Most people are unaware that their home is the most valuable tool available for creating wealth, yet for most it will be their biggest liability, and for a large number, a financial nightmare.
Contrary to most people's beliefs, the house you reside in and make regular
mortgage payments on is in actual fact a liability. Yes, we've been told all our lives that it is an asset, and that is correct, but it's not your asset, it's the banks asset!
Until such times as you sell your house for a profit, or your house is generating an net income, above all costs including repayments, taxes, rates, maintenance and so on, it will be a liability to you.
The reason it's the banks asset, is simple. While you are making
mortgage payments on your house, a very large chunk of those payments is interest, and this interest is the banks income. The average home loan recipient will eventually pay back around 3 times what they borrowed, after tax, so it doesn't take a rocket scientist to work out that the banks are making huge profits from your house. Therefore, your home is an asset to the bank, or for a better description, an income generating asset.
We are taught to go to school, get a good education and get a good job. We are also conditioned to believe what will make us happy. So for most of us this means, get married, buy a home, have children, buy cars and other material possessions, have a 2 to 4 week holiday once a year, and at the end of a 40 to 45 year period, we will be able to look back, reflect and say, well done, I have had a good life.
Unfortunately, there are several catches. To fund this sort of life, you need
debt. We are also allowed to accumulate this debt at a record rate. We are not educated as to the implications of accruing this debt, and what's worse, all these things don't really make us happy. Being in debt, working several jobs, not seeing your children when you want and losing sleep don't make people happy. Then at the end of the whole journey, there is a 99% probability, you will not be able to fund your retirement, at least not to the lifestyle you were accustomed to.
So when you do finally retire, what are you going to say? Oh, I own my own home, so sacrificing my relationships, my health and my lifestyle was worth it. I should hope not! This biggest problem I see with this whole scenario is that we are teaching our own children to do the same thing. I could not fathom for even a second, wanting my own children to be a slave to money for their whole lives, only to pass that on to my grandchildren.
For the purposes of this article, there are several classes of home owner/buyer - The first home buyer looking to purchase their first home, the young family who have been making repayments for 1 to 10 years, the older family who are past the halfway mark of their term, and the retirees.
The first home buyer is for the most part, in a relatively neutral position. They are only looking to get into their own home, start a family and get stable employment. That's okay, but they need to ensure they are looking ahead, and this is where they are vulnerable. If allowed, they will be conditioned all too easily by the banks and the credit trap. Their first home loan is not the biggest problem, but it's what comes with it that is. They will get access to so much credit, and because of the instant gratification syndrome, they will amass too much debt, and either sell up or work harder. Either way, they are stung too early in their life, and already have the notion that life is tough.
We now move into the young family stage, where the debts are starting to rule their lives. Unwilling to admit defeat, the young family will try and find a solution, which in a lot of cases means getting second and even third jobs. The biggest problem here is that they haven't actually learned to change their spending habits. Sure, they may increase their repayments on their loans, and may even start putting some money away, but it will not last long because they still suffer from the instant gratification syndrome. Eventually, their expenses rise to meet their new income, and they end up exactly we're they started.
The solution then is to refinance their home loan and consolidate their debts, which almost feels like a fresh start. What they don't realize is that they have just increased the term of their home loan (meaning they really are starting again but with more debt) and the money they save from only having one repayment, will soon evaporate because they will find ways to spend it.
The third stage is the saddest in my view because it's when the effects of the
debt trap have really taken their toll. The level of belief in people by this stage is at it's lowest since they were born, and it's also where things like depression, stress, the mid life crisis and even suicide are at their worst. You need to step back a bit and think of it like this -
If you could imagine a young couple with all the dreams in the world of having a family, traveling the world, having careers they love, and leaving a legacy to their children, all of a sudden reach the age of 40 plus, and realize they are no closer to their dreams than when they were twenty, they are going to start asking questions. Questions such as, "Is this all there is? I've worked so hard, I've tried to do everything right, I've sacrificed time and time again and I have nothing to show for it. I don't understand. What the hell am I here for? What have I been working all my life for?"
It's these sorts of questions and the feelings of emptiness and loneliness that cause the huge problems. The only answer's for some are to find ways to numb themselves or find ways to make it easy to just accept things the way they are. What other's will do is get into the refinance trap and refinance every two to three years, thinking they're getting a better deal, but in reality, extending their slavery to money and debt. The biggest problem here is that they are sold on interest rates and most never seem to take into account the actual cost over the life of the loan, and the ever increasing term of the loan.
