If you spend even a small amount of time following politics, you’ll no doubt have noticed the hundreds of ideas and schemes that continue to emerge from the White House. Some stick, some disappear and others come around for a second go.
The recent proposal to consider 50-year mortgages created conversation in the real estate industry.
Currently, it’s not legal for an institution to provide a mortgage for longer than 30 years.
The idea that you might stretch out the debt for a further two decades is aimed at making monthly mortgage costs more affordable. At first glance, this seems to make sense.
The problem so many Americans face is the cost of real estate and making payments on the loan that’s required to make a purchase. There are two issues to consider here, however.
Firstly, any stimulus you apply to real estate risks triggering higher prices. If you can afford more, then you can pay more. It’s a principal that works the world over.
Secondly, there’s the cost of servicing a mortgage for a further 20 years. I went into Gemini and asked it to model 30- and 50-year mortgages of $400,000. It used the interest rate of 6.75%, and it did not apply fees such as taxes and insurance.
The answer was revealing. Firstly, under a 50-year loan, you lower your mortgage payment to $2,271 a month, or $567.75 a week.
By comparison, over the lifetime of a 30-year loan, you’ll pay $2,548 a month, which is $277 more.
The total cost of a 30-year loan is $971,280. Of that, $517,280 is interest cost. If you spun the debt out to 50 years, your total repayment is $1,366,200. That’s $448,920 more in interest, according to Gemini.
The Japanese government has tried this strategy. It allowed banks to issue multigenerational mortgages to help families who faced sky-high prices in cities such as Tokyo. Their loans extended to 100 years and more.
It was criticised for masking the true cost of a mortgage. Also, it didn’t make the real estate scene in Japan any better as the plan preceded the country’s extended economic stagnation.
What’s interesting about floating the 50-year proposal right now, however, is that many Americans have taken a look at their mortgage situation, and they’ve come to the conclusion that it really does pay to accelerate your repayments.
The idea has disappeared from the political agenda for the moment. Perhaps it will return. But if any changes are made, our politicians will have to vote to modify the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was passed following the 2007-2008 financial crisis.
The best tip I can provide is to pay down your mortgage as quickly as possible. By doing so, the equity you achieve in your home will allow you to upsize your next property, or improve your lifestyle in the years ahead.