Your house is not a retirement plan

A common scenario in New Zealand is to buy a house as soon as we can afford one. We spend as much as the bank will lend us.

As our incomes increase over the years, or maybe our family size increases, we tend to buy bigger, more modern, and more expensive homes. Again, as much as the bank will lend us.

This is more commonly referred to as climbing the property ladder.

What’s the problem?

1/. This extends our mortgage to a later date

New Zealander’s move house on average every 7 years. That is a lot of upward moves.

Each move to a more expensive house, pushing out our mortgage repayments a few years.

2/. It results in an undiversified asset mix

By buying as much house as we can afford, we limit how much we can invest in other assets outside of housing.

Lack of diversification is extremely risky. By having most or all of our net worth in just housing, we expose ourselves to a heavy loss if something bad were to happen to the housing market.

3/. It delays our savings

When all your money is going towards housing, then it means you aren’t saving or investing. Sure, there’s much worse things you can do with your money than paying down a mortgage and gaining equity. But, by doing so you are forgoing investing cash. Which leads to the next problem….

4/. You can’t eat your house

This basically means that your house won’t be able to pay your bills in retirement. Sure, your annual costs will be lower if you have a paid off house. But you will still need a lot of cash to pay for up to 40 years worth of rates, insurance, electricity, travel, health, entertainment, clothing, and so on. Your house can’t pay for those things.

Unless you plan to rent out your house, downsize, or get a reverse mortgage, then you will need savings. If you wait until you have paid off your house to start saving it may be too late.

What’s the solution?

Housing in New Zealand isn’t cheap. You don’t need me to tell you that.

So it should come as no surprise that a lot of homeowners net worth is tied up in their houses. It takes a large proportion of average annual spending. 30% in fact. Once you add in other necessities such as food (17%) and transport (15%), that doesn’t leave a lot for other expenses and savings.

It is no wonder that many New Zealanders have housing assets, but not much else. Your own house is not an investment, and shouldn’t be viewed as such. Sure, some people get extremely lucky with their timing, but don’t be fooled by their stories of luck. They are rare and not always the whole story.

My advice is:

  • Not to view your house as the holy grail to your retirement. Yes, a paid off house is a good start, but is only that. A start.

  • Start making plans for investing your money into assets that will get you much better returns than your own house and will diversify your risk. If you are new to investing, then this investing series will be a good starting point.

  • Don’t leave saving/investing too late. You can start while you still have a mortgage. With investing, time is your friend helping you to weather the risk and build a large enough stash. The longer you leave it, the harder it will be to start. Old habits are harder to break the longer we leave it. Your tolerance for risk will likely be lower later in life too, hence lower long term returns.

  • Stop upgrading house. We tend to always want nicer things. We buy a house and think we will live in it forever. But then we get bored of it, or just want a change. The statistics back this up because as a nation we move houses every 7 years. Buying and selling houses are expensive too. Is that bigger, more expensive house worth the extra cost, longer mortgage and lower retirement funds?

  • Don’t buy as much house as you can afford. This will leave some breathing space to invest in other assets.

  • Shorten your mortgage term so you if you are hell bent on paying off your mortgage then you can start saving earlier.

Final thoughts

I don’t see any point in spending all your working life paying off a mortgage with little room left for anything else. You may have grand ideas of just downsizing house when you reach retirement. But how likely is this?

You’ve spent a lot of time and hard work paying off the house and now that it is paid off you sell it? If it were me I’d want to enjoy living in the house I worked so hard for and spent a lot of time in with so many memories.

You could have all the best intentions to downsize in retirement to free up some cash, but once it comes time you will find it harder than you think. There is often a discrepancy between our expected reality and reality. We may have all the plans in the world, but plans change and so does life.

You may also be thinking about a reverse mortgage. But what is the point in that? You’ve spent your working life paying down the mortgage and now you’re going to ask for that money back at a much higher interest rate? You may as well have started saving earlier.

If there is one way to get ahead on your retirement planning, it is not to spend too much on your housing. Diversify your assets so you lower your risks and increase your cashflow for your retirement.

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