40 Year Mortgages as a Stepping Stone
First of all, the best mortgage of all is no mortgage! Having said that, in practice most people need a mortgage in order to purchase a house. However, do not be taken in by some of the pundits in the Real Estate and Banking Industry today that advocate a life time of mortgage payments. I am not anti capitalism but the current trend of consumerism in the extreme is to keep the consumer on a negative cash flow treadmill. In simple english, some advocates want to make it so easy and attractive to remain in debt forever. Going into retirement with a mortgage (debt) is just plain financial stupidity. I don’t care how many letters are behind an experts name, if he or she advocates that ludicrous notion then look elsewhere for financial advice!
As an example of ludicrous mortgage information, consider the comments of an “Industry Insider” who states that Canada lags the world in mortgage innovation and then goes on to plug “accordion adjustable rate mortgages” (AARM) that are available in Europe. An AARM is defined as follows, .. “they have fixed payments for the life of a mortgage but don’t know exactly how long that might be.” (Toronto Star, Sat Oct 21st 2006, page N17). This industry insider also states that there are people that “prefer to slowly pay down their house while building up wealth through high yield investments.”
Simple math shows that a borrower in the 40% tax bracket, who has a 6.6% mortgage, with after tax dollars, is actually getting an 11% yield by paying down his or her mortgage faster. The reality is that the 11% yield is guaranteed. Call me silly, but I will take an 11% GIC any day at todays low inflation rates.
According to a recent article (National Post, Saturday October 21st, 2006, page FP8), .. “Many experts in the mortgage industry say its just a matter of time until consumers are signing on to mortgages based on a 50 year amortization period with the general prediction it will appear in 2007”. According to a Real Estate pundit these new “heritage mortgages” that is, “dying with debt on your home” are justified because of anticipated inflation outstripping interest rates. Call me silly, but the historical data shows that inflation rates and interest rates are joined at the waist.
What is a borrower to do? I will use the example shown in the recent National Post article, that is $300,000 with 10% down payment, 40 year Canadian mortgage (semi-annual compounding) at 6.6% with monthly payments of $1,582.86
Initially you sign up for the 40 year mortgage, BUT at the first possible chance switch to one of the weekly payment plans that you can manage comfortably!
Instead of paying $1,582.86 per month for the next 40 years the borrower has at least three weekly payment options.
Pay $363.72 a week for the next 40 years and achieve a savings of $3,224 over the 40 years.
Pay $365.27 a week (aka non accelerated weekly payment) for the next 39 years and achieve a savings of $14,963 over 39 years.
That’s an extra $1.55 per week, one Tim Hortons coffee.
Pay $395.71 a week for the next 29 years and achieve a savings of $156,468 over the 29 years.
Play with these numbers any way you want! The numbers are fact. All the major lenders in Canada are aware of these savings. You decide who to believe and who has your best financial interest at heart!
I only want to sell you a mortgage software package once, .. not sign you up for a lifetime of payments! Call me silly, for being blunt but informative!