Use of debt has made property the best performer for most people
While most people haven ’ t done well out of Bitcoin , a lot have done well out of property . One of the reasons is the use of leverage . Simply , using debt to buy a property has resulted in much better returns . When investing in other asset classes , debt is less often used .
Even small increases in the value of your home can lead to a much bigger financial gain than putting a deposit into alternative investments and then renting . As a very simple example , consider someone ( let ’ s call him John ) with $ 100,000 saved . John is considering whether to use his savings to get a mortgage and buy a $ 1 million home or put his deposit into a share portfolio instead . Both shares and housing are seeing the exact same capital growth of five per cent per annum . If John doesn ’ t buy a home , he will pay rent instead of paying off a mortgage .
After just one year , you already have a vastly different scenario . If John bought the house , the value of his home has increased by $ 50,000 . Alternatively , the value of his shares would have increased by $ 5,000 , 90 per cent less than the capital gain of the house .
Renting long term puts you at a disadvantage given higher exposure to market fluctuations
Buying a first home is important , not just to get on to the property ladder but also because being a renter at retirement means that you are much more likely to be living in poverty . It ’ s also the case that being a renter makes you much more susceptible to market fluctuations .
Consider if you bought in Sydney 10 years ago , you would be paying less on your mortgage now for a home that ’ s worth double than what you paid for it . If you rented , you would be paying $ 9,360 more per year for a home that you hold no equity in .
Effectively , when you buy , you ’ re locking in repayments at the price you paid . Obviously , this will fluctuate according to interest rate changes but ideally over time you pay down your mortgage reducing this sensitivity . If you rent , then you will always need to pay market rent .
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