Buying vs investing and renting a house

 Ten years ago, I bought a house with a twenty-year mortgage.  It has been an emotional decision and, as I am about to become mortgage free, I would like to share some considerations and costs.

 

I will look at it as an investment and compare it with other investment opportunities.

 

House bought in 2016 for 475,000. House cost in 2026: 600,000

 

Total money paid:

• Initial deposit: 150,000
• Legal cost and tax: 14,500 (1,500 + 13,000)
• Three one off over payments over years: 34,000
• Monthly payments over ten years: 211,000
• Total paid to the bank:  395,000 plus initial cost 15,000

 

Still owe: 130,000 to the bank. Interest paid: 50,000

 

My preference was to lock the mortgage as fixed interest.  First five years the mortgage interest was 2,7%, the last five years 1.4%. I have also maintained monthly payment the same from the beginning, even with all over payments. Last year I was overpaying 400 a month.  The house grew in value 125,000 over ten years or 2.3% a year. 

 

We bought it emotionally and the sellers’ agent used our feelings to full extend – we overpaid 25,000 over sticker price. This is despite that we had no ongoing chain – the seller got their money straight away, without any waiting.

 

Opportunity cost.

 

If I would invest 165,000 in S&P500 for ten years I would have 650,000 today.  For the first five years I could have save about 3,000 a year as renting was cheaper than paying the mortgage. We bought a ran down property where single lady used to live there in the retirement without much money and no help from her three kids, so any kind of maintenance was done in the past fifteen years. Built in wardrobes and bathrooms were fifty years old by the time we moved in.

 We have also invested around 70,000 in the house – replacing fence around the property, internal painting, the internal doors replacements with fire proof ones, built-in wardrobes replacement, hardwood floor, wood burner, etc.  

 

If I invested initial 165,000 and 300 a month for the past ten years, I would have 800,000 today.  Now I would have additional 130,000 to add to the nest egg.

 

 

This is a real-life example to invest in a property as alternative.  930,000 at 3% withdrawal rate would guarantee to last 30 years, or 27,000 a year. This would cover the rent entirely and no need to spend any money to maintain the house going forward.  

 

I am also budgeting 1,000 a month for life for the ongoing planned and unplanned maintenance.

 

The decision to become mortgage free is partially emotional due to the unfair dismissal (I have severance package) but also driven my raising mortgage rates. I have also been fortunate, as due to low interest rates, as I have been aggressively reducing the principal I need to pay. With high performing S&P500 and high interest rate on mortgage the value gap would be even higher.  It has to be noted that historically high inflation depresses consumer spending and S&P500 growth.

Next five-year mortgage with our loan to value of 27% is 5% a year. The bank also never reevaluated house value since the purchase.  I think this immaterial, due to very low risk on the loan. The land alone would cost more than the remaining loan.