A House is NOT an Asset...

A great post over at Sex Health Money Death highlights one of the reasons that owning your own home is not the best way to an early retirement or increasing your income.

  • cost money on an ongoing basis.
  • are difficult and expensive to buy and sell.
  • can trap you in negative equity if you buy when they are expensive.
  • may need to be sold to pay for care in old age.

The mistake a lot of people make is to plough money into a home while they are working, thinking that it will help them retire. They often forget (or simply don't account for the fact) that the house will not be earning them an income when they retire, but it will require ongoing costs:

  • taxes
  • maintenance
  • insurance

Instead, more people should focus on accumulating true assets, like those mentioned in a previous post, namely:

  • Stocks & shares (e.g. like owning a tiny portion of a productive business)
  • Cash
  • Bonds
  • Commodities (especially precious metals)
  • Property (only if it's not the house you live in!)

Spending too much on the fifth "asset", if it's your own home, means not saving enough into the other four, which can generate you an income when you choose to stop working.

The guidelines I suggest for people considering buying a home (or wanting to change their lifestyle to retire earlier / wealthier) is this:

1) Put down the biggest deposit you can. 10% should be an absolute minimum. 40% should be the maximum, assuming that the interest rate on the mortgage is extremely low, as it is now.

2) Work out how much you can afford in repayments and additional costs. Too many people think about the mortgage payment, and not the "invisible" costs. 

Total monthly cost should not be more than 25% of your household net (after-tax) income.

A simple(ish) way to calculate the total cost is as follows:

Mortgage repayment + (1.5% of the house price / 12)

i.e. work out 1.5% of the house price, then divide by twelve to estimate how much additional monthly costs to budget for. This will roughly account for the three ongoing costs mentioned previously.

As a working example, if your take-home household income is the UK average and there are two of you, this will be around £3600 per month. Up to £900 could therefore be spent on total housing costs.

If you're looking at a house priced at the UK average of £225,000, you need to factor in monthly costs of (225,000 * 0.015) = £3375 / 12 = £280.

This leaves £620 available to pay the mortgage. At current interest rates, this would be just about manageable with a 25% deposit (£56,000) and a two-year fixed-rate.

Can't afford that? Save up a bigger deposit or buy a cheaper house...

The other thing to bear in mind is that owning a house is generally a very long commitment. You might be earning two decent salaries right now, but what about if one of you loses their job? What about having kids and paying for childcare or working part-time? 

Sure, you can sell the house and downsize, but as mentioned already, that's a giant hassle and an expensive one.

As always, everyone is free to choose their own path, but I think too many people are stressed out paying big mortgages and trying to juggle their time.

Life is short. Choose wisely.


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