Logically purchasing an asset of mostly appreciating value
at today’s price and paying for it in the future using a currency that devalues
is definitely a great idea.
While we argue that the cost of the mortgage would increase
the cost of the total investment, we need to recognize the time value for money
so let’s take few examples that allow us a clearer approach to the matter.
Let’s consider the average cost of financing annually 3 to
4.5%
Inflation (in other words the increase in goods values) thus
the drop in the buying power of a currency yearly is 3 to 5%.
Without taking any other aspect we recognize that the above
simple basics resemble a winning formula.
If we consider a mortgage arrangement with an LTV of 60% on
a value of a 1 million USD. (we will consider in all our examples that the
mortgage being arranged is a capital and interest repayment mortgage)
The question is: would the 600,000 USD spared in cash earn
more than the cost of mortgage including the interest, life insurance and
property insurance which will end up in most situations at less than 5%.
Most investments would earn you more than that as a
sustainable ROE, if you go for bonds, equities, or even another property.
In conclusion, it is beneficial to extend the reach of your money rather than restrict it. It is also beneficial to delay the repayment as much as possible.
In conclusion, it is beneficial to extend the reach of your money rather than restrict it. It is also beneficial to delay the repayment as much as possible.
The longer the mortgage term is the more beneficial it is to
have a mortgage except for very few exceptions.
