The perks of property ownership

New owners will enjoy the many benefits of property ownership

First-home buyers are back in the market. The number of loans they have taken up – as a percentage of total owner-occupied loans – rose to 18% in November 2017, according to ABS housing finance data. The last time the figures were at 18% or above was 2012.

Let’s hope the trend continues, because buying and paying off a family home, has been a traditional route to building wealth.

A family home does far more than just provide you with shelter. It’s the only investment that is free of capital gains tax. Under the current rules, if you realise a $250,000 gain on your share portfolio, and you’ve held it for over a year, you’ll pay tax at 50% of your marginal rate. A gain of this magnitude could push you into the top tax bracket (45% plus 2% Medicare). Make the same profit on the family home and it’s tax free, unless you have used part of it to make money.

Paying off a mortgage is also a form of forced saving. But new borrowers should make sure they could still afford repayments if interest rates rise by 2%-3%, because eventually they will.

Over time, as you pay off your loan, you will build equity in your property and you may choose to use this to either pay expenses such as your kids’ education or to invest, depending on your circumstances.

The equity is the difference between the value of your home and your mortgage balance. For example, if your home is valued at $600,000 and your mortgage is $300,000 you have equity of $300,000. Your lender wouldn’t allow you to borrow more than 80% of the value of your home but that still means you potentially have a kitty of $180,000.

The value of your equity grows even faster if your home is in an area where prices are rising. We’ve seen some massive hikes, especially in Sydney and Melbourne, and growth in those cities may slow for a while but as the population increases it’s likely house prices will as well. Long-term growth has been strong with Australian housing prices surging 6556% since the early 1960s, an average increase of 8.1% every year, according to research by the Switzerland-based Bank for International Settlements (BIS).

If your job takes you overseas, you can rent out the family home for up to six years at a time and still pay no capital gains tax when you sell, as long as it’s nominated as your main residence. If cash becomes tight you can also use your home to earn income, often by renting out part of it on either a long lease or as short-stay accommodation, using sites such as Airbnb and Stayz.

But make sure you realise this can create some adverse tax consequences, says Maria Dyson, senior financial planner at Omniwealth. Each year you earn income from your property it will need to be included in your tax return, she says. And a potential downside is that you may be subject to capital gains tax on the income-producing portion of your house when you sell.

Issues to consider when renting out a room or granny flat include apportioning the deductible expenses associated with the income-producing portion of the home and whether you can claim some of the interest cost on the mortgage, says Dyson.

Your home can also be your saviour when you retire, ideally with the mortgage paid off. If you need extra money to help pay for your retirement dreams, you can consider downsizing, perhaps moving to a cheaper regional area, or taking a reverse mortgage with a reputable lender.