Your home is almost certainly your biggest asset, so it makes sense to do all you can to avoid losing your hard-earned investment during an economic downturn.
Recessions are difficult to predict, so the best way to safeguard your home is to make a habit of taking sound financial decisions that will put you in a good position to weather any economic storm.
Boost emergency savings
Losing your job in a recession can make it impossible to cover your day-to-day expenses, such as rent or home loan repayments, food and transport.
Beefing up your emergency fund - cash reserved specifically for events like downturns - can enable you to still afford the necessities while you search for a new position.
Focus first on loading your emergency fund with one month’s worth of living expenses. After that, focus on building up a reserve of three to six months worth of funds.
A high-yield savings account can help you earn more on the money you put away.
It’s essential to create a monthly budget to ensure that you’re living within your means and not overspending. Experts recommend spending no more than 30 percent of your after tax earnings on discretionary items, but during a recession this percentage should be a lot lower.
Examine your monthly expenses and identify which items you don’t really need and which are necessities. Eliminate the discretionary items such as eating out and subscription services.
Pay off debt
One of the most important steps to a healthy financial situation is to pay off outstanding debt - particularly high-cost debt, such as credit card balances - to create some breathing space in your budget.
Eliminating high-cost obligations allows you to better prepare for financial emergencies in tough economic times - or high value investments when times are good. The more you’re able to put aside for saving and the less debt you have, the more funds will be available to you in case of an emergency, or if suitable investment opportunities come along.
Paying off your home loan more quickly than required will build equity, which will provide room to move in tough times. Instead of only making the minimum required repayments each month, take advantage of the current lower interest rates by keeping home loan repayments at pre interest rate cut levels.
If you have an access bond, the amount you pay over and above the minimum could be available if needed at a later stage. And, if your budget is really stretched, you could then improve your cash flow by reverting to paying the minimum amount each month.
Economic downturns can often lead to widespread job losses. If you’re worried about job security, paying off your obligations should bring you some peace of mind. However, this may not be enough to keep you afloat financially and you should keep an eye out for other income streams.
If you do lose your job, your property could provide a number of options to help tide you over a rough period. These include:
- Renting out your home and moving to a cheaper rental property for a period. In this way, you get to retain your main asset and when your financial situation improves you can move back into your home.
- Renting out a portion of your home to create an income stream. This works particularly well if your property includes a self-contained flat or suite and additional parking space for tenants.
- Selling your home may be a good option. If you have built up enough equity you could use the profit on the property to pay cash for a cheaper home and so eliminate bond repayments and rentals.
- Downscaling to a smaller, cheaper home has the added advantage of lower ongoing property costs, such as rates and maintenance.
If you are fortunate enough to be in position to buy one or more rental properties, a recession may be the ideal time to act. With interest rates at historic lows, banks keen to lend to creditworthy home loan applicants and plenty of eager sellers, a recession is a strong buyers’ market.
Be sure to keep to sound buy-to-let investment rules, though.
- Carry out thorough research, and buy in an area that is popular with tenants.
- Have at least 20% available for a deposit.
- If you don’t have experience in property management, consider appointing a reputable managing agent.
Long term view
Regardless of whether the economic downturn is on the horizon, it’s always a good time to make sure your financial portfolio is in good shape. Don’t make changes that jeopardise your long-term financial security based on short-term economic events. A recession is likely to last a year or two, but poor financial decisions could affect you for far longer.
For any type of real estate investment taking the long view is a smart approach. Property cycles go up and down, and if you have the resources to wait them out, things are bound to turn out well in the end.