Last year I visited a friend in the US, and he had just bought a house for his family. ”Congratulations on buying a house!” I said. He pointed out to a small closet and replied “oh, that closet is ours, the rest belongs to the bank”. Like the majority of households those days, they would spend the next 25 years buying back their house from the bank.
At this time, I owned two rental properties but was traveling around so I was really homeless, living out of two motorcycle panniers for 6 months. I was starting to feel the need to settle down, and even better, in a paid for home.
Could it be that difficult? Well, yes. First, because prices are higher. Two generations ago, buying a house cash after five years or savings was not unusual. A mortgage would be paid of in ten or twelve years at most. Now we are talking about 25 to 30 years to afford a normal house on a normal salary.
I had to sacrifice a few things in order to acquire a house cash. I chose a country with a low cost of living. I could have afforded a house in France but it would be a ruin in the middle of nowhere and I would have spent the next 5 years fixing it up myself. Here, for as annoyed as I am for having an anthill of workers around my house all day, I don’t have to do the work myself, and they should take three months at most.
Buying a house cash it not always wise.
My mortgage in the UK is at 2.29%. Here in Guatemala, I would have obtained a rate around 8 or 9%, even for a mortgage in US dollars. At 2.29%, I am not repaying my mortgage faster. Like I explained in this post, the average weighted interest rate on my debt load is pretty low, and I would rather have debt and invest my cash than live debt free and have nothing to invest. Of course, down the road, I hope to have no debt and a cash surplus to invest, but for now I need the passive income those investments produce.
I chose to leverage that cash and channel it into several investments instead of using it to pay off debt. As I mentioned, I own some cattle, a coconut farm, a 90 acres piece of land for development, and am considering other unusual investments, but that is for another post. All those things bring me money already, or should start generating an income tomorrow, that is more than the monthly repayment on my debt. If I paid my 2.29% mortgage in full, I would have to borrow the money again to invest, and it would be considered a consumer loan, for which I expect a rate of 7%.
If you have some debt other than your mortgage, killing your mortgage first is probably not financially smart. Your mortgage rate should be your lowest interest debt, and if it isn’t you should look into refinancing because rates have never been so low. You could even borrow more against your mortgage to pay off your higher interest debt. Not to buy more stuff.
But the feeling is truly awesome.
I could have chosen to keep borrowing when I bought my little house in Guatemala. Although as a self employed, semi-retired foreign girl, I had virtually no chance to get an approval on a loan. It already took me four trips to the bank to open a savings account, with no overdraft, no checkbook, no credit line. Just for the privilege of lending them my cash for a 0% or 0.1% interest rate, I didn’t bother reading the fine print. Imagine a mortgage.
But deep down, I wanted to own the roof I live under. That is the first time in my life that I live in a paid for house. I bought my first property at 23 but it was a rental, and I was renting elsewhere for myself. In the UK, I did live in the property I bought, and enjoyed the fact that I had no landlord to tell me how to decorate or abusively keep my deposit at the end of the tenancy, but most of the property belonged to the bank.
As I renovate this house, and build an additional bedroom, I know everything is mine. I never have to pay rent or a mortgage again. I can build more at the pace I can afford to. For now, it is just an extra room, and I hope to have a couple more to run a 4-5 rooms guest house.
That peace of mind is costing me, since I could have invested elsewhere. This is a luxury I deliberately chose to afford. And it is worth every penny.
Do you live in a paid for house? Is it one goal of yours or would you rather use your money for something else?
This post was featured on the Canadian Budget Binder, thank you!