The latest generation of homeowner is far more likely to borrow against the value of their home, to buy stuff that does not increase in value, like a car. Is this right or wrong?
Grandpa says it’s wrong, your dad’s done it though, and you’re all about it – but should you be?
Getting into more debt is dangerous…duh. You still need to repay it in the end. For most of us who’ve purchased our homes in the last 10 years though, chances are you’ll never actually repay your mortgage through earnings. It’s insane I know and you may disagree, but here’s an interesting study conducted by BNZ, where a ⅓ of current mortgage holders are currently aged 65. Imagine your state of affairs in 25 years time when you’re about to retire?
There are two simple forces at work here, pushing you towards this reality of being in debt at retirement. Firstly, you’ve paid a crap-load for your home – In fact, if you’re in Auckland you paid the most that anyone’s ever paid for it. Secondly, if you’re under the age of 50, chances are you’ve already ‘topped-up’ your mortgage to buy something else (renovations or credit card consolidation included). So whether or not it was on purpose, you’re hooked on finance-crack, and you like it!
So to decide whether or not this is right or wrong for you, it’s wise to understand what ‘debt-paradigm’ you belong to. Specifically, do you plan on retiring your debt through earnings, or through an eventual property sale? If you plan on becoming debt-free by repayment of your mortgage over time, then borrowing anything more on top of your current mortgage isn’t wise. Borrowing to purchase a car would be a dumb move then. If however, you think you’re eventually going to sell the current home and downgrade to the country, then giddyup, you’re going to sell it anyway and if it’s Auckland well, chances are the capital gains will take care of it all anyway. In fact, most successful property investors don’t retire debt through earnings, they eventually sell off a few properties when they approach retirement age.
So let’s say you’re both – you’re a lover and hater of debt (most fall into this category) – there is another way to determine if it’s smart to borrow against your home, to buy a car. Let’s say your current car is a 15 yr old BMW. Chances are it costs you around $1,200 per month on average, due to fuel and repair costs. Let’s say you sell it, get $10k, borrow against the value of your home, and buy something different. If you could save the full $1,200 per month (by not having that ol’ Beemer), what would it look like if you borrowed against your home, an amount of money that would cost $1,200 per month to repay?
$1,200 per month = a loan of $115k *
$10k is the value of BMW you just sold
$125k is the potential purchase price.
So here’s the thing, all cars are expensive to run right? Wrong! An electric car has virtually no servicing costs or running costs **. You don’t have to be a greeny to go electric – we have, and we’re never going back! For $125k you could purchase a Tesla Model S, which could go about 1 million kilometers before you’d have to change the battery (not to mention the fact that it would be the fastest car on your street!).
So there you go – It’s okay if you don’t know what your ‘debt-paradigm’ is. It does make sense to put your next car on the house, as long as it’s an electric car. The savings in running costs will offset the holding costs over 10 years when the mortgage required to purchase it gets repaid. Did I mention I have a slightly used electric car for sale?
If you enjoy reading these blogs and would like to see short videos of similar tips and hints you can watch the video here and while you’re at it, share it with your friends!
*At 4.5%, a 10 year mortgage on $115k would cost $1,200pm
**Maintenance costs on an electric motor are virtually non-existent, and in Auckland, it’s possible currently to charge your car for free courtesy of Vector.