Like the blog I released on ‘How to teach your kids about: Tax’, I believe that talking to kids about certain money topics, such as mortgages, early has a number of advantages. For mortgages in particular I believe that it’s important to talk to kids about them early as:
Buying a house, and getting a mortgage, will be the biggest financial decision they are likely to make
Mortgages aren’t taught in most schools
You can have the comfort that by your kids’ developing a savings mindset from a young age, they will be ready to save for their mortgage later in life
They’ll have a greater understanding of ‘good debt’ versus ‘bad debt’
In this blog I’ll go through how I talked about mortgages with my 8 year old daughter.
Coming up with a nice visualisation for this topic
Usually when talking to my kids about these topics I come up with a way to simplify the message and then test it out on them. For example, for my pensions blog (which is surprisingly one of my most popular blogs) I came up with a hidden Blue Tree forest and Magical Multiplying Trolls and then tested to see if this was easy for my kids to understand. For this topic, mortgages, however, it was different. I was swimming with my eldest daughter and mentioned that I was going to talk to her about mortgages as soon as I could come up with a good way of explaining it. She was keen to learn more there and then, however, so we ended up talking about mortgages whilst swimming! As we were talking she then came up with a great analogy herself. So credit for this blog’s analogy goes to my daughter! For those that haven’t read my blogs before, we invest our girls savings and show them these savings as Blue Trees. As their savings grow, their Blue Tree forest grows. I now use seeds and trees to help explain many other money related topics. Purple Trees (house) and Red Bushes (mortgage) To help kids visualise a mortgage, my daughter came up with Purple Trees for the house or apartment that you want to buy or, which you own. These Purple Trees grow over time like Blue Trees (investing in the stock market) but can also get damaged (fall in value) at certain times too. I explained that to own a Purple Tree (house) most people need to borrow money from a bank. The money they borrow is called a 'Mortgage'. I then referred back to the explanation of borrowing from when I taught about credit cards. When you borrow on a credit card, the credit card company plants a Red Tree seed which is not good as these Red Trees grow really quickly and take a lot of effort (money) for you to cut down. The differences between a credit card and a mortgage are that:
Mortgages are much larger as houses are really expensive
Mortgages grow much slower than credit cards (Red Trees), i.e. the interest rate you pay is lower
Mortgages are linked to your house, so if you can’t pay back the mortgage you can lose your house.
My daughter decided to call mortgages 'Red Bushes' (she initially thought of calling them Red Vines but after a discussion we felt vines were seen as negative whereas mortgages are actually good as most people wouldn’t be able to buy their homes without them, hence we went with Bushes). Essentially, she visualised Purple Trees (houses) being surrounded by a Red Bush (mortgage).
The aim is to try and get rid of your Red Bush so that more of your Purple Tree is showing. The more of your Purple Tree that is showing above the Red Bush, the better. To make sure that the Red Bushes don’t start covering more of your Purple Tree, you pay money back to the bank in order to:
Cut down any new branches that the Red Bush grows each year (interest)
Cut down the original bush that came with the Purple Tree (capital)
This might sound straight forward but sometimes it can be tricky as there are a number of risks. The risks Usually, the bigger the Purple Tree (the more expensive the house), the bigger the Red Bush. The bigger the Red Bush, the more it grows each year. There are three risks that people face when it comes to mortgages:
The Purple Tree gets small - as mentioned above - like Blue Trees (investments) the value of the house can fall. This means that the Red Bushes could be larger than the Purple Tree. This would result in them being worse off over time.
The Red Bushes start to grow much quicker - sometimes the rate at which the Red Bushes grow can increase and mean that the amount you have to pay back to ensure you can still see your Purple Tree has to increase. This can be very stressful for some people.
People can’t afford to keep cutting down the Red Bushes - it costs a lot of money just to keep the Red Bushes from growing up the Purple Trees. If someone loses their job they might not be able to pay back their mortgage and therefore sadly need to get the bank to chop down the Tree and Bushes.
To avoid these risks, it’s good to make sure your Red Bushes aren’t too large to start with. This is why is it so important to save early. The more you save now, the smaller the mortgage (Red Bush) when you buy your first home (Purple Tree). Different types of Red Bushes I highlighted that there are lots of different types of Red Bushes. Some grow the same amount each year (e.g. fixed rate) and others change how quickly they grow (e.g. variable rate). I didn’t go into all the different types of mortgages (the items in brackets) to avoid overwhelming her, but felt that just letting kids know there are different types means they can investigate more as they get older. The key message was, the longer you take to get rid of your Red Bush or the faster the Red Bushes grow, the more work (money) it takes to get rid of them.
Summary In most cases, our kids aren’t going to learn about mortgages at school so it’s up to us as parents to teach them. There is no perfect age to start talking to them. However, it is key that they start forming a savings mindset at a young age so telling kids about mortgages early on can help them appreciate why putting a little bit of money away now can lead to benefits later in life. Remember to subscribe so you don’t miss the forthcoming blog on whether or not a Purple Tree is an asset or liability. Thank you for reading! Will