Debt Free John on 28 May 2008 07:33 am
In response to my post on types of debt Maria asks:
…which category would ‘buying a house’ fall into?
If you’re a devotee of Robert Kiyosaki (Rich Dad, Poor Dad) then you’ll know that he considers a house to be a liability and would therefore classify the mortgage as a "bad" debt. However I don’t think it’s that simple, after all you have to live somewhere and that somewhere is going to cost you money whether you own it or are renting it.
In my opinion mortgage debt is wasteful debt if you’re living in a house that exceeds your needs, i.e. a married couple using only one bedroom in a five bedroom house.
If on the other hand the mortgage is to purchase a home that meets your needs and it costs (in terms of the interest) roughly the same as or less than it would to rent a similar property then I would consider that to be an enabling debt as you would have had the negative cash flow anyway. But by owning your home you have a more stable family lifestyle, are able to add value to it and over the medium to long term it should rise in value giving you a return via the capital growth.
I do not however advocate buying your home in the hope of a capital return. Instead focus on it’s effect on your cash flow. Equally if you already own your own home I’m not keen on the "sell to rent" concept.