|
|
|
|
|
 INVESTING |
|
Smart Investing
Home sweet debt
 September 10, 2007
Robin Bowerman
Equity in your home is one of the most valuable assets that Australians have. Around 60% of the average Australian’s wealth is tied to the value of their home so it is incredibly important in terms of the average person’s financial security.
And in recent years products have been developed to help put that asset to work – mortgages offering revolving lines of credit have become commonplace while new products like reverse mortgages offer new ways of unlocking the capital in your home.
But the collapse on the US sub-prime mortgage market raises some interesting questions about the use of home equity.
One of the underlying beliefs in using your home equity is that the value of the home will continue – over time – to rise. So leveraging the capital tied up in your house can be a very effective way of building wealth using a competitive borrowing interest rate and the potential for the growth of the assets bought with the home equity funds.
But as the US mortgage crisis – and subsequent fall in house prices across most major US cities reminds us – at times markets can fall sharply and turn conventional wisdom on its head and that is when the underlying assumptions that justified the borrowing decision is shown to be flawed.
The latest release of a national home price index in the US - the S&P/Case-Shiller US house price index - shows it has fallen to its lowest level since 1987. So the impact has been pronounced.
The Australian residential property remains strong – if somewhat patchy – so the contagion that has affected the US residential property market has not had a noticeable effect here with the possible exception of some of the secondary mortgage institutions and some well-publicised hedge fund collapses.
That said the US President George Bush believes the impact of the mortgage market problems still has some way to go before it is all played out. As a result he has announced a package of measures to help out some households under severe financial stress stay in their homes and also removed a tax anomaly that was preventing some people from refinancing.
Sensible borrowing is a legitimate financial planning strategy. But the risks rise along with the potential to build wealth. Whether it is an unexpected spike in interest rates or something as unforseen as the US mortgage mess any borrowing strategy ought to be well stress tested.
Ask yourself what the impact on your lifestyle would be if the mortgage rate went to 10% or 15%? What would happen if your property’s value dropped 20% in a year?
The flexibility of new mortgage products is to be commended on many levels but beware the clever packaging that glides over the risk factors because the bottom line is that the lending institution will want their money back.
Debt used sensibly in conjunction with available tax deductions can help people build wealth. But just because you can borrow a lot does not mean you should. Too much of a good thing can backfire and threaten the financial security that has already been built up.
More articles from this week's CompareShares newsletter:
Stocks: Uranium heavyweights come back fighting
CFDs: Hedging your losses, and making profits, using CFDs
Fundamental analysis: What is the price/earnings ratio of the overall market?
Smart investing: Home sweet debt
Resident Trader: Trading against computer-generated stops
Stock of the week: ABC Learning
Analyst report: The right insurance for investment
CFDs: Slippage - the sworn enemy of CFD traders
Options: Trading options close to expiry
Whatever your views, you can discuss this article - or any of Robin's articles - on our message board Your 2 Cents.
Robin Bowerman is Head of Retail at index fund manager Vanguard Investments Australia and the former managing editor of Shares and Personal Investor magazines. To receive this column by email each week go to http://www.vanguard.com.au/ and register with smart investing.
 Email to a friend
 Print this article
|
|
