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Mortgages... yea or nay?

A1roller

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May 7, 2015
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im not sure whether this is posted in the right section, please forgive me if not.

I'm part way through scripted and one thing I remember reading earlier on in the book seemed to me that it was quite negative towards mortgages and deeming them part of the script (MJ preferring to own his home outright).

I'm wondering whether it can ever be justifiable to use a mortgage to finance a home purchase?

I can of course understand the reasons behind a mortgage being part of the script, when people use it to purchase a house well beyond their means.

In the U.K. Housing market, it is often substantially cheaper to pay your monthly mortgage payment than it is to rent (although the margins get thin in hot markets such as London and arguably the maintenance cost of a home can offset cheaper costs) and you're also going to own an asset in the future, although this will take 25 years and for most will tie up a large proportion of their wealth in something which doesn't produce revenue.

Not to mention that the ROI on property investments in the UK is greatly increased by leveraging a mortgage product to purchase and reduces the barrier to entry for property rentals, but I understand that this leaves you open to exposure if interest rates change and your mortgage payments go up.
 

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CareCPA

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I use a mortgage on both my personal home and my investment properties. If you buy smart on both, you substantially reduce your risks.

For example, with all of our expenses, including mortgage on primary residence, we can still pay the bills with one full time salary. If we had maxed out our mortgage, we would both have to work full time, and we could not take the risks to pursue businesses that interest us.

With the investment properties, utilizing mortgages allows us to scale more quickly. As long as you are buying at the right price to rent ratio (and not for speculation), then you should be ok even in a downturn. Exceptions always apply, but aren't we here to take calculated risks?

Do I wish we could do it all without mortgages? Of course I do, but in our case the mortgages actually allow us to get where we want to be faster.
 

MJ DeMarco

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In the U.K. Housing market, it is often substantially cheaper to pay your monthly mortgage payment than it is to rent

In this case, it might be suitable for you. There also might be a case for it if the money is cheap, say 3.5%, and you know you can leverage that cash elsewhere at better returns.

Beware of "one size fits all" advice as that is not my intent in either books.You'll notice at the end of UNSCRIPTED that the money-system concept covers both, paying cash for the house or a mortgage.

I've had mortgages and I've paid cash for homes -- I like not having that payment. That said, is there a case where I might hold a mortgage again? Depends on the cost of money, my longer-term goals, and a variety of other variables.

You said it best -- a mortgage is a part of the SCRIPT when you are using it to get into a home you cannot afford. There are scenarios where it is a tool in the toolbox.
 

zerobrainwash

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I will provide my own subjective take on this as I have a mortgage too for the same reasons as yours, it's cheaper than rent and it made me save aggressively.

While on paper it looked good, I soon realized the responsibilities held me back from leaving a slowlane job as I was scared about not being able to have a consistent income. That's drawback #1.

Drawback #2 is that things break and you have to spend money, time and mental resources to get these issues fixed. Since time and mental resources are far from unlimited, evaluate if you are willing to sacrifice at least some of it.

I solved situation #1 by renting out the apartment at a price higher than the monthly payments and then sucked it up by coming back to live with relatives to whom I also pay a bit of rent but still come out on top. This gave more freedom to leave a slowlane job and someone else is paying my mortgage. Drawback #2 has not been solved yet.

The key takeaway is probably this - financially on paper it is a rational decision to take a mortgage if rent is much steeper. However, there are other aspects involved, mostly related to time and energy which are the most valuable resources you have.
 
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DrkSide

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Mortgages aren't inherently bad or good. They are just a tool that you can use depending on the situation.

We have one on our current house because it made sense. Interest rate was very low and I can make more money in my businesses by keeping the cash available for growth vs putting a larger down payment on the house.

On the other side if you have the money sitting is a bank account earning <1% interest it makes sense to pay cash for the house where your interest rate would be higher.
 

A1roller

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I will provide my own subjective take on this as I have a mortgage too for the same reasons as yours, it's cheaper than rent and it made me save aggressively.

While on paper it looked good, I soon realized the responsibilities held me back from leaving a slowlane job as I was scared about not being able to have a consistent income. That's drawback #1.

Drawback #2 is that things break and you have to spend money, time and mental resources to get these issues fixed. Since time and mental resources are far from unlimited, evaluate if you are willing to sacrifice at least some of it.

I solved situation #1 by renting out the apartment at a price higher than the monthly payments and then sucked it up by coming back to live with relatives to whom I also pay a bit of rent but still come out on top. This gave more freedom to leave a slowlane job and someone else is paying my mortgage. Drawback #2 has not been solved yet.

The key takeaway is probably this - financially on paper it is a rational decision to take a mortgage if rent is much steeper. However, there are other aspects involved, mostly related to time and energy which are the most valuable resources you have.

