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Sneaky $10,000 bonus proves Aussies shouldn't buy a home: 'Trap'

Many Australians are trying to buy their own homes in the hopes of a financial stable future. But is that the best option?

Money guru Ben Nash breaks down the financial differences in owning a property to live in or as an investment.
Money guru Ben Nash breaks down the financial differences in owning a property to live in or as an investment. (Supplied)

Buying your own home is the Australian dream. It's the thing many young Australians see as the first big financial stepping stone to success.

But the reality is that the sooner you buy your own home, the poorer you’ll be. Most people who don’t understand this fall into the trap of listening to the conventional ‘wisdom’ and pay a heavy price.

In Australia, there is a big difference in the financial outcomes you get when you buy a property as your own home vs buying the same property as an investment, and the difference comes down to the tax rules.

Consider this example based around buying a $1 million property.

Worth noting that the numbers work the same way at any price point, I’ve just picked $1 million to make the maths easier to understand.

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BREAK IT DOWN: Assuming you put in a 10 per cent deposit and borrow 90 per cent of the purchase price, you’d have a mortgage of $900,000.

Based on current mortgage interest rates of 6.5 per cent, your interest costs would be a total of $58,500 p.a.

On top of your mortgage interest, you’d also have ongoing property costs like strata, insurance and maintenance.

The actual amount will depend on your property, but these tend to average around 1 per cent of the property value, so on a $1 million property this would be $10,000 annually.

This brings your total costs of owning (and living in) the property to $68,500 annually.

Given you need somewhere to live, and the fact the property market increases by an average of 6.3 per cent annually, meaning the expected price growth on your $1 million property would be around $63,000 p.a., this sounds like a pretty good deal.

But it could be so much better…

Let’s compare these costs against buying the exact same property as an investment.

In this case, you’d be up for the same interest expenses and property costs of $68,500 each year.

But the kicker comes through the tax rules, which allow you to claim 100 per cent of these costs as a tax deduction.

This tax deduction would reduce the amount of tax you pay on your employment income, and therefore reduces the cost of holding the property.

And on top, because your property is an investment, you’d have this rented out so would be receiving rental income on the property on top.

BREAK IT DOWN: The average rental yield across Australia is 3.7 per cent, meaning you’d receive a rental income on your $1 million property of around $37,000 each year.

If we then add the rental income against the costs of your investment property, the result is a net cost of $31,500 annually.

It’s this net ‘cashflow’ of your investment that you claim as a tax deduction each year.

Assuming your income is above $45,000, your marginal tax rate is 30 per cent, meaning you’d receive a tax refund of at least 30 per cent of the net property expenses back at tax time.

Based on total deductions of $31,500 refunded at 30 per cent, your tax refund each year would increase by $9,450. This brings the net cost of holding your property after tax to $22,250 p.a.

You might be wondering why you’d choose to buy an investment that costs you $22k every year, and the simple reason is the expected growth on your property.

As mentioned above this is $63,000 annually, meaning the net benefit to you in holding the property is $40,750 every single year. This is a solid upside in anyone’s book.

And it’s worth noting that if your income and tax rate is higher, your deduction and refund will also be higher.

The next logical question is where do you live?

For this example, you’re going to rent the identical property next door; same value, same appeal, same location, basically identical.

The cost of renting this property will therefore be identical to the rental income you receive on your investment property of $37,000 annually.

In reality, when you’re renting things get even better because you have the flexibility to rent a slightly different place that’s cheaper or more expensive based on your budget, and can even look at properties in different locations from where you want to buy.

But in this case to keep it directly comparable, you’re renting the place next door.

We now have all the numbers to see how well things stack up.

Owning the property as your own home comes with total costs of $68,500 each year.

If we compare that against owning the same property as an investment, it comes in with total cost of $59,250 annually (net investment property cost $22,250 + rental cost $37,000).

This means that by holding your property as an investment you’re better off by $9,250 every year.

That’s an extra almost $10,000 you can be using to save, invest, pay down your mortgage, or just keep up with the cost of living.

And once again, if your tax rate is higher, the investment property scenario is likely to be even more beneficial.

Today it’s hard to get ahead.

There are a lot of people struggling with the cost of living, interest rates, and the list goes on.

These people aren’t making the progress they really want to get ahead, and this can be a frustrating position to find yourself in.

But there are options, and using the rules to your advantage can make things a lot easier.

I get that owning your own home is the Australian dream, and that most people would prefer to own their own home rather than dealing with rentals, a property manager, and all the things that come with renting.

But owning your own home comes with a cost. And the question you have to ask yourself is whether this is a price you’re willing to pay?

Ben Nash is a finance expert commentator, podcaster, financial adviser and founder of Pivot Wealth. Ben is about to release his third book, Virgin Millionaire; the step-by-step guide to your first million and beyond.

Ben runs regular money education events to help you save more and invest smarter. You can check out all the details and book your place here.

Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstances before acting on it, and where appropriate, seek professional advice from a finance professional.