Make the most of the family home
For the majority of families, their home and superannuation will be the two most valuable investments they will own in their lifetime. Here we discuss how the family home might be utilised to potentially assist in wealth and lifestyle creation.
For those that have purchased their family home, a great deal of value is often held within its walls. This value comes in many forms including physical, emotional, financial and more. Specific wealth strategies can be created around anything of financial value and, once in place should be fine-tuned throughout various life stages. So what should property owners consider when it comes to utilising, most effectively, the home in which they live?
I am accumulating wealth
Income potential is high in this age group. If you are not already salary sacrificing into superannuation, this is a good period in which to begin. Alternatively, and particularly in order to take advantage of historically low interest rates, increasing mortgage repayments could make a big difference in the time it takes to pay off the house, and the amount the mortgage eventually costs you.
Too few people review their home loans, instead allowing the mortgage to take care of itself. A mortgage review may mean you discover a better deal elsewhere. But it might also simply lead to a discussion with a representative from your lender, revealing a better way to manage your account. An offset savings account connected to the mortgage account, for instance, can save a considerable amount of interest over time.
And a redraw facility that offers essential funds at mortgage interest rates, rather than personal loan or credit card interest rates, can also make a real difference.
It is very important to ensure your investment is protected and to review your insurance levels on an annual basis.
Paying down the mortgage on the family home as quickly as possible is important as interest on this loan is typically not tax deductible. At the same time, the more you pay down the debt, the more equity is held in the house itself – assuming the value of the house is not decreasing.
Finally, during this period it is very important to ensure that your investment is protected. Has your home and contents insurance kept up with the current value of the property? Have any improvements you have made along the way, or valuable items within the house, been added to your insurance policy? Don’t let your most valuable asset go unprotected or under-protected. Review insurance on an annual basis.
Key points
- Consider salary sacrificing or increasing mortgage repayments
- Review your home loan
- Check your insurance levels.
I am looking forward to my retirement
The children are older and are perhaps even at the stage where they have moved out, or are at least paying their own way. You are working on maximising your retirement savings and your income is reaching, or is at, its peak. Then why do you feel cash poor? As a home owner it is important to realise that you are also asset rich. So how do you release some of the value in that asset?
Some decide this is a good time to downsize, which achieves several valuable goals. Firstly, it gives you the freedom and the time to downsize at your own pace and on your own terms, rather than suddenly having to do so when health or other issues force a move. This means you can take your time to plan and choose the lifestyle you desire, rather than having to accept whatever is available in your price range at the time that an urgent move is required.
Now is also the time to put in place a solid estate plan, including Wills and enduring Powers of Attorney.
It also frees up a lot of equity for investment elsewhere, money that was previously locked up in the value of the family home. This allows for diversification and different investment strategies to be put in place, such as a balanced mix of income and growth, instead of growth alone.
Additionally, the money that is now available could be used to generate an income. However, as with any investment strategy, you should consider the level of risk you are comfortable with, your goals and the investment timeframe.
A family home containing spare bedrooms can itself be utilised to generate additional income. Granny flats can be rented out to long-term tenants or short-term visitors. Other areas of the house can be renovated to create spaces that can also be rented. In the age of property-sharing websites, spare rooms in a house located in a desirable area can provide an impressive income for those that welcome the company of travellers. Such income can continue into the future in order to help fund a retirement.
A third option, if you haven’t done so already and if it fits your risk profile, is to borrow against the equity in your house to boost the value of your investment portfolio in a potentially tax-efficient manner.
Be sure to constantly review your insurances, particularly if you make the choice to take in renters, and to evaluate your home loan arrangements to ensure you are receiving the very best deal. Now is also the time to put in place a solid estate plan, including Wills and enduring Powers of Attorney, to make sure the value in the family home is looked after and is distributed in accordance with your wishes – should anything happen to you.
Key points
- Consider downsizing
- Can you create income from your house?
- Borrow against equity to invest
- Review your insurance levels
- Put an estate plan in place.
I am enjoying my retirement
Your home now, most likely, is completely mortgage-free. But requests may come from your children to act as a guarantor over their mortgage. Try to remove any emotion from such a decision and consider it, as you would any other investment, rationally. As with any agreement it brings with it an amount of risk, perhaps this fits your risk profile, perhaps it does not.
If you have not yet put an estate plan in place, it has now become a necessity. The wealth you have created throughout your working life can be looked after and distributed according to your wishes if Wills and enduring powers of attorney are in place. This is important for
everybody at this life stage, but even more important for those that own all or part of a business, or have children from another marriage. Clarity around your final wishes is vital. Perhaps most important at this stage is the bearing of the family home on matter such as aged care and Age Pension.
Downsizing is a popular decision during this life stage, and for good reason. There is an emotional side to moving out of the family home, but once that original hurdle has been negotiated, most retirees feel a sense of release and relief.
They are no longer responsible for the physical and financial demands of the upkeep of a large home. And a move can bring them closer to friends and family, or to an area offering better infrastructure for the elderly.
Perhaps most important at this stage is the bearing of the family home on matters such as aged care and Age Pension, which can be substantial. The issues around this topic are broad and complex. Be aware that expert advice is highly recommended in order to assist with any major decisions regarding your family home.
Key points
- Consider guarantor requests very carefully
- Review your estate plan
- Consider lifestyle benefits of downsizing
- Speak with an expert about the family home in relation to benefits.