I think that what you're saying with drawback one is surely applicable to rent too though? Either way, you are going to need an income to pay for the home you live in unless you live in an unencumbered property, unpaid rent seems as much of a problem as unpaid mortgage payments to me?

The only difference being if you own your home and are paying a mortgage on a house bought at the top of the market which has to then be sold to recover arrears at the bottom of the market it could bankrupt you, but I guess this wouldn't be applicable to most people at present who bought after 2008.

Point 2 is a very valid one though.

In this case, it might be suitable for you. There also might be a case for it if the money is cheap, say 3.5%, and you know you can leverage that cash elsewhere at better returns.

Beware of "one size fits all" advice as that is not my intent in either books.You'll notice at the end of UNSCRIPTED that the money-system concept covers both, paying cash for the house or a mortgage.

I've had mortgages and I've paid cash for homes -- I like not having that payment. That said, is there a case where I might hold a mortgage again? Depends on the cost of money, my longer-term goals, and a variety of other variables.

You said it best -- a mortgage is a part of the SCRIPT when you are using it to get into a home you cannot afford. There are scenarios where it is a tool in the toolbox.

Yeah I kind of thought that this was what you were getting at with the mortgages, using a mortgage product not as a tool for gross consumption but as a tool which would benefit you financially. That being said, most people in the U.K. Wouldn't be able to afford their home without a mortgage, even those who were relatively conservative in their purchases so what constitutes too much home?

The financial benefit of using a mortgage for an investment property seems fairly obvious at the moment.

Take this example of a home bought by a friend recently and the difference in ROI based on two different scenarios.

Scenario 1 (unencumbered)
Purchase price: £45,000
Refurbishment cost: £25,000
Purchase fees: £2,500
Income (rent minus agent fees and repairs): £5,280
Yearly ROI: 7.3%

Scenario 2 (mortgage)
Purchase price: £45,000
Refurbishment cost: £25,000
Purchase fees: £2,500
Remortgage @ £85,000 valuation after refurb, yearly mortgage cost at 5% interest rate and 75% LTV £3187.50
Cash left in deal: £8750
Income (rent minus agent fees and repairs): £5,280
Net income after mortgage: £2092.50
Yearly ROI: 23%

A much higher ROI with the mortgage but obviously you are vulnerable to interest rate rises.

Also mortgages in the U.K. require you to lead a scripted life (25k pa income from a j.o.b and owning your own home).

Not sure where I'm going with this reply, but I guess I'm agreeing with you that it depends?
 

zerobrainwash

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I think that what you're saying with drawback one is surely applicable to rent too though? Either way, you are going to need an income to pay for the home you live in unless you live in an unencumbered property, unpaid rent seems as much of a problem as unpaid mortgage payments to me?

You are right, I made it too much of a self-study. It works for me as I can rent a room cheaply from relatives. An unpaid rent is a risk for sure. I am mitigating some of it by renting the apartment through Airbnb only. Anyhow, it looks like one of those things where you can find really good arguments for both sides, like Windows vs. Apple. In the end, whatever you choose will probably work out just fine as long as you are smart about it i.e. keeping focused on minimizing expenses for rent.
 

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I just bought a house with a mortgage. The bank paid me negative points to drive up the long term interest rate. I plan to only have the mortgage for a few years or less, so the bank will never see the ROI for the negative points they paid. Meanwhile, in the United States, mortgage interest is deductible. However, the mortgage process itself post 2008 is a tremendous pain in the a$$.

Author James Altucher advocates renting and never owning a home. However, he lives like a vagabond. For the most part, I see a thirty year amortization with minimal principle paid off within the first several years of payments as a scripted trap. It used to be the American dream, but that was when houses were almost guaranteed to appreciate over time.

Investment advisors always tell you to have a mortgage and invest the funds elsewhere. However, investment advisors are part of the system. They get paid to tell you that. They live like parasites off of your money. Personally, the prospect of being mortgage free cuts one more cord of control that other people have over your life.
 

Get Right

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However, the mortgage process itself post 2008 is a tremendous pain in the a$$.
This is the exact reason I will never have another mortgage.
 

CareCPA

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This is the exact reason I will never have another mortgage.
I'll probably still get more mortgages, but I did think I would have to give up a kidney or a first born child the last time I got one.
 

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This is the exact reason I will never have another mortgage.

The level of detail they went to on this last round was insane. My last mortgage was pre 2008, and literally they called it a "cup of coffee" mortgage because in the amount of time it took you to drink a cup of coffee, they approved you. Those days are not coming back any time soon. This mortgage examination was more thorough than a proctology exam.
 

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A1roller

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Personally, the prospect of being mortgage free cuts one more cord of control that other people have over your life.
This is key also, the ability to say f*ck you to mortgage lenders is a great position to be in.

When you have a mortgage, you may get a better ROI from an investment property, but you also surrender control over that ROI which becomes vulnerable to interest rate changes.
 

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