The final group are the ones that have plodded on and made it to the end. There is a sense of achievement here, but it's soured by the fact that their situation will not get better and their age makes them feel that it's all too late. Over half of retirees will still owe money on their homes (most likely more than what they originally borrowed all those years ago), and will have less in savings to both service the debt and to maintain any sort of acceptable lifestyle.
A further, more disturbing statistic is that the average lifespan of retirees is only 2.5 years, and this is largely due to the fact they don't feel they have any purpose in life anymore. They have finished work, and because they lack any serious funds, they have no way of pursuing their life long dreams. Their lack of a reason to get up in the morning literally saps their life energies away.
So let us say you have made it to the last stage, once you have paid off your home (most people take more than 30 years to do this because they are forever refinancing), you are left with a property that actually still incurs expenses. These expenses include rates, taxes and maintenance. Therefore, it is still a liability, and most people just don't understand this. The only way to turn this liability into an asset, is to either sell it for a profit (assuming the profit is larger than the interest cost of the loan) or to create a cash flow from it.
The first way of turning your home into an asset by selling it, makes logical sense to a lot of people because it just a case of simple mathematics, but it's the emotional aspect of not wanting to part with the home that prevents people from taking such action, until they find themselves in a financial position that forces them to sell. This creates a trap for a lot of retirees who sit on a house with a whole heap of equity, but have no cash flow coming in to support their lifestyles.
The final blow comes with an evil trick the financial institutions are now playing, and these are called seniors loans or reverse mortgages. A retiree can borrow a portion of the equity in their home, without the obligation of having to pay it back while they live in the home. When they sell, they then pay the loan back, but in the meantime, the loan is growing in size due to interest and fees.
The obvious problem here is that at some point in time, there is every chance there will be no equity left because the loan will always be growing. Once this happens, the retirees have lost there home to the bank. The other problem is because they believe they are entitled to enjoy their retirement (and I don't blame them!), they are more than likely going to spend the money on lifestyle and enjoyment, rather than just living. This will evaporate the equity at a record pace, resulting in selling their home to get the rest of the equity.
The final blow comes when the inevitable happens and they die. If they still owe any money, the banks will still get the whole house. It's as simple as that!
Now, I've probably depressed a whole lot of you here and that was my intention. When I read statistics such as - '99% of people living in western world will retire being dependant on someone else', it makes me angry. All of us living in the western world are living in the richest countries in the world and yet we can't even look after ourselves. We take advice from the institutions who make all the rules and ultimately control most of the money.
Both sides of globe are controlling, whether it be communism or the western banks and governments, but one thing we have in our favor is the ability to have free will and control our own destiny. Whether this has caused apathy among us is unknown, but I'd be willing to accept that we have had it to easy for too long and are now paying the price. We need to wake up and take control of our finances and ultimately our health and relationships.
So how do we change our finances?
First of all, you need to get a little education. If you can understand how this whole system works, then you put yourself in a better situation to do something about it. Education is an ongoing process and you need to accept you will have many years of conditioning to undo. The best part of it is that it doesn't take as long as you may think. Once you can understand some simple basics, you can change your life from one of being a slave to money, to one of being a master of money, ultimately creating financial freedom.
I'm not talking about becoming stinking rich here, but if that's your wish then go for it, I'll be your biggest fan. I'm talking about becoming self sufficient so that you live to work, not work to live and that you are not dependant on a job or pension for your main source of income. It is not as complex as some may think, as creating
wealth is very simple, but it is not easy, and this is simply because the biggest changes come from within all of us, not only individually, but also collectively.
Contrary to people's beliefs, most millionaires live next door all of us. They drive second hand cars, live in standard houses and don't spend needlessly. What they do do is take responsibility of their income and expenses and make sure the money they do get is working for them rather than the other way around. They also use the biggest tool available to them wisely, and that is their own home.
To understand how to use your home loan and mortgage better visit our site, but remember this; if you want to take control, then get an education from those who know, and more than anything, be patient and enjoy the process
About the Author
Dean Whittingham is author and writer for his company Tridean Pty Ltd trading as
www.TrideanDevelopments.com
