Martin Hawes: Enforced savings are a homeowner's advantage

Photo / Kenny Rodger

Opinion

One of the good things about home ownership is that it provides an enforced savings plan. If you own a home with a mortgage you will have to make the payments. Every dollar you pay off the mortgage is a dollar that is added to your net worth.

At present you could make a good financial case for renting rather than owning a house: there will probably be very little capital gain in the next few years and renting a house is around $7000 a year cheaper than owning it - that is, someone paying rent will have perhaps $135 a week more cash than someone paying a table mortgage, rates, insurance, maintenance, etc.

What is important is what the renter does with that extra cash. To be better off than the home owner the renter must do something sensible with the extra $7000, and by "sensible" I do not mean spending it.

Although renting may be better financially, when you bring common behaviour into the mix the advantage evaporates. You can't look at finances solely as a series of numbers - human conduct and our little foibles have to be brought into account, and in this respect the enforced savings plan that is a mortgage is a great advantage.

Few renters save the extra $7000. In fact, I would guess that in most cases renters do not even know that they have more money. The temptations of Newmarket or Amazon are so great that, without a good spending plan and a good bit of discipline to execute that plan, the extra cash just goes.

Homeowners may also spend everything that is coming in but at least a part of that adds to their net worth by paying off their mortgage, even when the property does not grow in value, because the extra cash they might have had is taken off the mortgage. The renter spends everything and has nothing to show for it; the owner spends everything and has a smaller mortgage.

The big strategic decisions we make in life (eg, renting or owning) come into stark relief with time. It may be a small difference of circumstances that tips one person into owning and another into renting but mortgage reduction enforced by a bank will magnify that difference many times over. By the time the renter and the owner turn 40, there will be a big gap. The renter will have had a better lifestyle so had better have some good memories - he will be a long way behind his home-owning cousin.

* Martin Hawes is a financial adviser. His disclosure statement can be found at www.martinhawes.com