Mortgage Games People Play



We examine the question of whether extending the duration of mortgage makes financial sense (and for who?). Find more at …



24 Comments

  1. Most first time buyers are taking out 35 year mortgages in the UK. I don't think anything over 25 years is a good idea when you look at the monthly payments vs the interest you pay. There is talk of 40 year mortgages becoming available soon here!

  2. The difficulty in this thiking is we tend to think this large sum of money that is paid in interest over say 30 years in terms of what that amount will purchase today rather than in inflation adjusted terms over that period. Grant that is an unknown but under our fait money system one can be assured it will be there, just at what rate. So actually it may well be in your favour to have a low interest rate loan over a long time period…… it would have paid off over the last 50 years it would appear leaving out private circumstances in the mix. Another factor to consider is work promotion salary increases, income growth to make these repayment a falling portion of one's income and possibly growing family and associated commitments.

  3. It's not just the cost of the house at purchase time, it's the cost plus the bank interest cost paid across the term, plus owner-occupier expenses ie rates, house insurance and maintenance. Add all that up over the ownership period adjusted. That's your sell price just to break even…if your lucky. Minimise bank interest payments, make the largest regular additional payments you can into a mortgage redraw offset. This also provides a super cheap (at mortgage interest rate) emergency-only line of credit (redraw funds) if absolutely necessary. Own and use ONE credit card for usual monthly expense (groceries, all bills) and pay it off in full each month no exceptions, you will also see on your statement how much/on what you spend so can budget. If you cant do this youre living beyond your means, so either get more money or cut back, read the statement.

  4. It's better to take a shorter period loan like 15 or 20 years upfront, not pay upfront after 5 or 10 years on such loans as most of interest is already paid in the first few years and mostly principle is paid in the latter years. Also in the latter years, better to keep paying proposed EMI rather than foreclose the loan, considering inflation and leveraging the home loan over credit card debt and even using it as capital for other investments. Bottom line, take the shortest duration loan upfront. Make the payments as scheduled.

  5. Price and wage increases also need to be factored into the mix$1228 in 1995 would be worth about $2200 in today's moneyand a $130000 loan (1995 Melb median house price) with a $1228/month repayment (at 10.5% for 25 years) taken in 1995 would still have a $1228/month repayment today but with the recent low interest rates would have been paid off years agobut today the same (average) house is worth $725000 and at 3.45% over 25 years the repayment is now $3611 per month nearly double that of 1995 in real termsInterest rates can only go up during the next 25 years or else all the banks are toastif interest rate go up a little to 7% the the repayment goes up to $5125 per monthIf they reach the dizzy heights of the late 1980s (17%) then the repayment is going to be an eye watering $10000 per monthIt is not going to end well for people running to take out these new loans

  6. So, say you're disciplined and have paid down your mortgage already, what should you now do with the extra cash that's not going on mortgage reoayments/rents now that you're clear? This may seem like a silly question but there's virtually nowhere to put cash now that isn't risky. Most people are too burdened with debt to realise that there is little to no return on investments for those that are prudent. Here in Ireland, investing is practically not encouraged at government level i. e. The personal TFA applicapble per annum is €1270 before gains are calculated. That figure is a direct conversion from the pre-Euro days of the punt and equates to 1,000 Irish punt. Reminder, we switched over in Jan 2002 so it's almost 20 years since the government has reviewed this personal tax free allowance. Another way of putting it is the government have received little to no pressure to review this due to lack of demand for it. We are a nation debt-obsessed. And before someone mentions precious metals, are people really hoarding that stuff at home? Seriously??

  7. Martin, you overlooked one important aspect of paying off your mortgage early – the money you save has 2 important qualities that make it especially attractive. First, your return (or the interest saved) is a GUARANTEED return with no risk attached. Second, it is a TAX FREE return that the tax man does not take a cut of. I know of no other investment with those qualities.

  8. Well thats common sense to pay it off ASAP, but most people these days are too stiuoopid buying video games, netflix, nike this n that, whores, drugs, booze, sex toys etc. At the end of the day they pay double what their house is really worth! This whole system is fukked where we need to take out a loan to make the banks rich! Makes me sick!

  9. Many people incorrectly think that “front-loaded” interest means that the interest is charged at the front-end of the loan, rather than the back-end of the loan.That is a common misconception.”Front-loaded” interest means that the periodic interest portion of EACH payment is deducted first, and then any remaining amount of the payment is applied to principal.The only way to pay less interest is to pay more principal, either by a lower interest rate, or a shorter amortization term, or both.

  10. This is something so many people don't seem to be able to understand – all debt is bad debt! If you have to take a mortgage for a home, or a loan for a vehicle – pay it off as fast as you can and save interest costs. As for all other debt – just don't take it.

  11. Extending the term of the loan without without making sure the extension is “not unsuitable” seems to be a breach of the responsible lending laws per below (RG209):Meeting your responsible lending obligations will require taking three steps:

    1. make reasonable inquiries about the consumer’s financial situation, and their requirements and objectives;2. take reasonable steps to verify the consumer’s financial situation; and
    3. make a preliminary assessment (if you are providing credit assistance) or final assessment (if you are the credit provider) about whether the credit contract is ‘not unsuitable’ for the consumer (based on the inquiries and information obtained in the first two steps).

  12. Dunno…with the various forums I subscribe to, there is always a “cheapest mortgage”thread. There are a lot of aussies going for house loans, or making enquires, taking advantage of the lower rates. I'm still not convinced it's a good idea right now, and into (whatever) future we may have left

  13. Good job again Martin. One point to add. And this is the smoke and mirrors part… Whatever interest you pay has to be paid in AFTER tax dollars. So how much do you have to earn to make those payments? So a 500k mortgage over 30 years, the 350k interest you have to earn costs you probably in excess of another 150k. Therefor you are paying in round figures about twice the cost of the house. Nice work if you can get it.

  14. During the early 1880s, a land-only mortgage was 5 years. A mortgage for a property that had a dwelling was 8 years. By the end of the 1880s, it was 12 years. The was one of the aspects of loosening of lending criteria during the era that enabled the property bubble.

    The longer the lengths of mortgage loans, the greater the interest, the greater the banker profit, and the greater the property price. The winner: the mortgagee, the loser: the mortgagor.

  15. Martin North, I have a question for you. “How do governments tax DEFLATION?” The answer, I suspect is… “They CAN'T”, which is why your government is hell bent on keeping the property ponzi going!

  16. I give Martin's Math skills and Advice a score = B+Martin's advice: “Extending the life of a loan is not necessary a good deal. And the best thing you can do to improve your finances is to pay down your mortgage quicker than ever. The quicker you pay it down, the less interest you will pay.”The correct answer for an A+”Pay down your mortgage quicker than ever. And extend your mortgage term to 30yrs (or more).”Example: a) $2650 monthly – 25yrs termb) $2650 monthly – 30yrs term – you pay lesser interest than (a) & (c). In this scenario you are actually making an extra repayment to lower the principal. The lower the principal the lower the interest.c) $2400 monthly – 30yrs termWhether you are in mortgage stress or not, B) is the best option mathematically or environmental-circumstantial risk management point of view.

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