Should You Include Your House in Your Net Worth?

There’s a war that has been raging on in the FIRE community since the beginning. Every corner you turn, every FIRE forum you stumble upon, you’ll see people arguing for and against including your home in your FI calculations.

I’ve always been in the for camp, but I’ve never fully explored the notion. So, for my benefit as well as yours, let’s deep dive into this question – Should you include your house in your net worth?

There are some people who swear by investing in property, not just for their main homes, but as additional investments too. Financial Samurai is one of them, he wrote this article which explains why he believes that property investment is more desirable than stock investments.

Property investment in the UK has made some individuals very wealthy although, I believe that the time for this has long passed. Due to the recent legislation changes in second property stamp duty and increased personal income taxation on mortgage interest, a lot of landlords which I have spoken to have said that their costs are now greater than their income and that they’re counting on the house price going up significantly to make the investment worthwhile.

The increase in house prices means that a lot of the younger generation of FIRE pursuers may never even own their own home. Looking at the statistics for people who rent vs. people who own, the prices in the UK don’t seem to differ that much between ‘throwing money away on rent’ vs. ‘throwing money away on mortgage interest’. This seems to be due to the fact that a lot of people tend to borrow the maximum that their bank is willing to lend them. Meaning, people with a mortgage end up with the same, if not higher, monthly costs than renters. And that doesn’t even include costs such as home maintenance, home improvements and moving.

All of this makes the UK a very different playing field to the USA, where it seems a lot more people tend to not include their property in their net worth. So let’s consider this and explore the pathway of two individuals; one who is renting their way to financial independence and one who bought their own home. I’ll use blown up numbers so it’s easy to calculate and follow.

Path A – Renting

Timmy is your average 25-year-old and due to living on his own and in a very expensive part of the country, he’s decided that buying a home is not for him. He has a good job and is able to save 50% of his 40k per year income, but being able to move when and where he likes is very important to him, so renting is ideal.

Timmy’s Fact Sheet

  • Income of 40k per year after tax
  • Expenses of 20k per year, 10k of which is on rent
  • Years to FI 16.6 years at 41.6 years old

So, Timmy is left with a pot of £530k after 16.6 years of saving. He has housing costs in his expenses, but that’s OK as his pot size is big enough to pay his 10k rent and additional 10k expenses; he’s covered!

Path B – Mortgage

Alex is the same age as Timmy but he’s fortunate enough to live in a cheaper part of the country and he loves where he lives, so he’s decided to buckle down and get a mortgage on a beautiful home. He has an outstanding mortgage of £300k, at a 2% interest rate, this is costing Alex £1272 per month, £493 of which is interest alone.

Alex’s Fact Sheet

  • Income of 40k per year after tax
  • Expenses of £25,264 per year, £15,264 of which is on mortgage repayments
  • £9348 per year is going into house equity
  • Years to FI 24 years at 49 years old
  • 25-year mortgage

Even though Alex’s monthly expenses are greater than Timmy’s, there’s one big difference; Alex is also paying monthly into his mortgage equity. This means that even though Alex has the same income and almost similar expenses as Timmy, it’s taking him a lot longer to achieve financial independence, with his years to FI number being almost a decade greater than Timmy’s.

These figures don’t take into account the fact that Alex’s mortgage interest will get less and less over the 25 year period that he owns his home. It also doesn’t take into account that the house prices could go down (or up), and it also glosses over house maintenance costs. But forgetting about these things for the sake of simplicity (they may actually cancel each other out), it can be seen that Alex is getting a considerably worse deal than Timmy. This surely can’t be right?

Should You Never Buy a Home?

Hold your horses, don’t go selling up just yet! There’s one thing that Alex is doing which is skewing the numbers…He’s not including his house equity in his FI calculations.

As Alex has ignored the fact that he’s got a big pile of cash in home equity, he falsely believes that he’s not going to reach financial independent until he’s 49 years old. What will happen with Alex is, he’ll work until he’s 49, and think “Hurrah! I can now cover my £25,264 per year expenses! I’m financially independent!”. Then one year later when he’s 50, he would have paid off his 25-year mortgage. His expenses will now shoot down by £15,264 per year. People may think that’s great; he’s got a surplus! But that’s not the case. Alex actually wasted 7 years of his life working when he no longer needed to. It’s like hitting your FI number, then doing it all again “Just to be safe.”

