Is your home a retirement nest egg
posted: Sunday, 12th July 2009 - 09:20 • category: Real Estate
There are people out there with stories of buying in the early 1970s or 1980s and selling with a 1,000 or 2,000 per cent profit after ten or twenty years.
That is surely proof enough that it is possible.
And it is. But as with anything, it isn't always quite as simple as that.
Most had one thing in common...
They started off with a big deposit, and even more than that, the average loan size compared to household income was much lower .
So why is that relevant to whether you can retire on the value of your home?
It's relevant because of the amount of interest you pay over the term of the loan. Property owners and investors only ever talk about the price they bought the property for and the price they sold it at.
They never mention tthat they bought the house for $300,000 and paid $50,000 in interest over five years and then sold it for $400,000. Plus they had other costs such as stamp duty, agents fees, maintenance etc. So they just broke even on the deal."
Instead we always hear, "we made 100 grand on the house in just five years, try doing that on the stockmarket."
And naturally we always hear the argument that capital gains on the profit from your home is tax free. True. But they also forget to mention that the mortgage repayments are made with after-tax money.First pay tax then pay your mortgage
That's why the best time to pay off extra is now when interest rates are low --because even a small 1% or 2% rise in interest costs next year or the year after will add thousands onto the interest bill of even the average mortgage.
Reducing your interest expense on your home mortgage as quickly as you can makes more sense than paying it off over 25 or 30 years.
You see, a house is a depreciating asset. It's no different to a car. It really isn't. If you live in a home for 30 years, even if you update the fixtures, it's still an old house. That means you'll only receive for it what someone is prepared to pay for an old house.
In many cases, the actual home is worth little more than the value of the land it's standing on.
Should property values decline home owners become imprisoned in their homes thanks to negative equity. They'll find it impossible to move due to the value of their home being significantly less than the amount of the loan.
The dream of retiring in luxury on the 'equity' built up in one's home may still be possible, but we're afraid to say that based on the current state of the over-inflated housing market it's more likely to be the exception rather than the rule.
Having extra non-home investments is crucial as you go into retirement
