Economic freedom
A family home is a must for anyone who is serious about achieving economic freedom. In this ebook, we look at the ways in which family homes contribute to your economic and social wellbeing, and spend a lot of time discussing practical ways to make home ownership more effective - especially when it comes to helping out other members of your family such as adult children or elderly relatives. Given our commitment to gender equity, we also devote considerable attention to the unique difficulties facing single parents, and especially single mothers.
Buying the right family home is much easier when you manage your finances as effectively as possible. So if you need to talk to someone about how to make the best decisions about your own family home, talk to us.
We hope you enjoy this ebook. Please let us know your thoughts and we look forward to continuing to bring you high quality, practical information that really helps - just like this one.
Introduction
It is hard to think of any person who has achieved financial security without owning at least one piece of residential property - typically the family home. Most of the people we see either own a home, are in the process of owning a home, or aspire to owning a home. This is why we make owning a family home a key aspect of our advice.
When we see clients who already own a home, they often ask us common questions. These questions include: Should I sell my existing home? Should we renovate? Is it protected if something goes wrong (especially important for self-employed clients)? Is my home included in my will? Should it be? Should I use the home as as security for an investment loan? Should I use my home as security for my adult child's home loan? The list goes on.
For clients who do not already own a home, some common questions include: Should I rent or buy? Should I buy something affordable for now, pay it off fast and up-grade later? Or should I buy something for more than I can comfortably afford now and simply work harder than ever before? Should I invest in shares instead, buying a fixed amount every month rather than paying off a home loan? Should I buy a business first?
These are all great questions. And we have decided to produce this ebook as a way of helping you find answers to them.
Buying a home has never been a bigger issue for many Australians. We see this in the fact that Australia's historically high rates of home ownership are falling. Home ownership rates have fallen from 71.4% to 69.5% since the 1990s. Australia is one of only five OECD countries where home ownership rates fell during this period.
That said, you could argue that this is not actually much of a drop, particularly as the population grew strongly during this period and home prices grew even more strongly. Housing may be at a time of low affordability, but 7 out of 10 Australians still own one.
Owning a home, and variations on the theme, is typically a major point of interest amongst clients of all ages. What's more, the home remains the greatest store of wealth for most clients. Super is catching up, and may one day overtake home ownership as the most valuable asset for most people. Certainly, some people are trying to argue this. However, it is likely that as average super balances grow average home values will also grow, due to a wealth effect between these two asset classes. That is, people will be more willing to take on larger loans to buy 'more home' as their super balances rise. And as older members of the community pass away, their adult children inherit their wealth, and typically use at least some of it to finance a home. Wealth in other areas of the economy always tends to find itself at least partly invested in the residential property market.
Such is the importance of the family home in people's thinking: people feel wealthier the better their home is. As a result, if the economy keeps growing, then the value of the average home is likely to keep growing as well.
Please feel free to share this ebook with any other person who you think would find it beneficial. And, if you would like to discuss your own situation, please do not hesitate to contact us.
CHAPTER 1
Choosing a family home
Buying a family home is a unique purchase. It is the only large acquisition that we make that is one part financial and one equal part emotional. Alright, we admit it: it is perhaps two parts emotional and one part financial. And the emotional and financial elements intersect with each other, so that each individual buyer has their own list of unique personal preferences for what they are looking for in a home.
There are three main variables that impact on these personal preferences: location, features and price. Let's look at each of these in turn.
1.1
Location
Most personal preferences start with location. People simply decide where they want to live first. Then they go looking for a specific house.
These are the common factors that dictate where people choose to live:
- Amenity (simply choosing the 'right' suburb is very important to many people);
- Schools;
- Transport (public and private - i.e. road transport);
- Parks and gardens;
- Shopping;
- Features such as coastline or mountains;
- Proximity to family and friends;
- Noise (eg how close a property is to a freeway or an airport flight path);
- Streetscape; and
- Proximity to work.
