A few years back, I got it into my head that I would pay off my mortgage and live for free.
All that money I was saving and putting into shares? Forget it. I would channel all those extra pounds at my mortgage principal until I owned my house outright. Once I did, my living expenses would be practically nil and work would be optional. A paid off house - it was practically magic!
But this plan didn’t pan out, because a year or so ago my wife and I realized that our house just wasn't right for us. It was too small for our growing family, and it was old and needed constant fixing. All that fixing meant extra money spent and more time away from the family fiddling with pipes and wires.
So a few months ago, we sold our house. We're renting right now as we look for the right house, and I've had some time to think through my original plan. A paid off house – is it magic? Really?
When I sold my house I received a cheque with my profits. My house did rise in value in the thirteen years I owned it. But when I look at the investments in my ISA, I can see that they rose much, much more over that period. It's just a fact. And that doesn't take into consideration the fees; it turns out, selling a house is expensive. After the money spent making it "sales-ready", and the percentage paid to the estate agent, I'd say about 7% of the total sale price – not just my profit – disappeared in a puff of smoke. Compare this to selling a traditional investment, which may cost a few pounds as a transaction fee.
But what about that paid off house? What about living for free? Isn't that valuable enough to counteract the high fees? Well, maybe. But the more I think about it, the more I realise there is no magic to a paid off house. Consider that the average home in the U.K. costs around £225,000. If I had this £225,000 invested in the markets, it would return value to you, either appreciation or dividends. If you have this money invested in a paid off house, it returns value in appreciation and in the rent you don’t have to pay, which is like an invisible dividend.
You could theoretically have that £225,000 in the markets and withdraw a bit each month to subsidise rent. Studies show that, with a given chunk of money, historically you could withdraw 4% the first year, then continue on like that and never run out of money. On £225,000, this is about £9,000 per year, or £750 per month.
To state it more clearly: if the value of an average home were instead invested, it could pay its owner £750 per month for decades. And this investment, unlike a house, will never spring a leak in its roof.
The thing is, while the maths on this check out, it would feel strange to withdraw money from investments to subsidise rent or a mortgage. But it wouldn't feel strange to live in a paid off house – millions already do. But it's important to note: these are basically the same thing.
So while I will probably own a house again, and I will want to get it paid off eventually, I'm not going to treat it like some magic fix to my finances. I'll put some extra pounds against my mortgage, but many more in traditional investments, and treat my new home as what it is: just another - non-magical - investment.
Photo - Andrew Buchanan