People could actually be working decades extra in jobs they hate, missing watching their children grow up and not living the life they choose, only to realise that when they actually retire, they’ll have a surplus of cash that they don’t need.

What Could Alex Have Done?

If Alex had realised that his house equity is basically just an alternative bank account, at 17 years when he had a pot of around 400k, he could have released his built up house equity (£200k) and invested it to make him financially independent. If he wanted to still eventually pay off his mortgage but not work for as long as 24 years, he could have acknowledged the fact that if he carries on with his initial mortgage term, he’d overshoot his FI pot total by a big amount and adjusted accordingly. He could have released say, 50% of his equity, invested the difference and been one step closer to FI. Another option for Alex could have been to increase his term back to 25 years and lowered his monthly payments to bring his expenses down.

There are a lot of things which Alex could have done, but there’s only one main point to consider in your planning process –

If you can sell your home, invest your equity, rent a property, and your money covers your expenses. You’re financially independent.

Don’t let anyone else tell you otherwise. If you don’t follow this rule, you’ll be at a huge disadvantage to the non-home-owners (as you can see from the calculations!) You may choose to own a home and still pay it off and invest even after you’ve reached your combined FI number, but if you do, remember this – At that stage, you’re already FI, you’re just paying more to increase your safety net.

Nothing frustrates me more when I hear people say, “My FI number is 500k and a paid off house.” What they should be saying is, “My FI number is 1 million.” If they choose to distribute 500k into a paid off house to lower their expenses or rent a house with 1 million invested, that’s up to them! However, their FI number is most definitely not 500k.

FI numbers shouldn’t be subjective – the first comment poses the question, “But how much is your house worth?”. You can’t possibly plug that into a FI calculation. One person’s house may be worth 500k, another 200k. Your predicted FI date should go off a single pot figure. It should cover all of your expenses, including the cost of your house, this way you can get an accurate portrayal of your actual FI date and not be lumped with double what you actually need after working your socks off for double the required time.

Join The Discussion Below

  • Do you think your house equity should be included in your net worth?
  • What’s do you think your final house pot / investment pot split will be?
  • Would you rather FI on time or continue paying off your house equity?

20 thoughts on “Should You Include Your House in Your Net Worth?

  1. I may have missed it as an bleary eyed after quite a late night but wouldn’t an alternative strategy be to use the investment/savings pot to actually pay off the mortgage early at around the time you think you’d be FI. Thereby reducing your monthly expenses, then you can see whether the remaining pot covers the rest of your expenses as per the X% rule that you’ve decided is your SWR.

    I think it’s fine to say “500k plus paid off house” if you know exactly what you non-mortgage related expenses are, and are planning on doing the above and so not overshooting by many years.

    Chopping 7 years off is quite a big difference! I remember doing some spreadsheets a few years back when struggling with this topic and most scenarios I plugged in seemed to only chop off 3-4 years the FI date when you considered the “no more mortgage” factor. But I don’t think any of them were including such a big mortgage as your example so maybe that was simply why.

    In any case I’m not all that worried about this until I get a bit nearer to FI. We have a 10 year fix on our mortgage (9 years left) so I’ll probably wait till near the end of that to reassess our situation and try to put in a final 5(?) Year plan on the run up to TrueFi. Honestly by then I’d hope to be running my own business and/or working even less than I am right now anyway though 🙂 but we’ll see what life throws at me. 9 years a lot can change!

    Always a great discussion this one! Thanks for the food for thought!

    1. Hey TFS!

      That is another option that I hadn’t considered! It seems it would work, although – the problem with having money in your house instead of the stock market is the lower expected returns (in the current climate)…Which is a whole other rabbit hole to deep dive into! That’s why a lot of the numbers seem to be skewed when a lot of your ‘savings’ are going into house equity too; your money isn’t compounding in house equity.

      It’s bloody complicated! Although, I think, like with most things; nothing is black and white. As long as people who are in absolute hell and would give anything to retire know that they can use their house equity if they so wish, then I think it’s fine. A lot of people will want to overshoot the 4% rule by a bit anyways to have a safety net, so paying off their house could be this. I just hate how you can’t plug a ‘paid off house’ into a maths formula very well – it isn’t very accurate! Unless you want to forego the house entirely and not consider it when calculating.

