How is a Home an Investment If You Pay >50% in Interest Over the Life of the Loan? 

Everyone strives to buy the home of their dreams. However, in recent times, high interest rates on mortgages are making homeownership a potential for loss. This is because, due to high inflation, you can end up paying more interest than the actual price of the house. Hence, the proposition of buying a home becomes questionable for many.

In this article, you will learn about the benefits of investing in a home despite high rates of interest. However, the article builds a picture of both sides of the story. Furthermore, you will learn about some smart financial benefits of homeownership, like tax advantages, long-term appreciation, and emotional security. Hence, to learn more about the advantages and disadvantages of owning a home despite high rates of interest, read on to the end of the article. 

How High Interests Impact the Long-Term Investment Value of Your Home? 

In recent years, mortgage interest is the interest that you have to pay on your home loan. However, in recent times, due to high interest rates (in some cases greater than 50%), people are ending up paying more for the interest than for the mortgage itself. This happens after the compounding of the interest.

Primary Factors 

The following are the major ways through which high rates of interest negate the potential value of investment in homes: 

High-Interest Rate 

In some cases, a major portion of mortgage payments of loan borrowers (for example, >50%) goes towards interest rates. This happens especially during the early years of repaying the mortgage. Hence, many borrowers feel discouraged. This is because they are spending most of their money on financing the loan rather than building the equity of the property. 

Long-Term Appreciation of the Property 

On the other hand, real estate properties generally have a tendency to appreciate its value over time. Hence, the value of the house that you have bought with the mortgage can have more value as years pass. Therefore, it is a good thing for the long-term value of the house.

Here, the big question that comes to mind is whether the rate of appreciation of the value of the property will ever outpace the rate of interest on the mortgage. The answer is “Yes.” However, this outcome depends on a variety of factors. You will find these discussions in the next few sections of the article. 

More Factors to Consider 

The following are some more factors that lead to interest rates outpacing mortgage payments: 

Market Trends 

In this case, you can research various trends in the history of prices of properties in your area. Here, you will be able to find whether the increase in prices is stable or the inflation is volatile. 

Local Economy 

The local economy of your city/state/country can also lead to a high demand for housing. Hence, this increases the prices of properties and also interest rates on mortgages. 

Specific Properties 

The condition, type, and location of your house can also have a big influence on the price appreciation of the property. If your house is in a popular or high-profile area, the price appreciation will be higher. 

If the price appreciation of your home for the long term is higher than the mortgage interest that you pay, then it can be a worthwhile investment for you. The profit you earn here is called capital gain. However, you can realize this capital gain after you sell the house for a much higher price than what you paid for the mortgage payment in total. On the other hand, if the appreciation of the property is not higher than the total mortgage payments, it will be a loss. 

Basically, it is not a guarantee that the housing market will appreciate with time. Hence, it is a wise thing to consult a financial advisor. This will help you assess your current situation and will enable you to determine whether the potential appreciation of the home will outpass the high-interest payments or not. 

Home as an Investment: Owning vs. Renting 

Although it is important to consider the financial aspects of owning a home, the value of homeownership extends way beyond numbers. Primarily, renting a house is a great option for people on a budget. However, the benefits of owning a home outweigh the former when it comes to the overall lifestyle and well-being connected to owning a home. The following are some of the major advantages of owning a home: 

1. The Stability Factor 

Once you stay in a property for rent, you are at the mercy of the landlord. Here, you might face various issues with time, like an increase in rent, unexpected termination of lease, updates in building policies, etc. Such problems are really irritating for a tenant who is staying on rent.

On the other hand, buying a home will give you stability. Here, you are in control of your living environment. Apart from that, no one will ask you to move, and you can stay as long as you fulfill your mortgage obligations. Hence, owning a home will give you a sense of security. This will help you to plan for the long term. 

2. Personalization 

A rental property is someone else’s property, and hence, there are obligations to modifications. Here, neither you can paint walls, install fixtures, nor will you be able to make any changes in the structure of the property.

On the other hand, homeownership allows you to personalize your space the way you want. Here, you will be able to renovate, restructure, and create an environment based on your lifestyle and taste. Whether you want to build your dream kitchen or you want to create a dream garden, by owning a home, you can customize it as per your liking. 

3. Freedom and Peace of Mind 

If you rent a property, you are paying for someone else’s mortgage. The rent that you pay every month contributes to their wealth. However, if you own a home, you will be able to build your equity with every payment you make. As a result, the loan amount decreases with time and your ownership of the property increases.

