Tuesday, 15 September 2015

The Big Mortgage Con: Are We Aiming Too High?

The great Australian dream (or American dream, or British dream, or wherever you come from) - it seems to be, to own your own home. I totally understand this bit. But I will confess to being perplexed at how a lot of people go about that.

So the dream goes: get a job, save the deposit, get a huge loan, work hard, pay it off. Almost uniformly, people seem to get the biggest loan they can qualify for and buy the most expensive home they can manage to get.

Does anyone stop and think about that? We would not shop around anywhere else for the most expensive of some other item (if we're only driving to the corner shop, we don't insist on a Ferarri). And yet this is how home-buying seems to work: go for the biggest and best.

The costliest, the nicest, the best location. Yes, of course, somewhere in the reasoning is that the more you spend, the better the investment. But first and foremost, if this will be the place where you are living, and you are buying this as your primary, long-term home, then it is not an investment in the early days - it's a home. It's a money pit. You will barely even touch the debt in the first few years, thanks to the interest/fees/taxes, so it's nothing but an expense. (I'm not going to touch on investing home equity here; that's for a later post.)

Essentially, the harder someone works and the less they spend, the faster they will pay the home off. But the end result still takes 20 or so years, perhaps longer if there are also debts from education, or if they upsize or move to a nicer area. And at the end of that, they will have worked for 20+ years for a roof.

And during that time, many people will have been too busy working to take proper advantage of the home that they bought. Quite often the home does not actually match the way that they will be using it. We're talking big formal dining rooms that never get used, because people sit in front of the tv with a takeaway dinner after a long work day. State-of-the-art kitchens when people don't have the time to cook. Second living rooms which sit empty. The only use of the yard is to be watered, weeded and mown every weekend, which is either more work or the expense of paying someone to do it. Guest bedrooms which sit empty for 50 weeks of the year.

Am I missing something here? Is it worth having a huge mortgage debt and long work hours, once you consider what they're giving you in return? Is it even worth buying, or would renting make more sense? Do people even ask themselves these questions or do they just jump onto the mortgage treadmill like their neighbours?

I'm not anti-home-ownership... merely asking whether people truly think, before these enormous spends happen. One thing that true Frugalists have in common is that every single spend is examined and questioned, and they consider how that spend will fit in with their lifetime goals. If one of your life goals is simply "buy a home" without any further detail, it's likely that you have (or will) go down the usual path of buying a place that doesn't fit your needs as well as it could, or spending far more than you need to. But imagine the goal was more specific, like this: "Buy an apartment, save like crazy for a few years, then buy a family home and rent the apartment out while we raise a family on one income." Suddenly the first mortgage would be automatically smaller (it needs to be, because their goal is to save like crazy for the second property). Or how about this one: "Buy a small house, pay the loan down as fast as we can, and be mortgage-free in ten years." This family knows what they want to achieve later on - not just "be in a house".

The point is, mortgages are long and sort of painful. So it's a good idea to figure out where you want to be at the end of that road, because it might impact quite a bit on how much you spend and what you spend it on.