Don’t let sentimentality make you an accidental owner

Hannah McQueen is a financial advisor, chartered accountant, personal finance author and founder of enable.me – financial strategy and coaching.

OPINION: They say financial markets are driven by two things: fear and greed.

But in the world of personal finance (where most of us live), there are many, many more emotions at play.

Impatience, reluctance, apathy. Frustration, optimism, spite – a myriad of emotions can impact financial decisions.

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People can be brash and stubborn and sometimes their hearts win out over their heads. Sentimentality can take precedence over practicality.

For example, I recently had two clients who were ready to move out of their first home as their growing families demanded more space.

Ella Bates-Hermans / Stuff

Banks, like any business, want to charge as much as they can. That’s what it means for your interest rates.

In both cases, they insisted on keeping the family home and using it as a rental. It appeared the reason was that they couldn’t bear to part with it, citing the many memories they had attached to the place – getting engaged, bringing their first child home, watching them do their first steps.

I get it – these things are valuable. But so does your hard-earned money and the time it takes to earn it, so on that point the case for selling the house is strong. (Also, I’d say having other tenants in your first house could quickly cure you of that sentimentality)

But the financial case was simple – being an existing property, interest expense deductibility is being phased out.

Thus, keeping this property will become more and more expensive.

Also, banks require you to keep more of your capital tied up for an existing property than for a new build, which means you cannot extend the mortgage to get a deposit for another property.

Thus, it costs more now and also reduces your ability to grow your wealth in the future.

Say you rented the property for $600/week, the mortgage was $500,000, other expenses were $5,000, and the debt was only interest at 5%.

By the time the ability to deduct interest charges is completely removed, this property will cost you approximately $8,646 per year in taxes (assuming a 33% tax rate) versus $396 per year for a property that is exempt deductibility changes.

Extrapolate that over 10 years and the difference is even more striking – and that’s before you factor in higher repair and maintenance costs and more of your capital being tied up in property, from so you can’t use it for anything more productive.

If you opt – or are forced – to sell it sooner, you may also have to consider the tax you owe under the clear line test rules.

The question is – is this price you are willing to pay purely based on sentimental reasons?

Even with the numbers presented, separating our emotions from our financial decisions can be tricky – so the alternative is to find a way to harness them.

A study conducted by Dr. Brad Klontz, an American expert in financial psychology, tested whether positive memories related to sentimental elements could be harnessed to improve financial decision-making.

They found that those who were able to develop a deeper emotional motivation to save money, through positive, emotionally charged memories, were able to save significantly more than those who simply received financial education alone. (A 67% increase vs. a 22% increase – so financial education still had some impact, but the emotional boost was stronger.)

In short, they concluded that we need to engage our emotional brain if we want to change our financial behaviors, not just our logical behaviors.

So in the example above – perhaps instead of just weighing numbers on a spreadsheet, you could consider what the house has offered you and use that as the impetus for making your decision.

It may be because your home was a safe haven for your children – and so you might decide that keeping them safe is very important to you.

A security that you could better help them achieve, eventually, by selling your first home rather than keeping it.

Maybe you loved the time you spent there together, playing in the garden and bouncing on the tramp – and as a result, you might decide that being able to spend more time with them is your reason not to. not spend tens of thousands of dollars to hold on. home itself, when instead you could use that money to do more things – before they leave the house for good.

It’s easy to dismiss sentimentality when the numbers make the best decision seem obvious, but financial decisions are inherently emotional, and we shouldn’t pretend otherwise.

But when the price of sentimentality is to miss future opportunities, it can soon bring up other emotions, like regret.

This column is for informational purposes only and should not be considered independent financial advice.

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