My wife and I own a wonderful house. It’s a big house on a big section, in one of the best locations I can imagine. We can accommodate a huge amount of people in this house (this weekend, we have six adults and five children under the one roof). It has a pool and we have a spa. If we wanted to, we could park 7 cars comfortably.
We’re proud of our home.
I’m less proud of the size of our mortgage.
We could have purchased a house for half of the cost of our current house. This would have at least halved the size of our mortgage, and more than halved the length of time it would have taken us to repay our mortgage.
However, we made this decision with open eyes. We realised that we were prioritising living in this house over other goals, such as expediting our financial independence and/or our retirement lifestyle.
Let me use some numbers to illustrate. These don’t exactly reflect our personal situation – they are illustrative only.
Let’s say my wife and I are both 35 years’ old. Let’s say we can afford to pay $1,000 per week ($52,000 per year) in mortgage payments and/or building wealth. Let’s assume a constant interest rate of 5% per annum for our mortgage and the same rate of return on any subsequent investments.
And let’s say we have a choice between buying a house that will require a mortgage of $300,000 and a house that costs $300,000 more and requires us to borrow $600,000.
If we purchase the first house, we can repay the $300,000 mortgage within 6 years. We’re mortgage free by age 42. If we continue to contribute $52,000 per year to wealth creation, we hit $1 million worth of income-generating investment assets by age 56. We get to $2 million by age 64.
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If we purchase the second house, it will take 17 years to repay the $600,000 mortgage. We’re mortgage free by age 53. If we continue contributing $52,000 per year and generate a 5% return, we’ll hit the $1 million mark at age 66.
By comparison, at age 66 with the first house, we’d be at approximately $2.3 million. The difference from buying a more expensive house results in a difference in investment assets of $1.3 million by the time we reach 66. Admittedly, we should own a more valuable home (hopefully it’s more valuable by at least $300,000). But by buying the more expensive house, the difference in our net worth is likely to be $1 million or maybe less than if we’d bought the cheaper home.
That’s a pretty substantial difference. Going with the cheaper house can lead to being financially independent, and potentially retiring, many years earlier. Or spending money on other things that could increase the quality of our life.
My wife and I made the conscious decision to go with the more expensive house. It’s a legitimate decision. We love this house. This is the house we want to raise our children in and we are excited about spending the next 20 or 30 years here. We can afford to make these trade-offs. We were prepared to pay this price to live in the home we want to live in, during our one go at life.
Other people might make a different decision. Their decisions would be legitimate too. When making decisions like this, it is a matter of making decisions that align with your personal values and what you want out of life.