YOUR WEEKLY MONEY DILEMMA
I purchased my very first home by myself 3 years ago! It is a 2-bedroom unit and at the time I could afford the repayments. I love living by myself and the freedom it offers but with the current mortgage and the increase in rates over the past year I am struggling. I'm thinking of renting my second bedroom out to a close friend whose lease ends at the end of next month. What are the pros and cons of this? The rent I would be charging will be $500 a fortnight and my current repayments are $1,352 a fortnight
I’m not sure about you, but when I imagined being a grown up, I never thought it was going to be genuinely aspirational to have a stable roof over one's head. Yet, that is the stark reality many find themselves in today. And it’s not just for those who have a mortgage. We have seen year on year rental increases up a whopping 13.2% over the last 12 months. Sydney is, annoyingly, leading the charge – up 23.6% for units.
It’s not that interest rates are *so* high, it's more about how much the cost is to purchase property.
In 1984 the average home was about $64k and the average income was $19k. So about 3.5years of average annual income would buy you a house (yes, before you come at me - I know interest rates where sky high then).
Today, the average home costs $920k against an average income of $90k – so it's TEN times average annual income. As mortgages are so much larger, any interest rate changes are felt so intensely because it’s on such a high amount.
So as more and more people are feeling the squeeze there are more conversations about getting a flatmate, partners moving in together to avoid double rent, and homeowners renting out a spare bedroom (or garage).
Here are some pros and cons:
PROS:
- Moolah. Based on your numbers above, you are going to have just over 35% of your fortnightly mortgage coming in to help you get some reprieve. This gives you options to bank additional money in your offset account (if you have one) for a rainy day or allows you to use it for the increasing cost of existing in this era. If you do keep it in your offset account, it will also see you paying less interest, meaning your repayments pay off more of the principal and could have you mortgage free sooner!
If you have survived this far, my suggestion would be to not see it as free cash (because it isn’t) and try your darndest not to spend it. That will help if you get extra rate rises in the future, or if a genuine emergency pops up.
- Shared living costs. The other thing about having a flatmate is that the single tax, you would be able to share household bills. Which then can be used to fund any current cost shortages you find yourself in.
- Connection. To be honest, this is both a pro and con (as like me, you say you love living alone). But, having someone around may mean you have more time at home on the couch eating homemade pizza and Aldi wine chatting which could see you spending less out. Boundary and expectation setting are important here though as each of you need to be able to communicate your need for space and alone time. Men are far more likely to suffer depression living alone, but women tend to have more robust social networks (yet that often comes with a literal catch-up price tag).
- Deductibility. If you are having someone rent, you should speak to your Accountant about what you are able to claim as deductible. It’s likely a portion of your expenses (interest, strata, insurance...etc) would now be tax deductible.
CONS :
- Tax. Because you are a homeowner, you can’t currently claim any of your expenses, but you also can assume that it is capital gains tax free when you sell it. However, if you got a flatmate there are two things to speak to your Accountant about – the income that you receive as rent (as it will impact your taxable income) and CGT. The ATO has made this handy guide on renting out a room.
- Space. Living alone means you can be your true weird self without judgement or care. Adding someone into that space can be quite a difficult adjustment. It also will test even the best of friendships. Get really clear if you are on the same page, what are their working patterns, do they stay up late when you are an early bird who hates noise, are they messy or like me, have a penchant for holiday themed tacky fridge magnets. The more you can discuss all of this ahead of time the better for you both.
- Legal Stuff. You want to make sure you have all the legal elements in place to make sure you aren’t left vulnerable if they don’t pay rent or won't leave. It's best to do this before someone moves in so they understand their obligations and it's all above board from the get-go. It may sound crazy, but I have heard some wild stories, - including one who tried to say that they weren't renting, but instead contributing to the mortgage and believed they were entitled to growth on the property. Let's avoid that hey?
Jess
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Money dilemmas can be a nightmare! They can leave you up all night ruminating about what to do, have you feeling alone and isolated or just plain ol' stuck. So, we are here to help. I am going to tackle one a week and give you my unbiased, no BS general thoughts on how to tackle your conundrum. We would love for you to send yours (or someone you know) in.
Obvs all of this is general advice only... especially important to note any and all of the comments above do not take into account your objectives, financial situation or needs. Before acting on any information, you should consider the appropriateness of the information provided and the nature of the relevant financial product having regard to your objectives, financial situation and needs.
