The Meaning of Milestones
Do you have a mortgage? If you live in Northwestern Europe, you probably do. According to Eurostat, more than half the population in the Nordic countries, the Benelux and, at a stretch, the UK and Ireland, live in their own home and are repaying a mortgage for the privilege. In the USA, more than 35% of homes are owner-occupied with a mortgage — a slightly different measure, but considering household size, quite similar.
If so, you may occasionally be thinking about the day that your loan will be paid off. At long last you will be free of the lender’s shackles, and you will be able to call every single brick, every rooftile, every door handle your own. Not only will you feel wealthier with a house that is paid off, you will also be able to actually save all the money that went back into the lender’s coffers. A highly symbolic moment, for sure. But how much substance is there to this?
A roof as a milestone
Home ownership is an emotive affair: the security of a roof over your head is, well, priceless. But economically, there is no real difference between renting a house, and borrowing the money to buy a house. Picture two pairs of identical twins: Anna and Alice, and Bob and Ben. Anna is married to Bob, and Alice to Ben. They move into adjacent semi-detached houses, but while Anna and Bob rent their house, Alice and Ben take out a mortgage to buy theirs (for, say, £243,500). Or, as we can reframe it, they rent the money to buy their house. For that is what renting means: you obtain the right to use an asset (a house or a sum of money), pay a monthly fee (the rent or the interest), and give it back to the owner at the end of the term.
Alice and Ben make capital repayments throughout the term, while Anna and Bob make identical payments in a savings account. Although the buyers start with an asset (the house) balanced by a liability (the loan), and the renters with neither, the two couples’ net wealth increases in very much the same way. Over time, Alice and Ben reduce their liability, and Anna and Bob build up an asset (their savings).