The worst advice I ever heard

I was wasting time at lunch this week, when I stumbled across this gem. Diane Foreman makes some bold statements, preaching to the choir of New Zealand Herald readers about how to best use your money.
Herald financial advice for 2014

Diane Foreman, owner of Emerald Group: Beg, steal or borrow to buy your own home, then pay off your mortgage as quickly as you can.
Home mortgage interest rates are cheap money and by paying off your mortgage you have the advantage of secure home ownership and the ability to remortgage your home for other investments, such as starting a business or investing in the stock market.
Residential real estate continues to offer a really secure investment base.

To be fair, it’s slightly better than just spending all your money on daily lattes, electronics, or other cupboard-filling gadgets/stomach filling niceties. But only slightly… Let’s go through this wisdom shall we?

Beg, borrow or steal to buy your own home.

Begging indicates that you are basically going in “over your head” to get a mortgage. If you have to beg a bank, or family, to support you, you are clearly doing something wrong. What happens when the interest rates rise and the just-breaking-even weekly payments gets too much for you? Do you know how much you’ll lose in a foreclosure? Not to mention the psychological impact of borrowing up to the hilt to get some real estate in this inflated market!

then pay off your mortgage as quickly as you can

Well that’s actually pretty good advice. Don’t go for the 30 year option – the banks love it! It means a guaranteed flow of delicious moneys for them for the next 3 decades of your life!

Home mortgage interest rates are cheap money

5-7% on a $300k mortgage (if you’re lucky! Maybe $600k if you want something decent!) is not what I’d call “cheap money”. 1% in the US – now that’s cheap money! But mostly I’d call this interest. Interest that you will be paying for 15-30 years, and will end up costing you about half of your mortgage amount.

A $350k mortgage paid over 15 years at 6% interest (Being highly optimistic here), will set you back $681 per week, and cost you $181k in interest. The same mortgage at 8% over 30 years will set you back a slightly more palatable $592 per week, and a total of $573,000 in interest. Yes, at this point, you would be *paying more in interest than for the house*.

Good luck, hope your house appreciates better than inflation! Have a play with the mortgage calculator at Interest.co.nz mortgage calculator and weep.

So to conclude, no, not cheap money at all.

By paying off your mortgage you have the advantage of secure home ownership and the ability to remortgage your home for other investments, such as starting a business or investing in the stock market.

Yes! After you have paid off that fat mortgage, remortgage it again so you can continue to pay interest! What a great idea!! And all for another investment, like a odds-are-it-will-fail business, or stock market! Oh hey, did you know that you can actually borrow money to invest in the stock market, without putting up your home as collateral? It’s called “buying on margin”, and is generally a stupid, insane idea!
This is how you invest in the stock market. You save up your money, right. And then you buy a good quality, low fee, index fund or ETF. You leave the money in there and automatically re-invest dividends. You continue buying shares throughout the good times and the bad. After 30 years, you are sitting on a massive pile of shares that are now paying out a quarterly dividend. You start moving money out of the volatile stock market, and invest it in bonds that give you a regular payout. You then use this money to fund your rent. There you go – you are set for life, and you don’t even need to worry about maintaining your own home.

Residential real estate continues to offer a really secure investment base.

No, no it doesn’t! What sort of insane idea is this? Where you under a rock in 2007-2009 during the US housing melt-down?

Let me drop some links to better people than me. Robert Shiller, insanely brilliant and very experienced economist says, “Your house is not an investment

JCollins, who writes a blog full of wisdom, says “Your house is a terrible investment

And how about Mr “Rich Dad, Poor Dad” : Your house is an asset scam

Why is it not a good investment base?

  • It’s illiquid – hard to get rid of, especially if the market is down the plug hole.
  • It can be wiped out in a few minutes by an act of God.
  • It needs constant maintenance to keep it’s worth, or perhaps you prefer to run it into the ground and sell it at a loss as a “fixer-upper”?
  • It requires yearly fees.
  • The price you sell it for will incur a ridiculous 5% sales commissions from your real estate agent.
  • It invites you to *spend more money* to make it look pretty and accumulate *stuff*.
  • It barely appreciates above inflation level.
  • It does not provide any cash returns on a yearly/monthly basis (unless you’re renting out a granny flat – great idea!).

The sad truth is, this is the majority opinion in New Zealand. I wait for the day for a rude shock to the market, or the retirement crisis, when retirees realise that they cannot afford to stop working, since “you can’t eat your house”.

If you really want to own a house, and can afford to do so without endangering your financial position. Then by all means, have at it. Just don’t delude yourself into thinking it’s an “investment base” or a great “investment”.

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