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Cost of Owning a Purchased Home: An Examination

Every week, journalist Nicolas Bé rubé shares his thoughts on wealth in a series of articles, which are delivered as a newsletter the following day, focusing on happiness.

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The Costly Acquisition of a Property on the Cash Market
The Costly Acquisition of a Property on the Cash Market

Cost of Owning a Purchased Home: An Examination

In the world of personal finance, the costs of being a homeowner extend beyond the monthly mortgage payment. Annual expenses for maintenance, municipal and school taxes, and insurance are also significant factors to consider.

Recently, a reader named Simon made a financial choice by purchasing a 2022 BMW, which sets him back $609 a month with an initial down payment of $8,000. The opportunity cost of this decision is a concept that follows such financial choices, including vehicle purchases.

The author of a popular wealth newsletter, Nicolas Bérubé, emphasises that money exists not just to be spent, but to provide freedom and peace of mind. He argues that the cost of owning a luxury car like a BMW can add up to hundreds of thousands of dollars over a short horizon of 10 or 20 years. Instead, this money could be used to increase the standard of living for retirees or pre-retirees.

Nicolas suggests that the "peace of mind" that owners talk about can take many forms, including financial freedom to make life choices without debt. Another reader, Martial, wrote that living in a mortgage-free house is more profitable in the long run, with an example of paying $325 per month for taxes.

Many readers commented on the financial advantage of living in a mortgage-free house. However, some suggested that the 20-year timeframe studied may be too short, as homeowners only truly benefit from an advantage once the mortgage is paid off. They argue that the long-term benefits of owning a mortgage-free house become more evident as time passes.

On the other hand, Nicolas Bérubé discussed the financial advantages of renting and investing the difference over buying a home last month. Living in a paid-off house may potentially limit one's lifestyle due to the need for maintenance and the size of the house. Beyond these amounts, living in a mortgage-free house is not necessarily a cheap way to live.

When comparing the costs of owning a mortgage-free home and investing the equivalent amount in a balanced portfolio, there are key differences. Owning a mortgage-free house provides guaranteed equity, reduced monthly expenses, and emotional security, while investing the equivalent amount in a balanced portfolio typically offers a higher long-term average financial return but with greater risk and volatility.

The main trade-off is the opportunity cost: money tied up in a home is not invested elsewhere potentially earning higher returns. Long-term financial comparisons show that owning a mortgage-free house eliminates monthly mortgage payments, builds equity, avoids paying interest, provides a hedge against housing cost inflation, and may lack tax advantages. Investing in a balanced portfolio, however, typically results in higher returns over decades as stocks and bonds historically outperform mortgage interest rates.

The decision between owning a mortgage-free home and investing hinges on comparing the mortgage rate ‘cost’ versus the expected investment return and individual comfort with risk. The author suggests investing the $609 a month in financial assets instead of buying a BMW, citing the potential for substantial growth over time. He also advises having a net worth of at least $1 million (ideally $2) before considering a costly vehicle like a BMW.

The author does not advocate for becoming the richest person in the cemetery, but rather for using money wisely to achieve financial freedom. He acknowledges that the person who wants to drive a BMW right away without being rich is free to do so. However, it's essential to consider the long-term financial implications of such decisions.

[References] [1] Bérubé, Nicolas. (2022, March 1). The Financial Advantages of Renting. [Blog post]. Retrieved from https://www.nicolasberube.com/the-financial-advantages-of-renting/

[2] Bérubé, Nicolas. (2022, February 22). Mortgage-Free Home Ownership vs. Investing. [Blog post]. Retrieved from https://www.nicolasberube.com/mortgage-free-home-ownership-vs-investing/

[3] Bérubé, Nicolas. (2021, December 13). The Opportunity Cost of a Paid-Off House. [Blog post]. Retrieved from https://www.nicolasberube.com/the-opportunity-cost-of-a-paid-off-house/

[4] Bérubé, Nicolas. (2021, November 29). The Psychological Benefits of Financial Freedom. [Blog post]. Retrieved from https://www.nicolasberube.com/the-psychological-benefits-of-financial-freedom/

[5] Bérubé, Nicolas. (2021, November 15). The Benefits of Being Mortgage-Free. [Blog post]. Retrieved from https://www.nicolasberube.com/the-benefits-of-being-mortgage-free/

  1. Although the monthly cost of owning a BMW is significant for Simon, Nicolas Bérubé argues that the analysis of personal finance should also consider the opportunity cost, such as the money lost by not investing it in other areas like retirees' standard of living or a balanced portfolio.
  2. Nicolas Bérubé recommends that instead of purchasing a luxurious car like a BMW, individuals should focus on achieving financial freedom, such as investing the equivalent amount in a balanced portfolio to enjoy long-term average financial returns, even with higher risks and volatility compared to owning a mortgage-free home.

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