If you buy a house for $400,000 and borrow the entire amount (not including stamp duty and legal fees), the interest payable for an interest only loan would be 26k PA at 6.5% interest rates, interest only.
That's $500/week.
Fast track 30 years into the future, you will still owe $400,000 on your house and still be paying $500 per week to cover the interest.
However, your house will most likely be worth 2 mil+ due to capital growth and inflation, so you now have gained 1.6 mil in equity which is yours to keep.
If you had to rent a similar house, you would likely have to pay maybe $1000/week in rent, double your interest repayments.
So what's the better position to be in?
Dodgy arithmetic.
A $400,000 house is nowhere $1,000/week to rent. $500 is more like it. For example, in our area, a $320,000 unit rents for $300/week, or $15,600/yr, a return of 4.9%.
Let's look at your example.
In 2010, we borrow $400,000 to buy a $400,000 house. Some states have stamp duty, all states have legal fees, let's pretend they're part of the $400,000.
From 2010-2040 we pay $26,000 annually in interest only. That is, we pay $780,000 in interest. And we still owe $400,000.
Thus, we are $1,180,000 in the red.
During those 30 years, we had to pay council and water rates. Council rates vary a lot, but a typical figure would be $1,000/yr for a $400,000 home. But this is in proportion to the council-assessed value of the place, which Hulk tells us has risen to $2,000,000 in 2040, council rates would be $5,000 or so - again it varies a lot. Plus council rates have inflation, too - should be $10,000 in 30 years. Call it an average of $5,500 for 30 years. That's another $165,000 down.
- $1,345,000
There are also water rates, at the moment only $500/yr, but expected to rise with global warming, desalination plants and so on. They'll at least double, probably more, with another doubling due to inflation. Thus $2,000 in 2040, average of $1,250/yr for 30 years, $37,500 in all. Small bikkies but it's still money.
-$1,382,500
No home is going to be entirely without maintenance over 30 years. Assuming no renovations (a big assumption), around $1,000/yr for plumbing, electrical, gardening, etc is reasonable. Again with inflation doubling by 2040, $1,500/yr x 30yr.
-$1,427,500
Now in 2040 we sell the thing for Hulk's $2,000,000. Our profit is thus +$572,500.
Now, either it was our primary residence or we rented it out. As our primary residence, the $572,500 is ours, but counts as income for the year, and gets taxed accordingly. So we get about $400,000. Great, eh?
Well, let's compare. Let's imagine we'd taken that $26,000 which would have gone to mortgage, and put it in savings. With 0% interest we'd have $780,000 after 30 years. With 5% or so, $1,800,000.
Of course over the 30 years we'd have to pay rent, etc - but still, we'd have to make an effort to piss away more than the $1,400,000 difference, since that's $47,000/yr.
If renting it out, you face tax on the rent as income, though if the rent falls short of the mortgage currently negative gearing counts it as lower income, it becomes a bit complicated, but you are better off than if it's your primary residence. Of course you have 30 years of dealing with tenants, too. Which may be alright, but may drive you crazy. And there'll be more maintenance to do, people aren't as careful with a rented place as with their own, it's human nature.
Bear in mind we're talking about thirty years here. A lot can happen in 30 years. Just think back to 1980. In the 30 years since then we've had the Cold War end, nations collapse, economic booms and recessions - and interest rates went to 17%. Maybe someone builds a shopping centre next door and your house price doubles, but maybe they build a highway or landfill and it halves. Hmmm.
Some people can make it work. Most people can't. Remember that nobody starts a small business expecting to fail, yet 85% do in the first 12 months Every person I meet starting a business assures me that they'll be different, everyone else is an idiot and they're a genius, that their particular business idea is brilliant and different.
People into real estate are not exempt from this. "Easy money!" they tell me. Uh-huh. Sure.
Best not to assume you're a genius. Maybe you are, but it's 85% likely you're not. Thus, get out of debt as quickly as you can. Debts are okay, but never borrow more or pay them off any more slowly than you absolutely have to.
Save first, borrow later.