Unless you have been living in a cave the last few years you would have heard a lot of talk about tiny homes, minimalist living and mortgage free lifestyles. The key point of this subject is to create a simple living alternative to have a debt free lifestyle and enjoy an uncluttered living space.

To achieve this, you can either:

  • Work hard, save hard and put your extra money into paying down your mortgage or;
  • Live in a simple/tiny home that requires little to no debt

 

First the Upside

When you do take out a mortgage you might see that over a 30-year term you could be paying roughly the value of your home in interest alone! So, if you bought a house worth $800,000 with a deposit of $80,000 and a loan of $720,000 at a rate of 5.5% paid off over 30 years, your total interest cost would come to $751,709. This is what is paid to the banks to allow you to purchase your own home – who are they to charge that kind of money?

This is enough to make a lot of people want to turn to the simple life. There are less pressures, you don’t have to fork out for unexpected costs and you don’t have a mortgage over your head.

If a simple lifestyle is what you are after and you are happy to do what it takes to go mortgage–free then this is a good option and we want to help you. There are so many benefits to this option with enough publicity about it, so for this discussion I will play devil’s advocate.

 

The simple life now might not be the simple life in 10, 20 or 30 years’ time. If you want to eventually settle down, not have to work and live comfortably in a space bigger than 15 square meters then a good option is to make your money work for you.

 

How you choose to use your money

Consider an investment that gives you a net return of 8% a year.  This means that $1 invested today would give you $10.06 in 30 years’ time. That’s $9.06 for not doing much at all. Now what if that $1 cost you 5.5% on a home loan? After 30 years this would have saved you around $4 in interest. So, which would you choose? Option A: Save $4 in interest or Option B: make $9 on an investment?

Or

You could put aside $1 a month to an investment that earns 8% a year. after 30 years you’ve got $1490. (You will need to put in more than $1, but we’ll roll with this one for now). On the other hand, you can put that $1 into your mortgage as an extra repayment and save $553 over 30 years. It is still a significant saving, but your $1 is not working as hard as it can be.

 

How you decide to live

Now, think about the simple living / small house option in isolation. If you have access to $80,000, you could build a small dwelling and move it onto a property or do up a boat and live on the water (I like this one). You won’t have any debt (or maybe just a small loan) and you won’t need to deal with the added expenses of home–ownership. The question is, what will the value of your dwelling be in 20 or 30 years’ time? Will it have increased or decreased in value? Can you sell it? Would it still be standing (or floating)? Can you even get it valued?

On the other hand, you could buy a house (a conventional house) valued at $800,000 with your $80,000 as a 10% deposit. You would be able to enjoy the benefits of living in your own home with your own land.

If property growth continues as it has been, your home will be worth around $3,173,148 in 30 years. Factor in 10% for house-related expenses and $751,709 in interest and you come away with $2,104,124. Your $80,000 just grew a whole lot bigger. Now the banks don’t look so bad anymore. At this point you could be debt-free and you could choose to remain, sell and downsize or rent and use the sales proceeds as part of your retirement. There are plenty of options to explore. On top of that, you can access this equity along the way as your property value increases and use that equity to buy more property. So, who says your home can’t be an investment?

 

Some points to consider:

  • You do not have to choose one option over another. You could live simply and invest. In fact, reducing the cost of your personal home which doesn’t attract income can free up capital for your investment which can bring in an income. You can also buy the land and put a small house on it, or simply use this option as a stepping stone. This space is open to your creativity.
  • We will always work on a strategy to help you save on interest costs.
  • The benefit to the investment option only works if you actually invest the money. Any investment will also expose you to market fluctuations and historical returns may not continue as they are.
  • There is no right or wrong answer here, your decision should be based on your desired lifestyle choice and the goals you want to achieve. Here are some questions you can think about:
  1. When do you want to retire and what does it look like for you?
  2. What does success mean to you?
  3. Do you want to leave something behind for your family?
  4. Do you want to help your children with university or buying a house?
  5. What is your tolerance for risk?
  6. How much space do you really need?

Whether you want to create a simple living solution or grow a property portfolio, we want to see you reach you goals.