Do you need a mortgage to build wealth?

For generations, buying a house has been seen as both a rite of passage and a cornerstone of financial security. But is building long-term wealth dependent on owning a home?

The path to homeownership has become more challenging

Since 2000, New Zealand house prices have increased nearly five-fold, while incomes have not kept pace. As a result, affordability remains stretched, with house prices still around 8–9 times household income – well above historical norms. At the same time, tighter lending rules and deposit requirements have raised the barrier to entry.

As a result, many first-home buyers are entering the market later in life (average age of first home buyer is 36), and a growing number of households are carrying mortgages into retirement. In practical terms, this shortens the window over which people are able to build wealth outside the family home. This raises an important consideration: whether owning a home is the best financial decision.

Renting and owning build wealth in different ways

Homeownership offers stability, a degree of protection from rising rents, and exposure to a tangible asset that has historically increased in value over time. It also allows for the use of leverage, amplifying gains (and losses) relative to the initial deposit.

However, it also comes with ongoing costs that are often underestimated, including rates, insurance, maintenance, periodic renovations and the costs associated with upsizing or moving to a new home. Higher debt levels can also increase financial pressure, particularly in periods of rising interest rates.

Renters, by contrast, avoid many of these costs and retain greater flexibility to invest in a diversified portfolio of financial assets, including shares, bonds, and other income-generating investments. This flexibility extends beyond financial considerations. As remote and hybrid work becomes more common, the ability to live and work in different locations is increasingly valuable for some households.

A practical comparison: renting vs owning

To explore the different financial outcomes of homeownership versus renting, consider two individuals with the same income and housing budget. One purchases a $750,000 home with a 20% deposit and a mortgage. The other rents and invests the difference between rent and the total cost of homeownership into a diversified portfolio.

For simplicity, we assume both allocate the same level of cashflow each year toward housing costs (mortgage payments, rates, house insurance and maintenance/ renovations) and investing, and hold no additional savings outside this.

Over time, both build wealth, but in different ways. The homeowner gradually builds equity and ultimately owns their property outright, while the renter accumulates financial assets through regular investment and compounding returns.

By retirement, the homeowner has paid off their mortgage and accumulated significant equity in their home, with total assets of around $3.3 million, the majority of which is tied up in the property. The renter, meanwhile, has built a diversified investment portfolio of a similar size – approximately $3.2 million – through consistent investing and compounding returns.

Accessible capital at retirement (age 65)

At a total wealth level, the outcomes are broadly comparable. The difference lies in how that wealth is held.

The renter’s portfolio is fully liquid and can be drawn on to generate income. Using a 4.5% withdrawal rate, this provides around $145,000 of annual income at age 65 (increasing with inflation over time).

The homeowner, by contrast, has relatively limited financial assets outside the family home. Their investment portfolio is approximately $240,000 reflecting the amount invested over the 5 years since repaying the mortgage. This generates around $11,000 per year. While housing costs are lower, they are not zero. In this example, ongoing housing costs in retirement (rates, insurance, maintenance/renovations) are estimated at approximately $33,000 per year – well above the $11,000 available from the homeowner’s investment portfolio

As a result, additional funding would be required. Accessing further capital would typically involve downsizing, selling the home, or using an equity release product such as a reverse mortgage. In practice, this shortfall could also be met through other savings such as KiwiSaver; however, these additional assets have been excluded for simplicity in order to focus on the core trade-off between housing wealth and a dedicated investment portfolio.

For the renter, housing costs continue throughout retirement. In this example, annual rent at age 65 is estimated at approximately $97,000 per year. To fund 30 years of housing costs, the renter would require around $2.1 million (based on a 4.5% withdrawal rate). This is comfortably covered by the $3.2 million portfolio, leaving approximately $1.1 million available to fund all other retirement expenses.

While both individuals are in a position to meet their long-term needs – including potential costs such as a retirement village unit or aged care – the key difference is flexibility: the renter’s wealth is readily accessible, while the homeowner’s remains largely tied up in the family home.

Financial independence doesn’t require homeownership

This comparison highlights an important point: financial independence is not dependent on owning a home. With a sufficiently large and well-managed investment portfolio, retirement – including ongoing housing costs – can be fully funded.

Of course, outcomes will vary. Investment returns are uncertain, house prices do not move in a straight line, and policy settings – such as taxation or lending rules – can change over time. These factors can influence the relative attractiveness of property and financial assets. A growing number of individuals are nevertheless choosing to step away from the traditional path of homeownership. In particular, those focused on financial independence and early retirement are prioritising diversified portfolios of shares, bonds and other assets to support long-term financial goals, rather than concentrating wealth in property.

We are not advocating one approach over another. For many, lifestyle, emotional and practical considerations will outweigh purely financial outcomes. For others, flexibility, mobility, liquidity and lifestyle optionality (including the ability to live and work in different locations) may be more important than the certainty of homeownership.

In reality, many people adopt a combination of both approaches – owning a home while also building a diversified investment portfolio.

The key point is that long-term wealth creation does not require homeownership. However, the financial benefits of renting only arise when the savings relative to homeownership are consistently invested over time. With a clear plan, disciplined investing, and the benefit of long-term compounding, renting can be an equally valid – and in some cases more flexible – path to financial independence.

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