- Person A and Person B have the same income and live in similar properties.
- Person A rents at $1800/mo and is able to save $1000/mo
- Person B owns a $700K property, has $140K of equity (20%), and therefore pays down a mortgage of $560K at a rate of ~3.6% (makes the numbers work, and pretty accurate), totaling repayments of ~$2,800/mo over 25 years.
On paper these two have the same disposable income and it seems that Person B's net worth is 'only' $140K higher. But, consider what happens over 5 years, even without house prices going up
- Person A will have saved $60K overall
- Person B will have have $74K in additional equity (now owe $486K), and can now refinance at 70% LTV instead of 80% LTV. This gain is because they saved interest on the debt repaid over 5 years.
Person A would have had to invest their $1000/mo savings in to something yielding a massive 8%/year and pay no tax on their returns to reach a $74K balance in that time.
Now consider that if house prices even go up 2%/year over that 5 years (inline with inflation), that Person B will also have an additional $70K of equity. Meanwhile Person A is only $60K to $70K (depending on the performance of their own investments) of their way to a $150K deposit, on a now $770K property.
Once you have hard assets and leverage, you have a huge engine of wealth behind you.