You should find that you can implement step 1 to 4 quite easily and start moving forward quickly. Step 5 is longer term, it is all about owning your own dwelling; turning the place you live into an investment. This may sound contrary to the previous step and it can be, however if you have been following the previous steps and developed a discipline in saving and growing your 10%, owning your own home is the next big thing to focus on.
These days in Australia buying your home is said by many to be unaffordable. In reality if you are willing to save, make some sacrifices in how you spend and where you live it can be done. If you really want it.
Home ownership
Pros:
- Once you pay your home off, your living expenses decrease as you don’t have to pay for somewhere to live.
- When you are older you can realize capital in your home by downsizing or having an asset to utilize for aged care.
- Stability in living in one home and having the ability to make changes as you wish
Cons:
- High price and entry costs – in most cases debt is required
- Ongoing maintenance costs; body corporate, maintenance, rates, water etc.
- Less flexibility, potentially long sales process if you choose to sell
Renting for the long term can be a great option too, choosing this option means you should focus on saving more than 10% of your income as you will always have a housing expense to meet and need to build extra wealth as you will not have your home as an asset. Some people have made this option work really well for them and if you prefer a more flexible lifestyle it can be a real winner.
The owning or renting option is a personal choice, so if you do decide ownership is the path for you then the below points are very important to ensure you can continue on your journey of wealth:
- Don’t jump into the first property you see; slow and steady still applies here, make home ownership a medium to long tem goal and work away at it over time.
- Saving enough to afford a 20% deposit – this works well upfront as you can avoid lenders mortgage insurance and often access better interest rates form lenders. The real bonus is, it gives you flexibility. If house prices drop, interest rates increase or your work situation changes you are still well positioned for the long term. If you borrow 95% and any of these events occur; you could become a forced seller or really struggle financially to hold onto your home.
- Plan on living/owning your home for at least 10 years – this is the minimum average timeframe that it takes to make a significant profit in purchasing and later selling a home. (Don’t be fooled by the, “I bought it for $500,000 and sold it for $600,000 3 years later” story – you need to add the costs of that scenario into that equation; stamp duty, interest paid over that time, agents costs in selling, you will find that your profit is quickly reduced. That is without factoring in any improvements/renovations you may have made in that time. Property is a long term game!
- Pay it off over time – pay principle and interest from day 1. Pay off extra each week, fortnight or month, you want to pay it off within the original 30 year timeframe or less. You need to factor this into your calculations when you are working how much you can afford to spend on your home.
- Continue your previous disciplines saving/investing your 10% – don’t let the home you live in be your only asset as it isn’t a true financial asset until you release capital by selling it.
- Renegotiate your mortgage every 3-5 years – bank offers are constantly changing, interest rates offered will change and the product you sign up for today may not suit you in 3 years time. Be mindful that this can reset the 30 year timeframe you are paying the mortgage off over – so make your own calculations to see what you should be paying regularly to still pay your loan off in the original 30 year term.
Owning your own home may not be your dream and it may not fit in with aspirations for your life, so think long and hard about jumping in. And if you do decide to proceed make sure you do it the right way!