investment strategy.
Homes are typically not purchased with the sole or dominant reason of building wealth as there are many non-financial, lifestyle factors that influence where we live.
However, that is not to say that the decisions you make will not have any impact on your investments.
In this blog, I will discuss how the location of your home can impact your ability to meet your retirement goals.
The size of your home loan and your cash flow
People wonder if they should repay their home loan in full before they start investing.
If not, how much should your home loan be before it’s prudent to start investing?
The answer to this question depends on many factors:
The location and type of home – what do you expect your home to be worth in 10 years?
Or 20 years? If your home is an investment-grade property, your home loan will become immaterial over time, even if you do not repay one cent.
Conversely, however, if you do not expect your home to enjoy a lot of capital growth then repaying your home loan becomes more important.
Size of your home loan and cash flow
Another factor to consider is your interest rate exposure.
Is your home loan so large that you are more exposed to interest rate movements?
That is, someone with a $2 million home loan will be more susceptible to interest rate movements.
Principal and interest repayments on a $2 million home loan will be approximately $129,000 p.a. today.
However, if interest rates rise to say 8% (like they were in early 2008), the repayments will increase to $176,000 p.a. – an extra $46,000 p.a. after-tax.
That is a lot of money to come up with.
Therefore it would be important for this person to reduce their home loan balance before they begin investing.
The same is true for your LVR too.
If you do not have a lot of equity in your home (say you have borrowed 95%) then you should spend a bit of time repaying your home loan and consequently building equity before you invest.
Get some equity to work hard for you
What if your home is not well-located and as a result, you do not expect to enjoy much capital growth?
If that is the case then it’s even more important for you to start acquiring some high-quality growth investments.
That is, it’s more important to acquire assets than repay your home loan.
This is why it is so important to work with a professional that will help you make those purchases.
You can’t rely only on luck or gut feel.
What should you do now?
If you do not expect a lot of future capital growth from your existing home and you do plan to upgrade it in the future, consider doing it sooner rather than later (if it’s possible and safe to do so).
I don’t mind clients upgrading their homes if it means that they have a better “quality” property.
In the long run, it will help them build wealth. As most Australians will only have their own home as investment.
If you do not expect a lot of capital growth from your existing home and you are happy where you are (i.e. no planned upgrade), then please ensure that you are actively investing in growth assets.
Reach out to a Property Strategist and see what would be the next step forward.
