10 February 2017

A 30 year mortgage is too long

Sonnie Bailey

My wife and I recently purchased a house. For the first time, we have a mortgage. It is the first time we’ve had debt for a long time. 

It got me thinking.

The term for many mortgages is 30 years. That is a really long time. I’m 36 now. If we took 30 years to pay off the mortgage, I would be 66. The year would be 2047. They’ll have remade the Harry Potter franchise two times over by then. 

I’m unlikely to be retired by time I hit 66. I hope to have many good years ahead of me at that point. But that’s simply too old to be finally paying off the mortgage and then trying to build additional wealth for when I’m no longer able to generate an income. 

It’s hard to predict the future, but I am pretty certain that any superannuation benefits I receive will be limited. My generation needs to have its eyes open about this. So it’s imperative that I plan for the day I’m not able to work.

Granted, owning a decent home by the time you hit retirement is not a bad place to be. My general observation while I was a lawyer working with older people was that so long as you paid off your home, you were probably okay. You could afford to go to a retirement village where the weekly payments were low and you could live off your superannuation. If you need residential care, you will be entitled to a residential care subsidy that will support you. Owning a home is better than nothing.

But personally, I want to have a comfortable retirement. So in simple terms, I want to own a home and have financial assets of a certain value to provide for accommodation and decent living expenses. 

The value of financial assets I want to accumulate is personal to me. But it is significantly higher than the value of my home. It reflects the sort of lifestyle I want to have in retirement, and incorporates a buffer for the fact that you can’t guarantee what investment returns will be, and you can’t anticipate other factors such as health or family issues.

If I wait until 66 until I’m in a position to build financial assets, it will probably too late to get to that point. 

Compounding interest works for good and for ill. The sooner my wife and I can pay off the mortgage, and stop paying interest, the sooner we can build assets which generate income. The sooner we pay off the mortgage, the better positioned we’ll be.

(Of course, I’m simplifying. I’ll be building assets by contributing to Kiwisaver, and I may make some investments while paying off my house. But for as long as I have a mortgage, repaying it will be my financial priority. Repaying debt is like making a risk-free, untaxed, guaranteed return investment. It’s an investment I’m happy to make.)


About the author 

Sonnie Bailey

In his spare time, Sonnie likes telling people that he’s a former Olympic power walker, a lion tamer, or that he is an orthodontist. He is none of those things. In reality, Sonnie is a financial planner based in Christchurch. Through his business, Fairhaven Wealth (www.fairhavenwealth.co.nz), he provides independent, advice-only, fixed-fee financial planning services. Sonnie is a “recovering lawyer”: he has specialised in trusts and personal client work. He has also worked as a financial services lawyer for many years.

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