      With regards to that other debate – “Re-mortgage and invest.” Vs. “Pay off the house.” – Perhaps counter-intuitively to this article, I am actually planning on paying off my mortgage. However, I think that’s as I plan on overshooting my ‘FI number’ quite a bit and I know that I’m not one for stopping making money (It’s fun!). So, as I’m not skrimping too much to quit all income generating activities ASAP, I can be a bit ‘meh’ about particular points like this. They’re fun to discuss though! 🙂

      Maybe I could try and write some kind of Excel macro to simulate some more house scenarios?

      Here’s to plenty more food for the thoughts!

  2. Very interesting post! I’ve always said to myself those exact words, “my FI number is £500k and a paid off house,” assuming that the house would cost no more than £200K. It’s a long way away yet, but your article has certainly given me something to consider. Gotta get onto that housing ladder first though!

    1. Hey Dr FIRE! Thanks for stopping by 😀

      The one worst thing about this is…It can’t be spreadsheet’d! Unless of course you completely ignore the fact that you have money sitting in a property, but if you do that, as you can see in the post – it leaves the average mortgage owner a lot more worse off than the average renter, as the mortgage owner is forced to make additional savings!

  3. Great post! Do you have any advice in terms of negotiating equity release? I know most mortgage lenders want to know specifically what you are looking to purchase/use the money for. I’m not sure they would go for the ‘investment’ angle.



    1. Hi Ryan,

      Thanks for commenting 🙂 I’m not the best to give advice on this as I haven’t released any large sums of equity. Really, you should be able to find a lender that will give you the money as long as you meet the borrowing criteria. It’s the same as any other loan. Some people remortgage to fund business ventures, investment via second properties or just to have some more cash. I don’t think you’ll have trouble finding a lender that will give you the loan, especially if you have savings to show you can pay back the loan whenever you like. I know a lot of people who don’t like having any money in their house other than their deposit as they think that they can get better returns elsewhere, it’s definitely done a lot.

      I’ll let you know if I find out any more info 🙂

      1. So I’ve tried and failed to do this. None of the mainstream lenders (at the time) were interested in a cash out mortgage. They would (patronisingly) explain to me that it was too risky for me to cash out as I might lose the money. Some were more comfortable with a cash out for an imaginary BTL, but then would only release the funds on completion of the fantasy house (which wouldn’t work).

        I was considering going to a crappy sub-prime lender and then swiftly remortgaging to a mainstream lender, but they were so predatory I couldn’t stomach giving them money.

        I’m now finding Scottish Widows to be reasonable (so far), but I’m still a loooooong way from actually getting my mortgage.

        I’d strongly advise against assuming you can simply get a cash out mortgage on a house you own. You’d think intuitively that you’d be a better risk, but it hasn’t panned out that way for me (banks are worried about the risk that I’ll sue them for giving me the mortgage that I want). It might not be impossible, but it is far from straightforward.

        1. Hey PWF!

          I didn’t realise how hard this would be, thanks for your input. I guess this means that you should probably avoid overpaying your mortgage and take out the biggest term offered to avoid paying off quickly and give you some more wiggling room? Seems silly that you can plow in as much money as you want, but then the bank won’t let you take it out again?

  4. That is quite a conundrum you pose there. In addition to those you outline, I think there is potentially a middle ground option.

    Unlike stock portfolios, you can’t easily sell off a sliver of an owner occupied home (particularly one with a mortgage encumbered title) to service a “safe” withdrawal rate approach to retirement funding.

    What you could potentially do however, is extract the accumulated equity from your home to use for investing purposes. This does not incur the significant transaction costs associated with selling the property, but (depending on the flexibility of the mortgage arrangement) may well involve refinancing things.

    Note: Your family home is placed at risk by this approach. Also you would incur interest expenses with this approach. That is ok so long as the investments purchased were reliably self funding.

    The lender only cares about whether they will get their money back should you default on your loan. Your family home secures the mortgage. The Loan-To-Valuation ratio defines the margin of safety, both for you and the lender (which is why 95-120% mortgages are a terrible idea!).

    So long as you can demonstrate that you can service the loan repayments, you can use the extracted equity for anything you like. That said, it only makes financial sense to invest in an asset possessing a higher rate of return than the mortgage interest rate.

    Another well trodden approach is to downsize as you approach retirement. Folks may need a large family home, in a good school catchment area, when they have young kids… but once their kids have aged out of the school or left home, they no longer need such a big house. Emotively this is a problem for many people, but financially it is one of the easiest ways to convert locked away equity into accessible cashflow.

