7 ways to effectively build net worth with your house
Hello fellow Protagonists,
In the previous Mindful £100K post, I shared with you where my £100K net worth came from. £71,776.74 of this was from capital in my house so I feel its something we should consider first.
For many of us our mortgage/rent is likely to be our biggest payment each month. It has the potential to rinse a lot of our money but if done mindfully its an opportunity to boost our net worth greatly.
I do not see the houses we live in as assets in the traditional sense, as for most of us they tend to take more money out of our pockets than what they put in.
The majority of us that decide to purchase a house will do so with a mortgage. Mortgage comes from the Latin Mort (Massive) and Gage (Debt) Don’t let labels fool you, a mortgage is just a pretty name for a debt. They didn't offer Latin at my school.
Here are tips to help you effectively build your net worth with your house. For those who are currently working towards buying your first house, I will add some additional information at the bottom of the post though I do plan to cover this in more detail at a later date.
1. Having a house that has what you need
If you are planning to buy a house as a couple with no children why do you need a 4 bedroom house? If you're planning to live on your own, ask yourself if you really need a second toilet.
OK, so we may want to add humans to the house at a later date but we can potentially move to somewhere more suitable when our situations change. Depending on how we are hoping to add these humans, it may not be in our control how long this could take.
In a previous post we covered the term Lagom, which roughly means "Not to little, not too much". Buying a house to fit your current needs could save you a small fortune and sometimes we just have to compromise with what our priorities are for our house (a larger garden or a drive).
2. Having a house that you can afford
This means a house you personally can afford not what the mortgage adviser thinks you can afford. If I followed the top amount the broker was willing to sign off, I would not have a life outside, Covid or no Covid.
I personally made a rule and aimed for my repayments to be no more than 25% of my net monthly income. This gave me room to pay for my other expenses and a little wiggle room in case of any increases in future interest or unplanned costs.
A house is for you to enjoy, not to impress others. Other people are probably too busy thinking about their own homes anyway.
3. Keeping the mortgage length as short as you can
Hands up who wants to be 70 and still paying off a mortgage. We may not be thinking about this right now but it could be the defining factor on being able to retire or not when we do get to that point.
Extending the length of your mortgage could be cheaper right now but can mean being far more expensive in the long run. The longer you have a mortgage the less that is paid off your debt at the beginning and the more fun compound interest has on your purse/wallet/coin pouch.
When we come to remortgage, if you were always used to and comfortable paying £500 a month then keep paying that when you remortgage by reducing the time left on it further. If we managed on £500 before it shouldn't impact on our quality of life in that sense.
Shorter terms will increase your net worth faster.
4. Avoid interest only mortgages if your aim is to build wealth
In a sense this is similar to renting except you may get to see appreciation of your house over time with the housing market. I am making a particular reference to the house we live in here remember. I am no expert in renting properties but do hear that interest only mortgages are used by some landlords in this situation. Don't take my word for it though, I know sweet FA.
Focusing on paying off capital reduces the costs down the line, frees up money to invest in other things if you want to, or just makes life feel that little bit more relaxed.
5. Pay down your other debts
A mortgage is so much easier to pay if we do not have other additional credit cards, bank loans or car finances going on at the time. This spare cash could even be used to overpay on your mortgage if you wish.
This is also a key point for someone who is trying to build a deposit up. This is surprisingly difficult when you have a new car to finance. I made that mistake myself so can give this one as a gift from experience.
6. Take current interest rates into account
Buying a house during a period of low rates can become a trap down the line. Sure you can make the payments at a 2% interest rate, but what about 5%, 7%, 10%?
Going by £200,000 on a 25 year mortgage, this would leave a monthly payment of £848, £1169, £1414 or £1817 respectively. Suddenly becomes no joke right. £1000 more for no additional benefit to your net worth. It will pay for a nice new varnished table in a board room somewhere though.
7. Over-payments build straight on your capital
This is how you hear of people who manage to pay off their mortgages in 10-20 years.
It even makes sense to overpay whilst interest rates are low so that when they eventually increase, we will take less of a hit.
I did not personally overpay but am considering it moving forward. Read your policy to avoid charges. I know my current mortgage allows 10% in over-payments each year. Very unlikely to get anywhere near that mind.
Getting a deposit together
Building a deposit can be a long process which can test our ability to stick to a longer term goal and stare at some of the largest balances we have had in accounts without spending it on something shiny.
Aiming for the old fashioned 20% deposit is a good idea if you can. Government schemes will come and go, just be mindful of what you are signing yourself up for. Getting a property with a 95% mortgage means you can move into a house for a far cheaper initial price, but interest is being accrued regardless and it only takes a small downturn in the housing market to suddenly find yourself in negative equity on your house (you owe more than its worth). Squeaky bum time.
When focusing on net worth it might actually be a financial benefit to continue to wait and save for a larger deposit than to move in as soon as you can. With a larger deposit you could get better rates on your mortgages.
I realise that we will all have our own situations but after a year of renting I moved back in with my family to save up for a house deposit. I didn't take this as serious at the time and it ended up taking me years. I believe with focus I could have done it in half the time.
Also home ownership isn't for everyone and that's fine. There are plenty of other ways to build net worth.
Go forth and use these principles to help turn your home into a net worth stacking machine!
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