There is a word of caution with this last feature. Many people buy a home for its proximity to their workplace… and then change jobs. So, it pays to think not only about where a current job is located, but also where any future work might be situated. This will be easier in some occupations than in others. A police officer, for example, will have a lot of flexibility in terms of where they work. A beach lifeguard, not so much.
The role of the Adviser
When buying a family home, there are many factors that need to be considered. Typically, a purchaser needs to 'trade-off' some of the factors that underpin the choice of location. Talking through these factors with a knowledgeable person can save a lot of time, money and heartache. A good adviser more than pays for themselves here.
To give but one example of such a compromise: many people seriously under-estimate the impact, both in time and money, of living a long way from where they will spend their time. Many outer suburbs, for example, require families to own two large cars as there is no other form of transport available and services are located some distance apart. Queensland's RACQ estimate that the average weekly running costs of a medium car are at least $11,700 a year. Now, let's say you decide to live a lifestyle that requires one car. This means choosing a location where members of the family can use public transport or walk to either work or school. This means that the family will save $11,700 each year.
At 5% interest rates, dedicating this amount to mortgage repayments would allow an extra $170,000 to be borrowed and used to buy a home. Looked at from another perspective, you could say that the price of each car is $170,000 worth of home.
1.2
Features
Circumstances dictate many of the features we need in a home. No matter how much they love each other, a family with three children simply cannot live in a one bedroom studio. A family with four car owners probably needs off-road parking. A family with large dogs needs a backyard. The list goes on.
Other situations are more unique. A person in a wheelchair, or an older person, should typically avoid second storeys, unless the house has some easily-used way of moving between floors (for example, a lift).
Other features are more a function of preference than circumstance. Some people love 100 year old Victorian-era homes. Others want their home to be as new as possible. Some people swear by brick; others prefer the aesthetic of weather board. Families with children might like zoned living, while other families find that if the home is too large everyone lives in a more isolated way than they would like.
Common features that people look for in a property include:
- Number of bedrooms;
- Number of bathrooms;
- Size and style of outdoor space;
- Size and style of indoor living space;
- Style of housing;
- Car parking;
- Swimming pools; and
- The overall 'vibe' of the property.
The role of the Adviser
Once again, an experienced adviser can help clients identify the features that they need in their new home. For example, many clients will intend to buy a house to live in for the rest of their life, but not factor in that mobility might become an issue 'down the track.' An adviser in this situation might suggest that clients choose single storey properties that do not involve steps.
Similarly, younger clients who are yet to start a family often seriously under-estimate their residential needs after children come along. Parents of teenagers will tell you: it is not simply a case of two kids meaning you need double the space. If you want to keep liking those kids, then you need more than that!
1.3.1
Price
Pretty important one, this. This is the decisive factor for many people. No surprises here: the right home at the wrong price is actually the wrong home.
The role of the Adviser
Working out what a client can afford is where financial advisers often make their most useful contribution. The main factors in determining how much a person can afford to spend on a home are addressed in the next sections.
1.3.2
Repayments
Many, if not most, people borrow at least some of the amount needed to buy a home. Repaying this loan is typically the most expensive aspect of owning the home.
ASIC provide a calculator that you can use to determine mortgage repayments for different types and amounts of loan. The calculator lets you work in two directions: you can input a given amount of money and then determine the periodic repayments for a given interest rate. Alternatively, you can determine how much you can afford as a repayment and then use the calculator to calculate the level of borrowing this repayment facilitates at a given interest rate.
It is a good to alter the interest rate payable in the calculator to determine the impact on repayments if interest rates rise. You must ensure that you can afford repayments at a higher interest rate than the one on offer, unless you know that you can fix the interest rate for the foreseeable future.
There are various ways to assess how much you can afford as a repayment. Housing affordability is often calculated by dividing the annual repayment for a loan into the annual income for the home owner. This gives a percentage: higher percentages indicate lower affordability.
For example, a potential buyer might decide that she can afford to dedicate 30% of her after-tax income to repayments. If she earns $50,000 (after-tax), this equates to $15,000. According to the calculator, on a home loan with an interest rate of 5%, she could borrow:
- $187,000 over 20 years;
- $212,000 over 25 years;
- $230,000 over 30 years.
