Ask Paul: I'm on a disability pension, should I pay cash for a house?
I think my only option is to buy a house with cash - but is this ever a good idea?
I am 32, single and searching for my first home. However, due to being on the disability support pension, my borrowing capacity is incredibly low, especially in this climate ($110,000).
Thankfully, after receiving a total and permanent disability payment to my super, I now have $750,000 of superannuation, in addition to $60,000 in shares outside super and about $50,000 in cash.
I have read that property only outperforms the sharemarket when it's leveraged, so I'm not sure whether it's worth investigating starting a pension stream from my super to get a mortgage (although this would reduce or eliminate my pension).
I have done a budget and can live on the pension amount. However, I do have a goal to keep $100,000 in my superannuation, so I am diversified and have money for emergencies (I'm able to withdraw from my super at any time) and the ability to grow my money.
If I do pay for a house in cash, I'd consider borrowing against some of the equity to buy more shares - although I'm not sure how this works and how risky it is. I feel very lucky, however, I'm also overwhelmed by this major financial decision. What do you think? - Gillian
Gillian, this is a huge decision. You have given me a fair bit of detail, but not anywhere near enough to even begin to tackle this. There is so much more I would need to know and understand.
Things such as the extent of your disability, your potential to work in the future, your family, your personal relationships, your attitude towards life. This list would go for some time!
You absolutely need to sit down with a professional financial planner. There will be an answer to your question, but only after much discussion, planning and working through various scenarios.
General things going through my mind are the long-term returns on super, which, since it was made compulsory, have been, on a balanced-type fund, around 7% to 8%pa on average, in a very tax-friendly environment.
Let's say that around 4%pa above inflation over the long term is historically a sensible number.
That would mean you could potentially see super as having the ability to provide some $30,000 a year in income. But how would this impact your disability pension?
I am not a great supporter of the "are shares or property better" argument. Generally, people selling shares say shares are better; those selling property say property is better. A lot depends on the property you choose or the shares you choose.
Both these asset classes have delivered good long-term returns. But what I think you are trying to do is to buy a home. A home fits into an entirely different category. Sure, a well-located home will be as good as most other investments, but it provides an intangible benefit: it is your home, where you live.
You have a complex set of issues here and they cannot be answered in a few hundred words in a column such as this. You and your life are far too important. You may want to start by talking to your super fund, which may have recommended advisers. But talk to an adviser you must!
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