90 year mortgages?
By Zain Jaffer
Recently a late June 2023 article in the Canadian Toronto Star newspaper reported a 90 year mortgage. This was the result of an adjustable rate mortgage that did not raise the monthly amortization but instead extended the number of years that the borrower had to pay for his housing loan.
This is a sad development. It means that the home borrower, assuming the house was loaned at the start of a working career, would continue past the borrower’s retirement age and possibly even beyond death. It means the children of the borrower would need to continue the payments, assuming that the monthly amortization is fixed.
Although practically speaking, most people would probably raise their payments once they make more money in order to shorten the mortgage loan. But people who are just living on the edge really have no choice. They just pay the monthly amortization that’s due in order not to default.
It’s also a testament to the unaffordability of housing for many, given the current high rates. If you are employed and single, then a high mortgage rate might still work if you cut back on your discretionary spending. Maybe less vacations in Europe and other cutbacks just to meet that more expensive monthly amortization payment.
But if you are a breadwinner of a family, in an industry or company that could go belly up at any time because of the predicted recession, then those many years of payments might even disappear and amount to nothing if a foreclosure happens. That would be truly sad. At best, it’s a higher monthly payment that lessens your discretionary budget.
The Fed rate hikes have raised average mortgage rates from around 3% prior to the hikes to around 7-8% now, and the Fed may still hike a few basis points to arrest inflation.
Consider for example a $400,000 house where you make a 20% downpayment of $80,000 dollars and take out a mortgage loan for the remaining 80% or $320,000 for thirty years at 6.7%. Your monthly amortization would be around $2,348, totalling around $28,178 per year. After thirty years to fully pay that $320,000 loan, you would have paid out around $845,360.
If you had gotten the pre Fed rate hike rate of around 3.7%, your monthly amortization would be $1,756. After thirty years you would have paid out $632,246 for that $320,000 loan.
Most people probably know that they can get the best discount rate for a house if they pay cash, but not many people have that option. The extreme is someone who takes a mortgage with a very small equity amount (or even in some cases zero equity), and most of the house value is tied up in a loan. For a multiyear mortgage, the total loan payment will greatly exceed the actual value of the house.
Housing is a major component of GDP. Developers right now are struggling to get financing for projects. Banks are caught with older treasuries that have lower market value because these pay older and lower rates compared to the new higher interest bearing treasuries. Basically not many banks want to make loans right now, and if they do, they want to charge higher rates on top of the Fed overnight lending rate just to make money. Liquidity in the real estate sector is quite dry these days.
Home ownership is the cornerstone of the American dream, but it is also a universal dream. Everyone wants to own their own place that they call home. Driving up mortgage rates to unsustainable levels and keeping people in debt for the rest of their lives just to pursue that dream should be considered a failure of the entire system. We should all work towards affordable housing, and keep everyone’s debt levels manageable and fully paid after a reasonable time has passed.