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8 Major Reasons Why Mortgage Is A Trap
Read This First Before You Take 30-years Mortgage
Like it or not buying a home should not be about what you can afford. It should be about wasting as little money as possible.
1. Worst Investment Ever
Each property is a few hundred thousand dollar investment, and leveraged. Most other assets are far more liquid, and can be diversified just because they are more granular. You could just as easily do this with shares or some other investment class. So when people tell you that it's the only way to become financially independent, they're wrong. Shares are normally a better long term investment than property, albeit with a greater volatility. When you buy you're effectively leveraging your savings to invest in property. Who would buy $250,000 in stocks on margin with only $5-15k down, or even $0 down?That would be ridiculous.
And most people don't have positively geared investment properties. Since 2000, rental income has not even covered interest charges. No rational individual purchases an asset that generates a net negative yield – but clearly speculators have been pursuing capital gains instead. And most other investments – talking about stocks, bonds, mutual funds, etc – do not fix the cost basis and selling price on the value of the commodity on only two particular days. And the ugly truth is having debt on something that does not produce any cash flow is a liability.
2. Financial Stress
The stress of having mortgage can be a good thing as it raises your budgeting standards dramatically but if more than 25% of your income will be going out in payments that will put strain on the rest of your budget. You won't be able to save and pay cash for furniture, cars and education. Many of us destroy our heath by sitting in cubicles at jobs we HATE, just to have the money to pay mortgage and to buy 5 minutes of “joy” from a pet at the end of the day, that we can’t even enjoy since we’re too tired and stressed out from the job. A mortgage is a secured loan against your property so if you can't keep up with repayments, you could end up losing your home and even other assets if the price of the house wouldn't cover your loan amount.
3. False Sense Of Financial Freedom
Your costs except your mortgage (taxes, repairs, maintenance, insurance etc) rise over time right along with inflation. If you buy a house and pay it off over ten or twenty or longer years you still have to pay insurances, rates, bills, maintenance, fees, etc.. for as long as you live in that house. If your home is your largest asset, that just means that you dont have any other assets. And house ownership is, at best, land lease even if you have no mortgage. You are paying property taxes, and even end up losing property if you can’t pay (try to not). House is a subject to eminent domain. You know, in case they decide that instead of getting our rent (damn! I mean taxes) they rather just take it away from you. And “Downsizing” by buying and selling real estate is very expensive. According to the Reserve Bank of Australia, it costs about 4% of the sale price of your home to sell (agents fees, advertising) and about 6% of the purchase cost to buy (stamp duty, government fees, conveyancing costs, loan establishment fees).
4. Opportunity Cost Matters
Remember, all our money is tied up paying the loan off. Know your oportunity costs. This is the 3.5% dividend your 330k in equity could be earning in ETF or REIT for example. Total annual cost of owning and operating the home should include that cost. The average American has 62% of their net worth tied up in their home, but how much income does that investment earn? Opportunity cost on down payment matters. The 20% downpayment on the $30,000 house Warren Buffett put in 1956 had an opportunity cost of billions of dollars. While it's true that you're buying an asset when you purchase a house, it's an asset that barely keeps pace with inflation, and you lose the opportunity to make other investments.
5. Sacrificing Too Much Family Time
When you buy house (and if you are a normal bloke with normal working wages and partner stays at home) then you go under this massive debt and next 15-20 years of your life is spent on thinking how to reduce this loan and all your efforts are spent on that. 54% passed on a family holiday because of financial pressures. 56% skip family time in order to work longer hours to help pay the mortgage. When buying and driving to work budget your driving costs at least a dollar per mile (80 cents/km to account for higher costs) because you absolutely must put a high value on your spare time to get ahead in life.
6. Not So Predictable
Interest rates on mortgages are constantly changing and can increase. Young people today, in particular, haven't really grasped the high costs of borrowing in times of low inflation. Most of them are leaning towards the experience of their parents, who bought at times of high inflation when the debt was eroded very quickly and made very good gains because of high inflation. A mortgage does not necessarily stay the same, even if you have a fixed rate. Changes in property taxes and insurance costs can and will affect your payment. In just four years, my mortgage amount changed three times for this reason, once by $150 per month because the mortgage company had “miscalculated” payments.
7. The Full Cost Of Ownership is Huge
Home ownership can be more expensive when you factor in rates, building insurance, cost of repairs, and strata fees. Maintenance on a property you own is as much "dead money" as rent. Council rates, water service rates, land tax, etc – all equally "dead money"." People should put aside costs of about 1% a year of the capital value of the house to maintain it properly. And if I could figure out how to limit home maintanance to 1-2% a year, that would be great. Replacing all the windows and doors for instance, is something like 12%. That’s 6-12 years worth of improvements. A furnace is 1.5%. Garage doors are 2%. Taxes are predictable and smooth, so a lot like rent, but ongoing maintenance/repairs is not, those come and go at seemingly the most inopportune times.
8. Less Mobility
Lets spell out very clearly why the myth of homeownership became religion in the United States. Its because corporations didn’t want their employees to have many job choices. Mobility is an asset. Job salaries is a function of supply and demand. If you can’t move because you have mortgage, then your supply of jobs is low.
9. But What About Equity?
It's true that taking out a mortgage loan, though, does give you access to equity. You can then borrow off this equity in the form of home equity loans or home equity lines of credit. Like rent money, mortgage interest is essentially “wasted.” It goes neither to improving the property nor to building equity. It takes 20 years before a typical borrower pays more principal each month than interest. And savings via equity is not as straightforward as you think. It’s is extremely unlikely that you’re are going to have your house go down in value over 30 years but it could happen (see Japan). Just have a think about that… how much equity do you have in your own home right now that you could be using for something more purposeful? Remeber that with equity tied up in the house the first and largest expense to consider is “opportunity cost”. That is, simply, what could this money be earning elsewhere? Since ETF or REIT pays a dividend of about 3.5% the opportunity cost for $330k equity is $11,555 (330k x 3.5%). That is, even conservative investment would pay you $11,555 per year while the house pays nothing. So buying a home TO LIVE IN does no such thing as equity. You can’t collect rent when you live in your home (unless you have kids). And even if the house goes up in value, it is irrelevant because you can’t live in your house and sell it too.
Helping People to Be Really Realistic
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by Alex Ershov @ 2019
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