Student Question
Hello Master, in a small city where house prices have shown little to no long-term growth, is it better to buy with a mortgage or pay in full? (I do have the means to pay in full.) Doing a rough calculation, the annual mortgage interest is quite significant — much higher than what a bank deposit would earn. Please advise. Thank you.
Master Chi’s Response
If house prices aren’t going up long-term, buying in full means you’re continuously losing money — it’s no different from just holding cash.
If you take a mortgage, it depends on the pace of inflation.
If inflation stays low, you’re also paying interest on top of that — which actually makes you worse off than paying in full.
If inflation runs high, your wages will rise and far outpace the interest rate, so the real weight of that loan shrinks as your income grows. But since your house price still isn’t rising, you’re still falling behind compared to other cities.
So if prices aren’t going up long-term in that city — even if it’s your hometown — why buy at all? You can rent.
If you’re forcing me to choose between bad and worse, then take the mortgage. Because the cash you hold onto can be invested in properties in major cities, where the appreciation there offsets the losses on your small-city property.
What most people don’t realize is that buying with a mortgage is essentially getting the house at a discount.
This can be worked out precisely using the inflation rate, the interest rate, and a present-value discount calculation. It’s a math problem — a very rigorous conclusion.
If inflation runs at 15% per year, buying with a 30% down payment is equivalent to purchasing the house at a 37% discount (paying 63 cents on the dollar). With a 50% down payment, it’s like paying 75 cents on the dollar.
This is why people say: getting approved for a loan is getting a deal.
This is why, when buying assets, you want the asset priced at a discount.
It’s just that in recent years, things have been locked down, and inflation hasn’t been showing up as visibly as it should.