If she increases her repayments to 35% of her after-tax salary, she can then borrow:
- $219,000 over 20 years;
- $247,000 over 25 years;
- $270,000 over 30 years.
Looked at from the other direction, a potential buyer can determine what the repayments are for a given sized loan, and then calculate the percentage of her income needed to service a loan of that size. Again, experience would suggest that you factor in an interest rate rise when deciding whether a loan is affordable.
1.3.3
Stamp Duty
In all Australian states and territories, stamp duty is payable on a property purchase. This can be a large expense which many first time home buyers, in particular, forget to factor in. For example, someone buying the median-priced property in Melbourne ($727,000 as of December 2015) will pay around $40,000 in stamp duty and related costs.
Happily, buyers who use debt finance are typically prompted by their lender to factor in stamp duty when they negotiate their loan agreement. Unhappy surprises on stamp duty are relatively rare.
The rate at which the duty is levied varies from place to place. www.realestate.com.au provide a stamp duty calculator which calculates the stamp duty payable in each state or territory.
1.3.4
Mortgage Insurance
Many lenders require borrowers to insure the lender against default. This is typically the case when the borrower borrows more than 80% of the value of the property being purchased. In such cases, there is a risk that the property could fall in value such that the full amount of the loan could not be repaid if the client sold the home.
The insurance is typically purchased at the time the mortgage is put in place. The amount of the insurance is often added to the amount borrowed, with the lender then passing the amount of the premium to the insurer. Borrowers should not be fooled by this cash flow, however: the premium is paid by the borrower, not the lender.
Premiums are typically somewhere between 1 and 3% of the amount borrowed.
Given that the mortgage insurance does not make the borrower any better off, many borrowers will seek to limit their formal borrowing to less than 80% of the value of the property. To do this, many people might source money from elsewhere (such as friends or family) in order to keep the balance of the mortgaged loan account below 80%.
1.3.5
Legal Fees
Purchasing a property involves some legal administration. Mortgages need to be put in place, titles need to be conveyed from the previous owner to the new one, etc. Legal fees can range up to around $2,500 for a purchase.
1.3.6
Council Rates
Council rates vary from area to area, but they are typically charged using a formula, meaning that the level of rates payable for a property of a given value can typically be calculated prior to purchase - or at least a very good estimate can be attained.
1.3.7
Insurances (Building and Contents)
Most home owners need to insure the building and the contents of their home. There are various online calculators that can be used to estimate these amounts. As these are all provided by commercial operators with a view to getting people to increase the sum insured, clients may do better by speaking directly with one or more insurers and obtaining a particular quote.
If you have bought a home and not yet settled, then you should look to insure the building right now. This will assist you in case anything happens to the property before you finalise the purchase. Talk to your insurer about this form of insurance.
1.3.8
Body Corporate Fees
Where two or more properties share some expenses of holding the properties, these expenses are typically paid by a body corporate. Body corporates tend then to charge fees to the individual landowners who make up the body corporate. Again, these fees vary according to the property, but they are typically disclosed to purchasers prior to purchase.
1.3.6
Council Rates
Council rates vary from area to area, but they are typically charged using a formula, meaning that the level of rates payable for a property of a given value can typically be calculated prior to purchase - or at least a very good estimate can be attained.
Useful Websites to Assist in Choosing a Family Home
There are many websites dedicated to aspects of choosing and purchasing a family home. Many of these have a vested interest and care needs to be taken. For example, websites for buyer's advocates will tend to suggest that buying a property is too difficult for most people (and thus that they should use a buyer's advocate). Here are some websites that offer good, objective advice.
The Hidden Costs of Buying a Home - realestate.com.au
Commonwealth Bank's Upfront Cost Calculator - as the name suggests, this calculator gives an estimate of the costs of buying a home using debt finance.
Buying a Home - ASIC's website for people thinking of buying a home. This is particularly designed for first home buyers.