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A home is “same, same, but different”. Sure, it’s a place to stash your stuff. But a home mortgage is also the cornerstone of wealth creation. Here’s five reasons.
First, your housing cost is locked in. Interest rates go up and down. Budget on a long-term average of 7.5 per cent and you’ll be pretty safe.
Second, mortgages are eventually paid off. Rent goes on (and up) forever.
Third, you’ve bought an appreciating asset. As the loan reduces and the home’s value rises, your equity increases. The renter never develops equity in their home.
Fourth, an offset/redraw account gives tax-free cash savings. Renters are taxed on interest they earn.
Fifth, you can invest your equity. You have the ability to access home equity to invest in other growth assets, such as property and shares, to build real wealth.
Some people turn a little Cujo and start frothing at the mouth over the above. They argue people are better off renting and investing the difference.
Cough (BALONEY!). Show me these people! Don’t show me a spreadsheet. Show me the people who have successfully invested the difference in the early years between rent and a mortgage. Struggling to find them? Why? Willpower – it’s too hard for most people.
A mortgage is forced savings. It takes away the need to exert willpower every month. And that will work better for about 95 per cent of Australians.
Bruce Brammall is the author of Debt Man Walking (www.debtman.com.au) and principal adviser with Castellan Financial Consulting.