    There are plenty of other options too, but this comment is rapidly turning into a blog post in its own right!

    1. I’d love to hear those other options! I’ve got your blog on my feed now, I’ll be waiting 🙂 It’s awesome that the bank would happily let you release equity to invest in the stock market. I thought they may be a little circumspect.

      That is another good option; to downsize. There is a risk in releasing equity too late though, as the returns (in the current climate) are so much higher in a passive index fund, Mr Mortgage would potentially lose out on a lot of compounding. A lot of people may end up paying much less for a mortgage as well, in that case, it’s a win-win for the mortgage seekers. They just have to be sensible enough to not go with the maximum loan that the bank will give them and make sure they pay the same or less on repayments than they would if they were renting.

      The main point I wanted to drill home was the fact that if you could sell your property, rent (or remortgage) a place and your money would then cover your expenses, your FI.

      1. The bank doesn’t care what you’re planning to do with the funds, providing you can meet your repayment obligations… or if not, they can recover their investment by selling the secured asset.

        You could be buying lottery tickets, bitcoin, vintage classic Chanel handbags, staking matched bets in the premier league… or blowing the lot on package holidays in Ibiza. Note to the audience: don’t do any of these!

        I agree if you own a home it must be included in your net worth calculations, it is a saleable asset after all!

  5. I include my house in my net worth as its quite a large part of my total assets and I have quite a bit of equity in the house.
    I am currently contemplating different strategies on the best way to release this equity in the near future, whether this is selling up and renting, downsizing, or selling and buying a smaller property that needs improvements or has development potential.

  6. One quick thought on this… rents tend to rise over time (with inflation?) whereas the size of your mortgage payment doesn’t.

    I know in theory your salary/earnings will rise too so ignoring inflation is fine for the Timmy scenario in isolation, but when comparing the two you probably should be factoring it in as for Alex his ‘costs’ will stay the same (despite a growing income), while Timmy’s costs will be rising.

  7. Yes, your house should be included in your *Net Worth*, but should it be included in your FI number? There’s a slight difference I think as the later has to fund your ER.

    That is something I admit has me a bit stumped. I have 200k or so equity in my house that I had *not* been including in my FI number, going instead purely off investments and cash. However, I think you mentioned somewhere else that you do include house equity in your FI number too.

    It’s a bit tricky, but I guess you could use some equity in your house by remortgaging, if you can. The interesting thing is, let’s say I remortgaged and took out 20,000 to fund some expenses, a year later my house might be worth 20k more. So I spent the 20k for free. Although…it’s probably not quite that simple is it.

    I’d be interested to know the answer to can you include house equity in your FI number because that would take me waaaayyy over my FI number!

  8. Thanks for your post.

    NOTE OF CAUTION – As another commenter states”I’d strongly advise against assuming you can simply get a cash-out a mortgage on a house you own” In the UK, affordability on additional borrowing is based on proven income, usually from permanent employment and/or temporary employment / other proven investment cashflows, however, the latter are subject to much stricter stress affordability stress tests. A mortgage lender will not consider assets in their affordability checks – only income and liabilities at the point of application. Additionally, the lender will want to know in broad terms what the additional loan funds are to be used for. The only surefire way to release equity is to sell, you will however have some transaction costs and you will then be left needing to find a new property to buy, again there will be taxes and transaction costs, or rent a property. If it’s a property that’s not your main residence then you obviously won’t have to find another place to live but you will possibly be exposed to capital gains tax.

    With regard to whether to overpay needs to be considered in terms of your deciding whether to overpay on your mortgage (usually capped at 10% per annum) will lock in a guaranteed saving at the rate of interest you have for your mortgage. This is usually less than the expected returns of a longer-term market investment however you, however, this return is not guaranteed. Additionally, this is tax-free saving however investments may be subject to tax unless in a tax-free wrapper such as a pension or ISA. It needs careful consideration with many factors at play. Whilst not personally wanting to significantly overpay I am working to make sure I can access the best mortgage interests on the market by working towards an affable Loan to Value (LTV) – For example, if you have a 90% LTV i.e. you have 10% equity and owe the mortgage lender the remaining 90% then you will usually pay a much high-interest rate then someone who has an 85% LTV, 75% LTV, etc. 60% LTV is usually the threshold to access the best interest rates. For me, this is in addition to maximizing ISA and pension contributions to the tax-free limit.

    I hope this helps other readers.

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