These factors enable you to get a sense of ownership, and you get the feeling of investing in your future. Furthermore, if you make further improvements to the property, you will be able to increase its value in the future potentially. Hence, it helps you to contribute to your financial security. 

On the other hand, there are various other responsibilities that come with homeownership. This helps you with maintenance and property taxes. However, the benefits of owning a home outweigh the costs. Here, you will have more stability, freedom, and control of the property. As a result, you will be able to personalize your space. Hence, there is always a sense of belonging and contribution to the quality of life. 

How Does Building Equity Help You with Mortgage Payments? 

According to Greg McBride of Bankrate, “The benefits of homeownership accrue over the long-term through the accumulation of home equity. Building equity comes from paying down the mortgage balance as well as future price appreciation. But importantly, the equity accumulation isn’t pure profit, but rather works to offset some of the many costs of ownership such as taxes, insurance, debt service, maintenance and repairs.” 

Although there is a financial aspect to owning a home, the concept of owning a home goes much beyond that. Homeownership is about building equity with the help of your property. You will not only accumulate wealth, but your rent payments will become tangible assets for you that will grow with time.

Here are a few concepts you need to understand: 

1. Building Equity 

When you are paying rent for a property, you are basically paying a monthly fee for someone else’s property where you are getting the privilege to live. Here, the money has no contribution towards your ownership. 

However, when you get a mortgage for your home, a certain portion of your monthly payment that you make goes to the principal. This principal is the actual loan amount that you borrowed in the first place. As a result, you are able to build equity, and your ownership increases for the property. 

2. Your Ownership Increases Gradually 

Each repayment that you make for the mortgage helps in lowering the value of the principal. Hence, this reduces your outstanding loan balance and increases your equity. Hence, with time, a major portion of your monthly payment goes toward your ownership and not the rate of interest that you pay for the mortgage. 

3. You Can Get Long-Term Gains 

As your equity in the property increases, your financial security increases accordingly. Basically, the value of the property increases over time, which helps increase your equity. Finally, when you sell the house after completing your mortgage, you will not only cover the original purchase price but also earn a profit due to the appreciation of the property. 

4. Better Control and Stability 

Generally, by having ownership of the home, you can get a sense of freedom and control of the property. This is impossible if you rent a property. By owning a home, you can personalize your space as per your taste, enjoy the benefits of improvements, and also make renovations for the long run. These factors can also increase the value of the property. 

A Hidden Benefit! – Forced Savings through EMI 

If you have to pay a lot in the form of interest payments for the mortgage, it might raise questions regarding the investment potential of owning a home. However, there is a hidden benefit behind it. Basically, you will be able to make a lot of savings with the help of your EMI (Equated Monthly Installments) payments. 

According to Investopedia, “The benefit of an EMI for borrowers is that they know precisely how much money they will need to pay toward their loan each month, which can make personal budgeting easier. The benefit to lenders (or investors the loan is sold to) is that they can count on a steady, predictable income stream from the loan interest.” 

The following are the ways through which your EMI can be a powerful tool that can help you build your wealth over time: 

1. Consistent Payment 

As compared to rent, which is a type of expense, a part of your EMI payments goes to the principal amount of the loan. As a result, with every payment, you are accumulating more ownership of your home. This helps you build equity with your loan payment. You can consider it as a plan for forced savings. Basically, the bank or the financial institution wants you to contribute toward your ownership every month. 

2. Limit on Impulse Spending 

If you commit a fixed EMI, it will act as a natural curb on your impulse spending. If you are aware of the fact that a significant part of your income goes to the payment of your home loan, you will stay away from unnecessary expenses. As a result, you will be able to make saving a priority and work on financial discipline. 

3. Saving Habit 

Once you make regular payments, you will be able to form a habit. As a result, this can help you work on your financial discipline and can hence have more effect than only on your home loan. This will motivate you to save for other long-term goals like future investments and retirement. 

4. Working on Equity 

The principal for which you are making monthly payments helps you to raise the equity for your home.

CNBC explains – “As you make mortgage payments, you reduce the balance of your home loan and build equity. If you make additional mortgage principal payments, you can build your equity quicker. However, that’s not the only way your home equity can increase. Equity is based on the value of your house rather than just the percentage of the mortgage principal you’ve paid down. If your home value rises, so does your home equity.” 

However, this equity becomes a valuable asset, which helps you with financial security over time. Furthermore, you will be able to leverage this equity to get funds for access during emergencies and renovations. 

