Why You Should Own Your Own Home

little houseWhile scarcity and affordability is a major problem for many young people considering buying their first home, there remain many reasons why you should strive to own your own home.

1. Inflationary Asset

Although inflation is at cycle lows right now, it will return. It is a powerful economic force that you can benefit from by owning inflationary assets, like property. The flip side is continually facing rent increases, which can, as Dubliners know full well, outstrip earnings, eroding renters’ standard of living.

2. Savings Habit

A mortgage can in certain circumstances become a ball and chain but it does ingrain the savings habit by forcing us to pay off a certain amount every month.

3. Leverage

Yes this is a double-edged sword for sure but over the long run it allows us to benefit from the cheapest form of debt, particularly in bull markets.

4. Buy And Hold

This is perhaps one instance where illiquidity and high trading costs can be a good thing. While obviously a negative if we can’t sell when we want to, we generally hold on to our home longer than any other asset, meaning we avoid the trading behaviour than can destroy returns.

5. Tax Free

The lack of a 33% tax on capital gains is a huge incentive for us to buy our own homes. No other asset class is given such preferential treatment so it makes sense to take advantage of this tax break if at all possible.

6. Home Sweet Home

Last but not least, there are all the ‘soft factors’ that add up to a strong vote for buying versus renting. The value of being able to design your interiors to suit you and your family (not the landlord) and never having to move again is, well, priceless.

A Financial Advisor’s Guide To Downsizing

Downsizing your home is a big decision that requires plenty of thought and planning. A large home and garden is wonderful for raising a family but it may not be the right place for you once the kids have flown the nest. Downsizing is often a very attractive proposition but there are personal and financial implications to consider. Let’s have a look at the pros and cons you should think about before you make a decision as well as some dos and don’ts once you’ve decided to make the move.

The Pros

  1. Retirement Funds Boost

Selling a larger house for a smaller one will provide you with a significant cash sum. Your retirement pot will receive a very welcome boost, which with careful management may, along with any existing savings and the state pension, be enough to support a long and happy retirement.

  1. Lower Expenses

Downsizing undoubtedly cuts household expenses. You can expect lower utility bills, a reduced local property tax, lower insurance, cleaning, maintenance and gardening costs, and, if you also downsize your mortgage, lower loan repayments.

  1. Easier Living

Saying goodbye to the demands of maintaining a large property can be liberating. It’s also a great opportunity to declutter. A smaller place requires less upkeep, giving you more time to get out there and enjoy the better things in life.

The Cons

  1. Emotional Ties

You will most likely have an emotional attachment to your home. So many family experiences and memories are anchored in bricks and mortar. Plus, having space for visiting kids (and grandkids) may be important to you.

  1. Greener Grass?

Yes the grass can be greener on the other side but not necessarily. You know (and love?) your neighbourhood so there is an element of risk in upping sticks and moving on.

  1. Hidden Costs

Like most financial transactions there will be unforeseen and hidden costs. There will of course be estate agent fees and stamp duty to pay, and without the use of a trusted financial advisor, investing your ‘downsize dividend’ can be daunting. Nevertheless, your lower living expenses and increased investment returns should, over time, more than offset these costs.

Do…

  1. Start The Process Early

We’re talking about a major life event so the more preparation and planning, the better. Getting to grips with the figures and researching the property market takes time. And don’t leave it too late in another sense – you might want to enjoy that boost to your finances while you still have the energy to do so.

  1. Seek Financial Advice

Downsizing comes in two parts. First – the sale of your home for a smaller one. Second – the careful investment of your extra cash. I would strongly recommend you seek the advice of an independent financial planner so that the strategy for both parts of this transaction makes complete sense.

  1. Research Your Market

Moving home is never easy. Try to get to know your new neighbourhood (and house) in advance so that you pay the right price for your new home and ensure there are no unpleasant surprises when you move in.

Don’t…

  1. Buy Before You Sell

Buying your new home before you sell your current one will just create a whole load of unnecessary stress. You may end up needing (expensive) finance to bridge the time gap or selling other assets to create liquidity. It’s just not worth the hassle.

  1. Tell Nobody

Any major life decision should be approached with as much family and friends support as possible, and the downsize decision is no exception. Make sure all your family are consulted in advance, regardless of how much you want to let them influence your decision.

