When we tell people that we don’t have a mortgage for our house, their reaction often is disbelief. If we add that we don’t have a mortgage for ANY of the three properties we own, the disbelief transforms into confusion. How is it possible? Read on if you are interested to learn how to save to pay for a house in CASH.
Last update: 11 December 2021
A mortgage is a common practice
Yes, it is probably true that the most common practice is to mortgage your house when you are looking for a way to enter the housing market. Houses are expensive and normally you don’t have a few hundreds of thousands of dollars just lying around. For a lot of us, getting a mortgage seems to be the only way to get a house. Well, of course, you could rent. But most people consider paying rent as ‘flushing money through the toilet’. In contrast, buying your own property is seen as investing. Your property will become worth more, so you will be able to benefit from that as a homeowner.
Unfortunately, there are a lot of problems with this way of looking at the housing market. We tend to neglect a lot of costs associated with a mortgage, such as commission, the often obligatory life insurance, the monthly interest, and fines for repayment of the principal. Another big problem is that banks often don’t allow you to rent out your house if there is a mortgage. So much for full ownership!
The best mortgage is no mortgage
Already very early in our relationship, we were pretty certain of one thing: no mortgage for us! We did some calculations when we started to think about buying a house. How much would it cost us in the long run to have a mortgage?
We discovered that eventually, we would have to pay the double amount of money if we would buy a house of 200.000 euros with a mortgage. For us, the ‘luxury’ of having a bigger self-owned house right away was not worth paying so much more. We didn’t want to financially imprison ourselves like that.
One mortgage advisor once told us: ‘the best mortgage, is no mortgage’ and he probably knew what he was talking about 😉
Things we did differently in buying our first house
We decided to approach buying a house the same way as we did with all our other expenses: we first would save enough money and then buy our house. In short, this is the secret to how we saved enough money to pay for three houses in CASH. Our idea was quite simple: instead of getting an expensive loan, we would rent our cheap apartment a few years longer. In the meantime, we would save as much money as possible.
This approach was quite different than that of our friends. Most of them bought their first houses with a mortgage and didn’t understand why we wouldn’t. We were working, so we had enough income each month to spend on a mortgage for a nice house. Why wait? However, we liked the idea of not having a mortgage, so we were willing to postpone living in a bigger house. We were certain we would be able to save to pay for a house in CASH in a few years and we liked our current apartment, so for us, this was not a big problem.
Eventually, it took us five years to buy our first apartment. This apartment was a really good deal, but that may be no surprise because we have five years of scanning the housing market in our city. We had become experts in recognizing a good opportunity. We went to see the apartment on Friday and we laid down the offer on Monday.
After we were able to save to pay for a house in CASH, we really were satisfied that we had been able to do this in five years. The apartment cost 75.000 euros (yes told you it was a good deal), which in retrospect means that during those five years we had been able to save 7.500 euros per person per year. Or in monthly terms: a little bit more than 600 euros per person per month. This sounds totally doable, right? We were not depriving ourselves of anything big or eating only peanut butter sandwiches. We were just making sure not to spend all our income each month and we would send our holiday pay and our bonuses directly into our savings account. If you are interested to save more, maybe you could consider setting yourself on a weekly budget.
Saving cash for a second property as well
After this great first ‘save-to-buy-experience’ we decided to continue our approach. We would keep on saving money, so we would be able to buy a bigger house in a few years. The idea was that we could sell the house and use this money together with our savings to upgrade to a bigger house. When we found a new buying opportunity after a few years, however, we didn’t feel that selling our apartment was the right thing to do. The housing market was not great and we actually didn’t need to sell. We saved enough money to buy the other property cash as well. We, therefore, decided to buy the second property and to keep the apartment for rental purposes.
This decision proved to be a very good one, although we never would have guessed that renting out our apartment would be financially so interesting. However, in doing so and because we had no mortgages, our fixed costs for living were almost completely eliminated. It gave us so much freedom that we now were able to live in a beautiful house without having monthly costs for it: we were able to pay for all expenses for both houses through the rental income from the apartment. Which, also, made it even easier for us to save more money. We had – kind of by coincidence – discovered a multiplying effect!
The multiplying effect
The interesting thing is that there is a multiplying effect when you go through the steps more than once. This means that each time, it takes less time to save enough money to reach step 4 again (see below). You will be able to buy a new property faster due to the increase in savings that is coming from your rental properties. This is – of course – under the assumption that you don’t start spending extra money.
The six simple steps to SAVE TO PAY FOR A HOUSE IN CASH process are as follows:
- Rent as cheap as possible
- Save money
- Wait for the right buying opportunity
- Buy a new property
- Rent out the old property (don’t sell it!)
- Repeat from step 2
In our situation, for example, this is quite clear when we put dates to our steps in the process:
- End of 2010: we bought our first apartment after five years of living together in a small rented apartment
- End of 2014: we bought our second property and start renting out our old apartment
- Summer of 2016: we bought our third property, starting renting this property out as well
- Until August 2019: we continued to save as money to buy our dream boat
You can clearly see that it took us five years to save enough to buy our first property. After which it took us four years to save up enough money to buy our second property. And it took only 1,5 years to save enough money for our third property. The multiplying effect of having fewer expenses (because the rent covers the housing costs) creates an opportunity to save more. This means that each time we need less time to save a certain amount of money.
In addition to this multiplying effect, we also were able to generate more work-related income. We have been making careers and started our own businesses, which has increased our salary. This increase is quite common for everyone starting on the job market. But even if we leave the growth in salaries out of consideration, it is easy to see that you save faster for each next property when you can rent out previous ones.
Some parts of our approach are rational. Such as calculating what a mortgage would cost us, and the fact that we didn’t want to make that sacrifice. Other parts of our journey are more coincidental. For instance, the fact that we decided not the sell the apartment, resulted in experiencing the power of the multiplying effect.
We are still very confident that no mortgage is the best mortgage. And we are positive that everyone can save enough money to pay for their house(s) in CASH. However, it does mean that you will have to postpone buying your first property to avoid that mortgage. It also means that you need to have a consistent approach when it comes to saving money. But we hope that it is clear from our example, that it is definitely possible!