An excellent discussion emerged from my post about whether or not debt should be part of your budget, and that is:
Is your mortgage a form of savings?
I am firmly, strongly in the camp of: NO it is not. It is a debt.
Let me explain why.
1. YOU DON’T OWN THE HOUSE YET, THE BANK DOES
Some argue that paying into a mortgage, is forcing you to save your money because it goes to interest but it also goes to the principal of the home, which will (hopefully) increase in value in the future and be a fixed asset in your portfolio.
I can see the logic of this being true, as you are paying into the principal and you will own the house in 25 years (or eventually), and it is an investment you can then re-sell to release the locked value.
It all sounds great but…. you don’t own the house yet.
The bank does.
To put it simply, if you were to miss a mortgage payment, the bank wouldn’t say:
Oh Jane, you’ve been such a great saver, paying off this mortgage and debt that you incurred that we are going to give you ALL the money you paid towards the principal back in cash, and take the house in exchange.
No no no..!
The bank just takes your house because you defaulted on the payments to re-sell and get the rest of their pound of flesh back, and that’s the end of that.
If the bank wanted to get their money back today, where would you get the cash to pay them back?
It’s locked in your house, right? And you can’t sell half a house.
You have zero actual savings until your mortgage is gone.
2. A MORTGAGE IS A DEBT, AND A DEBT IS A FORM OF DELAYED SPENDING
Don’t have the cash now? What do you do? Put it on a credit card, line of credit, or mortgage?
Well, you spent the money then, didn’t you?
A house is slightly trickier because it is an investment in the future after you’ve paid off the house completely and it becomes a fixed asset in your portfolio to hopefully appreciate in value, but you could say the same thing about any other consumable.
Why not invest your money in buying antiques by taking out a line of credit?
Designer clothes from a defunct designer’s line, all in the hopes of it being worth more than what you paid for it today?
It’s the same thing.
Paying money into a mortgage (debt) is a form of delayed spending because you didn’t have the cash on hand to pay for it 100%.
You borrowed from the bank to spend it on buying a house to live in. Yes, it is practical because you have a roof over your head, you can presumably resell it in the future to clear the mortgage and fees, and perhaps pocket a little profit from doing so, but at the end of the day, you spent money you didn’t have.
3. SAVING MONEY DOESN’T HAVE TO COME IN THE FORM OF DEBT
You could simply just save money and not get a mortgage (a debt) to do so. Why not just put the money into your bank account and invest it?
You don’t need to incur any kind of debt to save money.
I do agree that unless it becomes a bill some people can’t fathom saving money without spending it on something, which is why a mortgage COULD be seen as a form of forced savings, but … that just makes no sense whatsoever.
Get a mortgage, buy a house, but don’t be fooled into thinking you own anything or have any savings until that debt is gone.
You’re just paying the bank for the privilege of living in their asset.