Building Wealth Through Homeownership: Key Financial Advantages Explained
From Forced Savings to Inflation Protection—Why Buying a Home Can Be a Smart Investment.
Buying a home (or considering to buy one) is often a foundational step in an individual’s wealth-building strategy. Whether mortgage-backed or not, there are a number of factors behind this:
1. Forced Savings Mechanism
2. Appreciation Potential
3. Tax Advantages
4. Inflation Hedge
So let’s briefly explore each one, with a simple calculation to build some intuition:
1 - Forced Savings Mechanism
Monthly mortgage payments act as a form of forced savings, gradually building home equity, which can increase net worth over time. Unlike renting, where monthly payments don’t result in ownership, a mortgage turns a portion of your monthly payment into an asset. By making regular payments, you’re not only reducing what you owe but also increasing your stake in the property, making it a form of forced savings that grows your net worth over time.
Let’s say you buy a home for €300,000, put a 10% downpayment and borrow the rest at a 4% annual interest rate for 30 years (Monthly Mortgage Payment (Principal + Interest) = €1,288). Here is what your Year 1 calculations will look like:
Total payments: €1,288 × 12 = €15,456.
Interest paid: €10,800.
Principal paid (equity built): €15,456 - €10,800 = €4,656 (nearly €5000)
Each monthly mortgage payment increases your ownership in the property, which serves as a form of “automatic savings.” By the end of the first year, you’ve “saved” ~€5,000 in equity just by living in your home.
2 - Appreciation Potential
Unlike other forms of debt, a mortgage allows you to own a tangible asset that typically appreciates* in value. Real estate in the Netherlands, particularly in urban areas, tends to follow the same pattern. Sticking to the same example we started with earlier.
Let’s assume your home value appreciates at 4% annually (A rather conservative rate if you ask me. The last CBS report in the Netherlands consistently returns a figure of 11% YoY appreciation rate in the past months)
Initial home value: €300,000.
After 5 years: €300,000 × (1.04)^5 = €364,052.
Appreciation: €364,052 - €300,000 = €64,052.
In this case, your wealth grows by at over €64,000 in just 5 years, assuming no additional principal payments.
*Did you know that while this is often considered a “universal” truth, it doesn’t always hold true? During my visit to Japan, I was surprised to learn that home values actually depreciate over time. In fact, the majority of a property’s worth lies in its land value, due to factors such as frequent earthquakes and reconstruction trends driven by safety and modern design standards.
3- Tax Advantages
Homeownership also provides tax benefits, such as mortgage interest deductions. Though not always the case, this scheme comes typically in the form of a “government subsidy”, is dependent on a number of conditions, and may vary from one country to another.
Going back to our example: with a mortgage of €270,000 at 4% interest, your annual interest paid is €10,800. Assuming a top mortgage deduction rate* of 37.1% (I will elaborate more on this on a separate post), your total tax savings then are:
Yearly Mortgage Tax Deductions value €10,800 × 0.371 = €4,011/year.
What does this mean? The government is paying you back money and hence this reduces your cost of borrowing. You heard this right: you get rewarded for owning a home.
*I will elaborate more the mortgage deduction rate, how to calculate it, and the requirements/conditions to obtain it (specifically for the Netherlands) on a separate post, along with political and regulatory developments of this policy within the 5-10 year timeframe.
4- Inflation Hedge
Owning a home preserves purchasing power. Unlike rents which typically increase with inflation over time (and also other factors, most notably related to supply & demand), a fixed-rate mortgage ensures stable housing expenses. Simultaneously, property values generally rise with inflation as we demonstrated in the appreciation section above. Let’s take a look at the numbers once again.
Suppose you’re renting at €1,500/month, and inflation averages 2% annually:
Rent gradually reaches after 10 years: €1,500 × (1.02)^10 = €1,829/month.
Annual rent after 10 years: €1,829 × 12 = €21,948.
Meanwhile, with a fixed-rate mortgage considering the prior inputs:
Your monthly payment remains €1,288 over that same time period.
Over 10 years, your home value appreciates at an avg. 4% yearly rate, €300,000 × (1.04)^10 = €444,073.
By the 10th year, you’re not only saving on rent increases but also benefiting from a property valued at nearly €144,073.
What’s the key takeaway here? Whether or not you decide to buy a home doesn’t really matter.
From building equity through forced savings to benefiting from appreciation, tax advantages, and inflation protection, homeownership offers significant potential for wealth creation.
What truly matters here is that you understand exactly why you made that choice. It’s about understanding the variables, weighing the pros and cons, and making decisions that align with your goals and personal/geo context.