Unlike Hansel and Gretel, you can't eat your house

Generally speaking, New Zealander’s are mad for housing. We love owning houses and we are willing to pay over 10 times our incomes for them. We are willing to pay more than 30% of our income on housing expenses.

By buying overpriced houses that are unaffordable by all measures we often leave ourselves with not a lot of income left over for saving or investing. This is why so many older kiwis are now finding themselves with paid for houses (or close to), but low savings. This is what the saying ‘asset rich, cash poor’ refers to.


How does this happen?

We often buy as much house as we can afford as early as we can afford it. As soon as we have enough of a deposit saved up we buy a house because we are told that renting is throwing our money away. We also buy as much house as the bank will allow us to borrow as owning a nice home is the New Zealand dream after all. Then when we get bored of our dream home, we either upgrade that home or move up the ladder to a new dream home.


What’s the problem?

Your house can’t pay your bills. You need cash for that. If you haven’t saved enough outside of your house to pay for your annual expenses then you will find life extremely difficult in retirement.

With the rising cost of living and increasingly unaffordable house prices, the problem is twofold. It is harder to service the mortgage and we are buying houses later in life. This results in long term 30-year mortgages that don’t start until our 30’s for many people. This means many of us won’t be mortgage free until our 60’s. That is too late to start saving.

You may need more money for your retirement than you think. Using the 4% rule, if your expenses are $60,000 per year then you will need approximately $1.5 million cash to fund your retirement needs. If you are receiving an income or superannuation of $25,000 per year then you will need approximately $875,000.

This is money saved on top of the value of the house.  

With the rising cost of living, more retirees will find themselves in this position than ever before unless we can do something about it.


What can you do about it?

Save up more for your house
Just because the minimum deposit required may be 10%, that doesn’t mean you can’t save more before buying. If you buy a $600,000 house with a 40% deposit, instead of a 10% deposit you can save yourself $168,000 in interest payments at a mortgage interest rate of 5%.

Buy less house.
We tend to buy houses that are far too big for our needs. Why have a spare bedroom for guests to use only 5 days a year? You may be spending $100,000 or more extra just for the privilege of the spare room. Bigger houses also tend to carry larger maintenance bills, upgrade costs, insurance costs, heating costs and rates bills. Not to mention all the extra time cleaning.

Buy a cheaper house
By buying a smaller home with a smaller mortgage you will find it much easier to service the mortgage. The mortgage payments will take up a smaller percentage of your take home pay than a larger mortgage would. This means you can save more of your take home pay towards your retirement.

Start saving early
It doesn’t matter how small. Just start. If you can save just $300 a month for 30 years you will have $250,000 with investment returns of 5%. Over 40 years and the amount is $460,000. In just 10 years extra you almost doubled your money. An extra $210,000, of which only $36,000 was your own money. This is the power of compound interest and letting time do the heavy lifting.

Don’t be so quick to pay off the mortgage
There is nothing wrong with paying off your mortgage quickly. But if it means you are doing so with all your spare cash then it may not be the best idea. Leaving your investing until after you have paid off the mortgage may be too late to save enough to cover your potentially 35-year retirement. If you must pay off the mortgage quickly then at least try to reserve some cash for savings and investments.

Downsize house
If you have spent most of your life in one house then this is easier said than done. Although you may plan to downsize house when you retire, the reality is it is hard to pull the trigger due to how comfortable you have become in your home. Or maybe you want to keep the house as part of an inheritance to your children. It seems rather counter-intuitive to sell the house that you have spent all these years paying a mortgage on. You will find you want to spend some mortgage free years in the house. It is only natural to want to enjoy some of the reward from your sacrifices. These reasons make it hard to downsize, but it is still an option. I downsized house in my mid 30’s before I grew too attached and that has been the best financial decision I have made. 

Reverse mortgage
If you are not keen to downsize house, then a reverse mortgage may be an option. Reverse mortgages allow you to use the equity you have built up on your house and turn it into cash to cover your expenses. This strategy does carry risks as the interest rate on this type of loan is high and if your house experiences a flat or decrease in value then you could find yourself in financial strife and forced to sell. I have covered reverse mortgages in a bit more detail here.

Rent out a room
This is not my idea of fun at that time in my life. I am too old and set in my ways for roommate dramas. However, it still remains a valid option for some people if you have spare rooms and need the cash.


Final Thoughts

In an ideal world we will be able to continue to live in our house when we retire. The house where our kids and grandkids can come to visit. The house where our children grew up. In order to do this though we have to save money outside of our house. Our house can’t pay for our retirement unless we take on a major inconvenience, such as a roommate or a high interest reverse mortgage.

Over the years we get used to an income coming in every week or month, depending on your work pay cycle. It can be a shock in retirement to not have that same regularity of payments. The best we can do is to think about where we will getting our weekly cashflow from, because it won't be from the house.



The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here.


Comment below. What proportion of your net worth is in housing? Do you worry about cashflow in retirement?