5. Thinking Long-Term 

Although the EMI payments will make a big impact on your monthly budget, you will still need to make a long-term commitment to your home loan. If you view it from this perspective, the EMI will be a forced investment for you. As time passes, and as the value of your property increases, the home’s price will increase accordingly. This shall make the assets more valuable in the long run. 

Hence, you can make consistent savings which can help you build the equity of your home. As a result, this will create a nest egg which can be a big source of financial security. Therefore, you need to think long-term about your homeownership.

Some Tax Advantages to Consider 

Although the situation of high interest rates can be discouraging, one of the best things about homeownership is that it offers tax advantages. This can significantly reduce your financial burden in the long term. Here are a few tax benefits that you can avail of homeownership even if you have to pay high interest on your mortgage: 

Deduction of Mortgage Interest 

If you are a homeowner, this is the biggest tax benefit you can receive on your mortgage interest. Basically, here, the mortgage interest that you pay goes to reduce your taxable income. As a result, the government, as per its policy, offers subsidies for some of the costs of the loam. Hence, you get a chance to get into a lower tax bracket. Therefore, your overall tax liability lowers down. 

Exclusion of Potential Capital Gains 

After you complete the mortgage payments and sell your home, you will be able to make capital gains (profit) from the sale. As per government regulations, you will be able to exclude taxation on a certain percentage of profits. Hence, this reduces your tax burden when you are selling your home. Furthermore, you can also make higher profits after the property appreciates significantly over time. 

A Few Things to Consider for Tax Deductions 

The following are some of the major factors that you need to consider when you are applying for tax deduction with the government: 

• If you want to benefit from the advantages of tax deductions, you will need to itemize your deductions. However, this will not be a very advantageous position in certain tax situations. Hence, in such cases, the best option will be to consult a tax professional. 

• There are certain limitations to mortgage interest deductions, too. Furthermore, the government also set a cap on the amount of your deductible interest based on your loan amount. 
• There are certain rules for capital gains deduction, too. However, you will need to live in the property for a certain amount of time if you want to qualify for a tax deduction. 

Hence, you can see that certain tax deductions can offset your mortgage costs. Hence, owning a home is a long-term investment, even if you pay a high-interest loan. 

Focus on Getting the Right Property at the Right Location 

Consider you are buying an apartment for ₹80,00,000 with a down payment of 10%, which is ₹8,00,000. This means the bank or the financial institution will finance the remaining ₹72,00,000 through a mortgage. Here, you are in control of a significant asset of ₹80,00,000 with a relatively small amount of money of ₹8,00,000. 

This principle of finance, where you are holding an asset of a high price with a relatively small amount of money, is called leverage. This is one of the major ways of homeownership that you can use as an investment. Also, it works the same when you pay a high-interest amount over the term of the mortgage. 

The Leverage Strategy: A General Overview 

The following are the ways through which leverage as a strategy works in such a situation: 

Appreciation of Price 

If the value of the property increases by 10% within a span of five years, the price of the house will be ₹88,00,000. Hence, that is a gain of ₹8,00,000 in five years, even if you invested only ₹8,00,000 at the start of the investment. Hence, you will have a 100% return on your investment based on the down payment you made. 

Better Gains 

With the help of the mortgage, you are financing a larger portion of your investment. This is helping you to amplify your gains as compared to putting a large amount upfront. Furthermore, if you put a down payment of 50% (₹40,00,000), the return on investment to your down payment for the same price appreciation would amount to 20%. 

A Big Limitation 

On the other hand, you will need to be cautious with the leverage principle, too. If the value of the property declines, this will have a major impact on your investment. Furthermore, if the value decreases by 10%, it means that you are deep down in the mortgage. Here, you will have to owe more than the worth of your house. 

What are the Benefits of Leverage? 

Here are some of the major advantages of leverage that you can expect to benefit from: 

• With just a small down payment, you can attain homeownership. Hence, you will be able to build your wealth over time. 
• Leverage also helps you increase your investment returns compared to a smaller down payment. 
• You can build your equity in the home with your mortgage payments. Hence, you will be able to save over time. 

Factors to Consider While Using Leverage as an Investment Strategy 

You have seen that leverage is a powerful tool that you can use to turn the ownership of your home into an investment. However, you will need to use it in a strategic manner, as factors like market conditions, interest rate, and personal financial situation make a lot of impacts.

