For most of us the single biggest purchase and financial commitment we undertake in our lives is the roof over our heads. The recent Global Financial Crisis was triggered by the abuse of the housing market. Greedy lenders cashed in on unwary buyers with no-money-down offers as bait on the one hand while collecting insurance payouts from defaulters on the other. Nice while the music played until the Fat Lady sang. We all know who picked up the tab after that.
The worst thing one can do is to buy the house of your dreams with a mortgage, the word itself derived from the French word ‘mortir’ meaning ‘to die’, so mortgage means a debt until death. If you spend all your working life away from the house paying it off, by the time you get to enjoy the fruits of your labours with a meagre pension looming, then five-star poverty has arrived.
There is a simple rule that can prevent this from happening. It’s called the ’10-10-10′ principle whereby property is purchased with no more than 10% deposit, no more than 10% interest and at least 10% below market value. This provides a workable buffer for downturns as the equity will balance the interest so that a default won’t result in bankruptcy. At 10% interest in one year on a $500,000 property, $50,000 in mortgage repayments won’t even have reduced the loan by $1. Scary stuff, but we saw housing loans at 18% in the late 1980’s.
In the same way that we saw retirees superannuation accounts decimated by so-called financial planners, putting all your eggs in one basket with a massive mortgage is a bit like Bruce Willis standing in the middle of Harlem wearing a sandwich board declaring ‘I hate blacks’. A disaster waiting to happen.
To see the quality of family life eroded by a brick mausoleum is an unnecessary tragedy, the original objective having turned turtle into becoming a crushing weight instead of a boon, a dream turned into a nightmare.
In our consumer-driven society, food labelling laws and warning signs on tobacco packets are a tilt at providing some consumer protection, perhaps our front doormat should read ‘Caveat Emptor’ instead of ‘Welcome’, the risk of outstaying that greeting being too great.
Rather lose interest in the house than on it.