Puzzle Finance Blog


Home ownership is a dream but a mortgage doesn't have to be a nightmare


IS IT better to rent or to buy? Typically, the rent-or-buy debate is limited to financial questions. Will my mortgage payments exceed my current rent? Should I wait for interest rates to drop a little further?

Recent years have demonstrated that there are no longer dependable answers to these money questions - and that maybe they weren't the right ones to begin with. So we've shunted them aside to examine what we consider to be the more significant points of the debate: Does every man still need his kingdom, even if that kingdom's value plummets from month to month? And how will a 25-year debate limit future opportunities?

In the rent-or-buy debate, as with most big life decisions, a single, concrete answer is elusive. The most important thing you can do is make sure you've asked yourself the right questions.

My parents' generation had a collective fantasy about being mortgage-free. I guess it's understandable in some ways. So much of people's incomes go to mortgages, so to have that burden lift could mean a considerable lifestyle change. For many, a mortgage payment eats up 30 per cent of the monthly cash - sometimes more.

We often also believe that fully owning our homes allows us to enjoy them more. However, many will admit that once the debt is paid off, they sell up and buy the next debt-generating house. The truth is that paying off a mortgage isn't the overwhelming relief many people expect.

What we homebuyers don't consider is what happens to us for the 25 years during which we are paying the house off. Having a huge debt over our heads is not conducive to taking risks and seizing unforeseen opportunities. When all we can see into the future is the gradual eroding of our debt to the bank, it's not exactly a carpe diem situation. It's pedestrian, conservative and an almost imperceptible advancement from year to year. Our efforts fall like drips of water into a pool, hardly impacting the volume unless seen over decades. It's no way to think about your life's progress, that's for sure.

When you apply for a mortgage, you're risk-profiled. Will you be able to pay back the debt? Is the security a good bet? Is your health good enough? That type of thing. Getting approved is a dream come true - now you can kickstart all your big plans!

But then you end up spending a ton on furniture, renovations, even landscaping. Most people don't accurately estimate the costs of all these add-ons to the cost of a home, and it's highly likely that you'll go into more debt as you start racking up new expenses. Your dream home can easily start to feel more financially dangerous than a Hollywood coke habit. You start to worry about how you're going to recover pretty soon after you've started.

At this point, making a career change or a risky move starts to seem like a pretty bad idea. Although you can sell the house, the costs of doing so in cash terms, not to mention emotional terms, often make it seem impossible. If a partner or young family is in the mix, there's even more at stake, and even more inconvenience involved in making a sudden change.

I have known companies who do everything in their power to encourage their young up-and-comers to buy a house early in their careers, thereby tethering to a life nearby. Moreover, buying a house means you're less likely to end up working for the competition once you're comfortably settled in your job title. The dark artists of employee entrapment have used mortgages as weapons for decades.

The desire to own one's own property is innate for many of us. Ownership gives us a sense of security and fuels our egos. Having a place that you call your own means that you can't be evicted on a landlord's whim. It's easier to visualise a calm and happy future when your home is your own. But home ownership isn't necessarily a requirement for rosy future planning. That's a fallacy that's grown up out of a culture of home ownership. After all, you don't need to own a painting to enjoy it.

I have a friend who is a keen sailor and loves boats. He says there are only two days of boat ownership that give you great pleasure: the day you buy it and the day you sell it. It's much better to rent them. If something goes wrong, someone else fixes it. If your family grows, you rent a bigger one. If you have a tough year, you trade down from a 90-foot Swan to a 30-foot Beneteau. You're flexible.

The same can be said of renting houses. You can chop and change as your life develops, and if the market crashes, you aren't locked into a house with so much negative equity that the next 10 years of sweat and toil will just get you back to level.

If home ownership is for you, however, it's time to change your relationship with debt. My friends in banking think that paying back the capital on mortgages is crazy. They see a mortgage as a way of leveraging a great lifestyle. The more debt you can get, the better. It means more toys, more art, better wine and bigger houses.

They don't see the debt as painful but liberating. As with all things, you can change it for a price. Get used to buying and selling houses, moving money and mortgages around, and you'll see that 25-year debts are anything but. They are just about today, and if they get you what you want and free you to live your life the way you want, fantastic. Just don't think in terms of paying the whole thing back. They don't, which partly explains how the market collapsed so dramatically not long ago.

Since I can remember, I have been fascinated by people's dreams. It struck me from an early age that our fantasies shape our lives and how we live them. Idle conversation often gives me insight into such dreams, as people almost unconsciously mention that if they were to win the lottery, they would take that trip, move to the country, learn to sail, and on and on.

Essentially, these people feel that if by the weirdest fluke of chance they miraculously won millions of dollars, they might then live their life. That still is very strange to me. It's as if they are somehow incapacitated from choice and freedom unless they receive a huge windfall. This is a belief that is patently untrue.

The bummer is, our minds can work like that. Many people look forward to retirement for their whole lives, thinking at that point they can finally do what they want. If you think like that, chances are you will be disappointed. You'll be the same person when you retire, with the same limitations and fears. If you can't enjoy the present, do you really expect to change that much when you're 65?

The same can be said for houses. Our feelings toward them are irrational. They are loaded with emotion. A haven to raise a family, a sign that you are doing well, a place for friends to connect, a playground or an albatross around your neck - it's all a matter of perception.

Buy or rent? I guess it doesn't really matter. What matters is how good you feel about your decision. Big debt at a young age can be crippling for some and yet highly motivating for others. Inspired by my fanciful banking friends, I finally got over my fear of debt and now live in a huge pile by the sea.

My name is on the deeds, but I know that the bank really owns it. Nonetheless, I can live with that. I'm living the life I want, and I love it.

Paint some pictures in your head and choose the one that feels great regardless of the logic. It's your life. Live it.

Posted by News Limited Network on 8th February, 2014 | Comments | Trackbacks
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