How to pay off your mortgage faster with your spare bedroom

Belinda Punshon 15 February 2016

How to pay off your mortgage faster with your spare bedroom

Why it’s time to re-evaluate the use of the idle spare bedroom in your property. Renting out an unused bedroom could save you over $150,000 over the life of your home loan.

If you haven’t already jumped on the renting bandwagon, and you have untapped space in your property, it could be time to rethink the utilisation and configuration of your home. With around seven million space rooms sitting idle across the nation, there is approximately $1.42 billion worth of dormant real estate-- and Australians are missing out big time.

Our study found that 85% of owner-occupied houses and 60% of rental properties have spare bedrooms, and most homeowners are missing out on a potential $10,000 annual boost to their household income by not renting out a spare room, (not to mention the interest savings that could result if the cash was reinstated in the form of extra mortgage repayments).

On an average $450,000 home loan with 5.5% interest over an initial term of 30 years, you could save $150,856 in interest over the life of the loan by using your rental income as additional repayments.

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Whether you had a vision for a designated guest room, a future home office, or you simply needed a backup space when relatives come to stay, it’s worth converting your untapped space into an income-producing area now, and worrying about the rest later.

Advertise your unused space and attract high quality tenants to minimise your interest repayments, shrink your loan term, and free yourself from debt sooner.

What are the cost savings?

Renting out a spare bedroom in your home could generate significant cost savings in the form of lower interest repayments and a shorter loan term, but unfortunately many Australians are not taking advantage of underutilised space.

Our study found that householders are wasting valuable space and forgoing huge savings. The average cost of renting a room in 2015 was $202.06 which means that homeowners could be earning $808.24 in monthly rental income if they were proactive about using their spare bedroom.

To illustrate, if you had a home loan of $450,000 at 5.5% interest over 30 years and you made additional monthly repayments of $808 at year 5, you would save a tremendous $150,865 in interest.

You would also shrink your loan term by 9 years and 9 months, leaving you with an updated term of 20 years and 3 months. That’s nearly 10 mortgage-free years.

What about subleasing a spare room?

You could benefit from subleasing a spare room in your property, however if you are renting privately you must seek your landlord’s written consent. Keep in mind, that if you do sublet a room you are responsible for the subtenant’s behaviour-- so choose wisely.

What are the tax implications?

Before renting out a spare bedroom, it’s worth speaking to your accountant about the tax implications. If you rent out a space, a portion of your home is considered as an investment property by the Australian Taxation Office (ATO) which means you’re required to declare the rental income in your annual tax return.

However, you can claim deductions for certain expenses, such as maintenance, but these deductions can only be claimed for the portion of your expenses that are directly related to the rental income. You can work this out by calculating the floor space area that is occupied by the tenant.

Typically, you won’t be eligible for a full capital gains tax (CGT) exemption as you’ve used part of your home to produce income and the property may not pass the primary residence test.

Image: Shutterstock

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