Hence, you will need to consider the following factors if you are using leverage as an investment strategy to increase the equity of your home: 

• Make sure you have a full-proof plan for investment. This must also work when you are facing loss or when interests are higher. 
• Although leverage can amplify your gains, it can also increase your losses in a similar manner. If the value of the property declines, you will be able to owe more on the mortgage than the worth value of the home. 
• The appreciating tendency of a property is a long-term factor. Hence, you need to ensure patience. Furthermore, to ensure success, you will also need to assert a strong financial footing. 

How Your Homeownership Can Act as a Hedge Against Inflation 

According to the IMF, “Inflation is the rate of increase in prices over a given period of time. Inflation is typically a broad measure, such as the overall increase in prices or the increase in the cost of living in a country. […] Whatever the context, inflation represents how much more expensive the relevant set of goods and/or services has become over a certain period, most commonly a year.” 

Despite high rates of interest on your mortgage, the ownership of your home can also act as a hedge against inflation. Hence, it has the potential to become a worthwhile investment within a few years. The following are the ways through which your homeownership can help you through inflation in the economy: 

Fixed Monthly Payments 

As your inflation increases, your mortgage payment does not get affected as it remains constant throughout. However, this works only when you have a fixed-rate loan. Hence, you will be able to budget in a more effective manner. Furthermore, as your income increases with inflation, your mortgage liability becomes more manageable. 

Rise of Property Value 

In most cases, the value of property increases with time and generally keeps pace with inflation. In some cases, property value even outperforms inflation. Hence, the value of your home will increase alongside the rising cost of living. 

Higher Equity with Each Payment 

With every mortgage payment, you can make equity contributions to your home. Basically, this equity is the portion of that property that you own. As you pay more of your principal amount of the mortgage, this equity increases accordingly. Furthermore, as the value of the property rises with inflation, your equity also grows with time. 

Additional Points to Consider with Inflation 

There is no consistency with inflation, and there can be fluctuations in the housing markets, too. Despite that, in the long term, homeownership helps people deal with inflation. Furthermore, it also adds a sense of security when costs are rising everywhere. 

Apart from that, there are also maintenance costs for homeownership, which are important to consider. Although you will be paying fixed mortgage payments, upkeeping and maintenance are essential. Such costs do increase with inflation. Hence, you will need to factor in such costs in your investment plan. 

Basically, whether an investment is right for you or not depends on your individual circumstances. In addition to that, you will also need to consider other factors like the local housing market, interest rates, as well as your own financial goals. Despite these factors, homeownership can be compelling since it has the potential to outgrow inflation, and there are fixed monthly payments. 

Further Non-Financial Benefits of Buying a Home 

There are certain situations where your home can provide you with various non-financial benefits. One of the major problems with inflation is that the prices of everything increase with time. However, in the case of your home, the increase in prices actually benefits you in the long run. Hence, your home acts as a potential savior for you in such a case.

The following are some of the major non-financial benefits of homeownership that you will need to consider: 

• You will not need to face the hassles of a landlord. This is because you are the one who is in control of the property. Whether the house needs repairs or a complete overhaul, you are the one who is in charge of the property. 
• Having a home provides you with emotional security since you have your very own space. Apart from that, this also acts as a protective investment at the time of inflation. Basically, there is a full sense of security and comfort that one cannot replace. 
• There are no uncertainties about owning a home. Furthermore, you will also not need to own the hassle of renewing your rent agrement. 
• In this society, everyone considers home as a symbol of accomplishment and success in the society. Furthermore, it also helps you to determine your status significantly. 
• By owning a home, you can create a legacy for the future. If you have a family, your home, if maintained for a long time, can become a symbol of family history. 

How Homeownership Can Give You the Ultimate Pace of Mind?

If you ensure the stability of the financial side of things, there is absolutely no reason for you not to own a home. Many people abstain from buying a home because they think that a significant portion of their income will go away. 

However, you can handle the financial side of things by getting a mortgage for the home. Despite high rates of interest, you will be able to manage your mortgage payments if you have a plan with which you can work. 

Owning a home gives you a sense of control and stability. Hence, you do not need to worry about making rent payments after every month. However, you do have to repay your mortgage every month. This can be beneficial in the long run as the price of your house increases with time due to appreciation. 

Wrapping Up 

Hence, you can see that despite high interest rates, homeownership can be a major option for you in the long term. It can help you get financial gains and build equity in your home. Furthermore, you will also get the advantages of stability, emotional security, and customization, all of which will contribute to your overall well-being. 

Do you have a different idea about taking a mortgage despite high interest? Consider sharing your ideas and opinions in the comments section below.

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