Money

Is a House an Asset or a Liability?

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In most cases, an house that you live in is a liability. Unless it goes up massively in value, or you have a lodger that pays the mortgage. Let me explain using an example.

You buy a house worth £100,000? You borrow £75,000 over 25 years to pay for it.

You

  • Assets = £25,000, growing slowly because you are paying off the mortgage
  • Liabilities £75,000
  • Expenditure £350 per month for 25 years, £187 of which is interested, shrinking slowly again because you are paying off the mortgage

After 10 years you sell the house for £115,000. Has the house been an asset or a liability?

  • Profit = £15,000
  • Paid off mortgage = £25,000
  • Leaves £40,000 in your hands on selling

However your expenditure was £350 x 12 x 10 = £42,000, so its not because you also had bills, council tax and repairs to do in that time.

So a home is usually a liability even in these times of low interest rates. Why does the bank call it an asset? Lets look from the banks point of view:

The Bank

  • Asset = Loan of £75,000 to you, well it is an asset because they don’t have to pay the loan
  • Liability = Loan of £75,000 from their lender to be able to give you the loan
  • Income = £350 per month, of which £187 is for them to keep
  • Expenditure = £31 per month, thats the cost of the loan to them at 0.5% APR.

Over the 10 year period, the bank has earned £42,000 – £25,000 = £17,000, for just the admin of filling out the mortgage forms and ensuring the money was accounted for. Not a bad days work!

So a house is an asset, its just not your asset, its the banks.

However if you move out of the house and put it up for rent, or take in a lodger in your spare room, it becomes an asset. Why? Because the tenant / lodger pays the mortgage. The debt suddenly becomes “good” debt, because while its debt against your name its not you that pays it off. Rich people will tend to have not that much debt that they have to pay (as a percentage of their income/worth), but they might have quite a lot which others have to pay, depending on the type of business they are in.

Why have I blogged about this? Why is this important? Because the same concepts can be applied to anything and doing so will help you understand how the world works, or at least the bits that are important to you. This also might help you see opportunities at the time rather than after the event. I’ll be covering more in future posts.

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