  1. Be Afraid To Change Your Mind

Don’t discount the option of staying put. Downsizing is almost always a good financial decision but personal circumstances should also play a big role in your thought process. You are allowed to change your mind!

This article first appeared in Irish Home magazine. For investment advice call Money Smart on 01 276 0006 or email info@moneysmart.ie.

Alternative Investing : Property

Buy-PropertyContinuing our short series of blogs on ‘alternatives’ – investments in anything other than stocks, bonds or cash – in which we take a look at the four most common asset classes in general order of risk/return profile; Absolute Return, Commodities, Property and Private Equity.

No.3 of 4 : Property

What is it?

From my experience as a financial advisor, in Ireland property is far from an investment alternative. In fact for many, everything except cash and property are alternatives! So I think you’ll understand if I skip the ‘what is property?’ bit. What I will say is that today I’m evaluating property as an investment for those who already own their own homes. Just for the record, I believe that owning your own home makes really good financial sense for lots of reasons – which I’ll cover in a future blog. But for now, let’s just talk about non-home property investments.

What are the Pros?

  • Expected long term returns of around 6% – higher than cash and bonds.
  • Portfolio diversification as performance is not correlated to equities.
  • Property is a ‘real asset’ that has an obvious ‘bricks and mortar’ capital value and pays (rental) income.

What are the Cons?

  • Single property risk and hidden fees can be higher than expected.
  • Can be subject to equity-like volatility and severe illiquidity.
  • Diversification benefits cannot be relied on in a financial crisis.

How to invest?

You (or your pension) can of course directly buy an investment property and take advantage of expense income tax relief – but the capital gains tax exemption has now been phased out. Or you can avoid the additional costs, worries, single property risk and leverage risk (if you’re borrowing to invest) of being a landlord by simply buying a property fund which exposes you to a large portfolio of property assets.

Do you need it?

Not necessarily, but for a more balanced portfolio, yes. At Money Smart we stopped recommending direct property investment once the capital gains tax exemption ended. But we do believe that your investment portfolio can benefit from a small exposure to a diversified property fund (or ETF or REIT) which may have both direct and indirect commercial (and perhaps residential) property holdings.

 

Talk to Money Smart about how to build a portfolio with appropriate asset class exposure by calling 01 276 0006 or emailing info@moneysmart.ie.

The New Central Bank Mortgage Rules

Scrabble Mortgage HomeMany of you house hunters will already be aware of the new Central Bank mortgage rules but if you’re thinking about applying for a mortgage for the first time, here’s a quick primer.

First Time Buyers

In Central Bank speak, the term “first time buyer” actually means “first time borrower”. So, if you are getting a mortgage for the first time you are a first time buyer. The new rules allow banks to lend you up to 90% of the value of the property, up to a value of €220,000 and up to 80% of the value on the balance above €220,000. A €400,000 property will therefore require a deposit of €58,000 – 10% of €220,000 and 20% of the remaining €180,000. The more expensive the house, the higher percentage deposit is required. In addition, your mortgage amount will be limited to 3.5 times your income (or 3.5 times both your incomes for joint mortgage applications).

Trader-Uppers

If you’re not a first time buyer I’m afraid you will need a deposit equivalent to 20% of the property value. And again, your mortgage amount will be limited to 3.5 times your income (or 3.5 times both your incomes for joint mortgage applications).

Buy-To-Letters

If you’re buying to let, the news is even worse. You will need a deposit equivalent to 30% of the property value. But the good news is that the (3.5 times) loan-to-income restriction does not apply.

Any Exceptions?

Yes, the banks have been given some leeway. They can exceed loan-to-income rules in 20% of cases, exceed home loan-to-value rules in 15% of cases, and exceed investment property loan-to-value rules in 10% of cases. How this will work in practice is anybody’s guess as the banks will have discretion. Let’s just hope that this ‘authorised rule-breaking’ is applied fairly across the board.

When Do The Rules Start?

If you already have mortgage “approval in principal” then the new rules will not be retrospectively applied to you. But once your approval runs out (usually after six months) any new mortgage approvals must follow the new Central Bank rules. If you are struggling to find a house to buy and you are worried about your mortgage approval running out, ask your lender what your options are – and don’t be afraid to ask if one of the exceptions can be applied to your case.

This article first appeared on IrishHome.ie