Home ownership makes sense if it’s part of an overall plan, but not if it’s your whole plan. Putting all your eggs in the real estate basket is just as bad as stashing all your money in any other single investment option. Just because it’s your home doesn’t make it a smarter choice.
People can convince themselves of anything. And nothing is a better example of this than the folks who squeeze themselves into too-expensive homes and then have no money to save for the future.
If you’ve rolled out the standard, “my mortgage is a forced retirement savings plan” it’s a sign that you’re delusional. While your house will likely appreciate over time, and that appreciation can be cashed out later on, you’re going to pay a whopping amount on interest on that mortgage, so the whole gain isn’t “profit.”
People are loathe to do the math on their house-as-investment strategy. With heads firmly buried up to their shoulders in the expert advice of “renting is a waste of money,” they’re good with guestimating their profits. Delusional. If you want a true picture of how much your investment has grown, you’ve got to factor in the interest on your mortgage and the carrying costs of your home. Time to add up all that interest you paid, the property taxes, maintenance and insurance costs, and including them in your “costs” before you decide exactly how much you actually “cleared” in gains on your home. Keep in mind that you will have to sell the house to realize your profit, so there are the costs associated with selling too.
And there are significant costs associated with home buying that most people don’t bother to think about until the bills start rolling in: the appraisal fee, home inspection fee, land transfer fees, water/septic tests (if you’re outside a major city), reimbursement of prepaid property taxes, costs to set up new accounts, and legal fees. This can be anywhere from 1.5-4% of the price of the home you’re buying.
Sure, the experts say, “it’s better to buy than pay rent and someone else’s mortgage.” But home-ownership is nothing like renting, and if you go into the process with this delusion, you won’t be prepared for the higher costs of living. Think utilities, maintenance costs (yeah, ignoring them doesn’t make them go away), property taxes, insurance, and myriad other things that will eat into your cash flow, and derail your savings. According to the Stats Man, homeowners spend $57,649 a year compared to renters who spend $32,536, which is a significant difference (over $25,000). Just being able to make the mortgage payments isn’t enough. Since home ownership comes with the constant need to fix or upgrade so you don’t end up with a dilapidated asset, there’s a whole whack of time and energy that also goes into the mix.
My favourite delusion of all is when people tell me, “The bank wouldn’t lend me more money than I could afford to pay back!” Ha! The bank exists to make money, and the more interest you pay the more they make. They could care less if they strap your budget tighter than a nun’s knees. And even after they’ve sold you too much mortgage for your cash flow, they’ll a) want you to tack on a line of credit just in case, and b) they’ll keep telling you what an idiot you are for not saving for your retirement.
Then there are the delusional folk who wipe out all their savings because they will do ANYTHING to get into a home of their own. They take money from their retirement savings plans. They’ll tap their TFSAs. They annihilate their emergency funds. Once into a home, expenses start cropping up but they have no safety net in place to see them through. If buying a house gobbles every red cent you’ve managed to squirrel away, that won’t end well.
Home ownership isn’t something you do at the expense of the rest of your financial plan. And it should NOT be seen as a badge… something you measure yourself and others by. Home-ownership is a lifestyle choice. Home ownership is great, if you do it right. Buy a home you can’t afford, commit to payments that stress you out, and you’ll rue it. Your home won’t be something you can enjoy, it’ll be an albatross around your neck.