Four tough truths about renting and retirement

They can’t scrabble together the scale of deposit a bank wants them to have to underpin a large loan. They can’t afford the enormous mortgage with six per cent interest rates on their average salaries.

And yet, despite this mess, owning a property could be the single greatest way of creating wealth ever in our economy. There are three simple reasons why: every dollar of capital growth you make on your home is capital gains tax-free for your entire life, and the amount of leverage you can take on your family home is higher than the leverage available in any other asset class, so when it grows, your wealth grows –fast quickly.

If you’re middle-aged and mortgage-free or close to it, count your blessings.

Paying a principal and interest mortgage is the most diligent long-term savings regime most people enter into voluntarily.

Over the last 30 years residential property has grown by an average of 5.2 per cent per year. And remember, all of that growth, if made in your principal place of residence is capital gains tax-free.

Jen, 28 and Greg, 29, are renting in inner Melbourne and have given up hope on buying a home for now. They’re young and working hard with a household income of $130,000 between them after tax and their rent is $42,000 per year.

They’ve grown up in Richmond, and lived all their lives in the surrounding suburbs of inner Melbourne, so that’s where their roots are and where they’d want to buy.

If they took out a mortgage on a small apartment they’d expect to be paying closer to $60,000 in repayments a year, and then they’d have to pay body corporate fees too. They’re afraid of getting themselves into financial hot water they can’t deal with.

They feel sick about not-buying, but they need to recognise that they still have time and choice – time to save up a deposit, to rethink their inner-city ambitions and move a bit further out of the inner city to a more affordable suburb if they’re brave enough.

Or, they might even consider getting themselves on the housing ladder earlier by buying an investment property in a suburb with good rental returns.

Lesson 3: Renting can be a financial and lifestyle choice – really

Renting for some people is a later-life financial choice– and not necessarily a bad one. These are people who have built up a valuable pool of financial assets and invested them in things other than their family home.

They might have a share portfolio, a rental property pool, or some valuable managed funds getting them a good and fairly reliable return in strong markets. And they’re able to choose where they want to live, renting because they think it’s a better use of their capital to own financial assets rather than their home.

Greg is 65, recently divorced and happily renting a two-bedroom apartment in Sydney’s northern beaches for $700 per week. He sold his family home worth $2.5 million when he divorced and ended up with $1.2 million in cash in the split.

Greg thinks he’ll rent for life because he can live in the area where his family and friends are based comfortably, generate a solid income of 6-7 per cent return from his $1.5 million in investments that covers his rent and not tie up all his funds in a family home that doesn’t make an income.

If he were to shell out for an apartment like the one he is living in he says it would cost him well over $1 million and leave him living on a much lower passive income and drawing on the age pension. And he wouldn’t be able to draw down money for holidays, or help his child get on the property ladder.

His numbers almost add up, if he can manage two things: the risk of nibbling away at the capital over time, leaving himself with a much lower pool of assets that in a bad-investment-year won’t cover the bills.

His big risk, remains that of ageing without a home and having to live in fear of moving more regularly. The reality is, Greg’s doing ok. And he has enough money right now to keep choosing to rent.

Lesson 4: Don’t let the clock run down

The last lesson that nobody tells you about in the rental market is the tick tock of the mortgage clock. When you reach the end of your fifties, no one tells you that your time is running out to get a home mortgage, and then, one day, you can’t.

Banks are restricted from lending to older people who don’t have enough earning years to pay back their mortgage before they turn 67. The door closes on buying a principal place of residence somewhere silently in your early fifties because you realistically need 20-30 years to pay down a decent sized mortgage.

You do still have one choice – to buy an investment property, and later kick the tenants out – just as that property would start being assessed for the age pension assets test because if you live in it, it’s exempt.

Consider the choices that Grant in Brisbane is making today, at 48, divorced five years ago with three teenage children and living in a rented house in the inner 5km, near their schools.

He’s chosen to pay for them to have a private education as a priority, rather than buy a home. He pays $1100 in rent a week for a house that might fetch $1.7 million in the real estate market, and he’s just making ends meet on his single-dad salary. He’s got six more years of paying school fees before he can see light in the tunnel to buy a home. By then he’ll be 54.

My worry for Grant is whether he’ll ever be able to get on the mortgage ladder if he leaves it much longer. It’s a slippery slope, missing out on the capital gains tax free growth on a smaller property in midlife, then ending up unable to get into the market later in life.

After chatting with all these people I have four messages for those who rent:

1. If you’re middle-aged and mortgage-free or close to it, count your blessings.
2. If you still have time and the opportunity to buy a home, consider the merits of it not just for today - but for your old age.
3. If you’re cornered into renting for the rest of your life, look into ways to build a stable source of income to pay your rent for the rest of your life, no matter how long you live or what markets do.
4. And if you’re renting and on a full age pension with no way out, you have my greatest empathy. The only thing you can do is your best.

Bec Wilson is the author of bestseller How to Have an Epic Retirement. She writes a weekly newsletter at epicretirement.net and is the host of the Prime Time podcast.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making financial decisions.

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