Should I buy a house before I retire, or keep renting?

I am very distressed about where I will live and how I will pay rent when I stop working. Should I buy a small unit at 59 with only eight or nine years of work left? I earn $116,000, contribute $800 a month to super (balance: $175,000), pay $2607 in rent, and have $5000 in savings. The bank says I can borrow $500K with a $25,000 deposit. Should I reduce super contributions for 12 months to save for a deposit?

I’m sorry to hear of the distress you are feeling and can certainly understand the worry that flows from not being secure in your housing arrangement.

Calculating what will leave you better off out of a mortgage and paying rent isn’t as easy as it may first seem.Credit: Simon Letch

At current interest rates, the mortgage repayments on a $500,000 loan are similar to the rent you are paying. However, while your rent is likely to rise over time, your mortgage repayments would remain relatively stable – unless interest rates increase significantly.

Potentially once you retire, you could do a lump sum withdrawal out of your superannuation to clear or at least reduce the mortgage, thus reducing your outgoings in the retirement phase of life.

Of course, the problem here is that then you have no superannuation to generate retirement income, and therefore would be heavily reliant on the pension. Nonetheless, you would alleviate your worry about housing security.

A significant obstacle, though, is the requirement for a $25,000 deposit. You should explore the First Home Super Saver Scheme, which enables you to withdraw voluntary super contributions. It is possible to take up to $50,000 from your super this way.

Emotion aside , an argument could be made that you would be best off continuing to rent.

Given you have been adding $800 a month to your super, you may have the $25,000 deposit “in the bank” so to speak, using this scheme. Note, to be eligible you must have never owned a property in Australia.

Other first homeowner schemes to help reduce the stamp duty burden vary by state. There is also the First Home Guarantee, which removes the need for the bank to charge you lenders’ mortgage insurance, so be sure to ask your bank about that. The Help to Buy program would also be worth exploring.

It’s worth mentioning that should you still be renting when on the age pension, you would be entitled to rent assistance, and also have a larger asset test limit under the means testing provisions. Emotion aside, an argument could be made that you would be best off continuing to rent.

Our first home was a small terrace. When we started a family, we moved out and bought a bigger house, keeping the terrace as a rental. The terrace is fully paid off, whereas we owe $1.2 million on our home. As a result, we pay high tax on the rental income. Selling would trigger significant capital gains tax. Are there alternatives to reduce tax while keeping or reinvesting the equity?

Your debt is in the wrong place, but this is difficult to unpick. The tax deductibility of debt is determined by the purpose that the borrowings were put to, so refinancing won’t help.

Regarding the CGT, keep in mind that there would be a pro rata calculation here to reflect the period of time that the terrace was your primary residence. You also have the 50 per cent CGT discount available.

If you expect a low-income year (eg, unpaid or parental leave) sometime soon, consider selling then, as the capital gain is added to your income in the year of sale. No easy fix here, though, I’m afraid.

Paul Benson is a Certified Financial Planner at Guidance Financial Services. He hosts the Financial Autonomy podcast. Questions to: [e-mail]

• 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 any financial decisions.

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