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Mortgage angst

I had a sudden moment of philosophical mortgage angst yesterday morning on the train. Reading the paper I found myself pondering if I was doing the right thing, signing up to borrow ARGH thousand dollars, to spend the next 25 years paying it off. Working for The Man, money goes in, money goes out… is this all there is?

BOOM! Mortgage, working, time wasted, life gone, mortality… it all hit me. I’m about to turn 35… my life is now mapped out until I’m 60. Should I be doing other things? Making more of my life? (Indeed, what if it turns out this is all there is to existence? Whoa… heavy stuff!) Enjoying my family, friends, hobbies more? Finding some entrepreneurial superJob that will earn me zillions (or at least pay off the damn mortgage) with little effort?

I was brought back to earth as the train pulled into Toorak, and a work colleague boarded and came over for a chat.

Pondering it some more later on, I know I’ve wanted to own my own house for a while, and I’ve snagged a good one, where I know we’ll be happy. I’ll pay it off as quickly as I can, maintain the short working Tuesday thing as a nod to the work/life balance, keep trying to ensure my work and extracurricular activities are challenging, stimulating and making a difference.

By Daniel Bowen

Transport blogger / campaigner and spokesperson for the Public Transport Users Association / professional geek.
Bunurong land, Melbourne, Australia.
Opinions on this blog are all mine.

11 replies on “Mortgage angst”

I recall having that angsty moment myself about 13 years ago LOL. That’s when we bought our house. I know, it’s a scary feeling to draw all the dots at once and see your life sketched out in rough for the next oh, 30 years. We’ll likely be here still in 20 years, I’d bet, with the kids (hopefully) moved out.

Good luck and I hope you win the loto (lottery – if you ever even bother) and pay it off sooner than later. At least the money is going towards something you own rather than renting all your life, is my thought.

Isn’t it funny how different people have different perspectives. I actually have two mortgages (well one and a half as one is ‘shared’) and didn’t have any of these angsty thoughts. The ‘shared’ is my current abode and the other is a rental that I got ‘at the right time’ before the most recent real estate boom, so it’s all worked out pretty good.

BUT my point is that I am currently having the same type of angsty feelings in regards to having children (probably a bit more than just momentary!!). Something that you have already accomplished and are obviously very proud of. I wonder if you had similar feelings then? ‘Cause I’d say a fair bit of life mapping goes on in that situation also.

I reckon you’ve done damn well and it’s a great move. Looking at the positives, once you move in, you can put pics on the walls and make holes with pin tacks if you want and repaint the bathroom and rip up that carpet and… oh whatever you feel like really! It’ll be brilliant! Very well done to you Daniel!

Extrapolating past growth trends (which is a hazard) consider that in 15 years time your house (which is similar to the Melbourne median) will be worth over $1m.

Should you wish to sell the house, you will pay no capital gains tax. No other investment is tax-free like this.

Should you qualify for a part or full age pension, note that the assets test is tough on renters and liberal on homeowners. Even if you live in a $2m mansion, you still get the age pension, whereas if you had a fraction of that in investments you get zilch.

Now onto the mortgage.

Even if you paid ZERO principal off the mortgage, your mortgage will get smaller over time because of inflation. The amount owing is dropping in real terms by 2-3% per year minimum.

Ditto for the repayments. Unless interest rates rise payments will get 2-3% easier each year.

Generally it makes sense to make extra payments for home mortgages, but not for investment loans where the interest is tax deductible.

A 25 yr $300k mortgage @ 7% is approx $2100 per month. Increasing it to $2500 per month (ie an extra $100pw) cuts 8 years off it (to 17 years). Paying $3100 per month (ouch!) gets it down to 12 years. But 100% of any extra payment is principle not interest so the debt is shrinking rapidly (5% pa or better).

By the time the term is down to 10 years, it gets harder and harder to make much headway. If one had that much spare moolah then investing it and/or downsizing work might also be attractive.

Oh the other thing is that when the amount owing is shrinking by (say) 5% pa and the house is rising by 5% pa (which is conservative) your equity is spiralling upwards, without one having to do any more than paying the mortgage.

Because there are not one but two lots of compounding at work the growth is exponential, and it would not be uncommon for annual growth in wealth (or equity) to exceed one’s annual job income after maybe 10 years.

I haven’t even covered the non-financial side like security of tenure, absence of landlord inspections and reno potential.

‘Buyers remorse’ is common. You’ve made a good purchase that fills your needs. So don’t let it bug you as the positives (as outlined above) are so overwhelming.

Blondie, rental yields are about 3-4%, interest is about 7% and other costs are about 3%.

Thus unless they bought at least 6 years ago or paid cash, the rent would cover less than half the landlords costs.

Right now I am more than happy to pay mine a yield of 3.5% on the current property value, especially if I can use the saving to get double or triple returns somewhere else.

Rent+Invest or BuyOwnHome are both good strategies and are 1000% better than renting and not investing. Home ownership (along with age) are two major predictors of a person’s wealth and are ahead of things like job, education and family background that most people think are key.

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