+25 Year Amortization for Mortgages

[arthur]

Donovan Bailey is advertising a 50 Year Amortization for Mortgages, and hopefully other lenders will follow suit.

A payment schedule such as this will allow many more people to get into the R.E Market, and since most people move several times, at the end of the day, many will trade down and end up Mortgage Free.

[bcjmmac]

Donovan Bailey is advertising a 50 Year Amortization for Mortgages, and hopefully other lenders will follow suit.

A payment schedule such as this will allow many more people to get into the R.E Market, and since most people move several times, at the end of the day, many will trade down and end up Mortgage Free.

Personally I can't see how this will benefit anyone other than the mortgage lender. I ran the numbers for a $250K mortgage @ 6%.
25 yr amort - $1599.52/mth, total int $229,909
50 yr amort - $1302.43/mth, total int $531,683

The monthly payment spreads get a lot narrower as the amount decreases. For example, on a $100K mortgage diff is only $118/mth going from 25 to 50 years.

Longest amort period I ever had was 15 years & would have had it paid off in 5 if I hadn't moved.

[steves]

Interest, like tax, can't be compared in this way. It is the present value of the interest stream which counts.

In fact, I made a quick calc which makes a case for longer amortization.

30 year old earns 80K, plans to retire at 65, dies broke at 95. Rates for loan and rsp growth both 5%, cpi 2%. Starts with 150K in his RSP.

His $250K mortgage would mean a $46,812 lifestyle should it be amortized over 25 years. Over 50 years, it would deliver a $47,147 lifestyle.

It actually surprised me, BTW.

[bcjmmac]

Interest, like tax, can't be compared in this way. It is the present value of the interest stream which counts.

In fact, I made a quick calc which makes a case for longer amortization.

30 year old earns 80K, plans to retire at 65, dies broke at 95. Rates for loan and rsp growth both 5%, cpi 2%. Starts with 150K in his RSP.

His $250K mortgage would mean a $46,812 lifestyle should it be amortized over 25 years. Over 50 years, it would deliver a $47,147 lifestyle.

It actually surprised me, BTW.

I'll dig out my financial calculator/spreadsheet. I assume from what you wrote that the difference in mortgage payments was reinvested (in a RRSP?) to come up with the cash flow figures. Not sure how I'd feel about having a mortgage until I'm 80 There are a number of scenarios that could be run - 25 yr mortgage, followed by 25 yr investing at same amt, etc.
Anyhow, I seriously doubt that the majority of people that would choose a 50 yr mortgage would have the financial wherewithal to invest the difference. IMO, most of them would choose it for the lower monthly payments IOT maintain their current lifestyle.

[dagan]

A difference of $335 with all the unkowns and errors inevitably present in a 65 year projection, is insignificant.

Second, the present value of any new loan should be the amount of the loan. IMO it is questionable to discount a 5% 25 year loan at any rate other than 5%. A 50 year loan should be discounted at the current rate of a 50 year loan. The 2 loans do not carry the same inherent risks and characteristics and should not be discounted at the same rate. If both the 25 year and the 50 year loan are discounted at their stated rate, then there is no difference. I agree that there is much confusing logic and possible logic, and differing views as to the 'right' answer on this issue alone, all such considerations weigh more than $335, which reinforces my over riding comment that the mathematical difference calculated is not only trivial but to a good degree, also whimsical.

[steves]

My point was that those types of comparisons "531K interest vs 230K interest" are misleading and in this case well off the mark. Although, as Dagan says, not very significant.

[dagan]

Actually, steve, I agree with all of that. Your point is a good one.

[bcjmmac]

Second, the present value of any new loan should be the amount of the loan.

Not going to argue the point & agree that there are numerous ways to manipulate these numbers.
Despite all that, doing a calculation using the inflation rate of 2% to determine the PV of the cash flow the mortgage company would receive from a 25 & 50 yr mort at 5% gives (used inflation rate of 2% as the discount rate)
25 years - PV $343K
50 years - PV $427K
As expected, the mort company isn't giving the money away.
I'll also grant there are cases where a 50 year mort might be beneifical for folks (especially for someone with cash flow problems), but for the majority the weekly/bi-weekly/monthly cash flow savings can be costly in the long run.

[dagan]

Use a different rate and get a different result. There are many ways to argue the discount rate. 2% is not the only choice. I'd argue that 2% is too low for almost all situations even if actual inflation exactly = 2% because there is no return for risk in the number. Different risk, different time frames = different appropriate rates, which means it can be argued that two different rates should be used for two different scenarios.

If the bank lends 25 year money at 5% and 50 year money at 6%, it can be argued that the 5% and 6% represents the rates that consider most all relevant factors and are the rates that should be used for a new loan. If 2% considered all relevant factors, wouldn't the bank lend at that rate? If the argument is that they require a profit for their time/and effort, then why wouldn't the borrower consider that in determination of the rate?

[bcjmmac]

Like you said earlier - lots of ways to calculate this stuff.
The topic was started reference 50 year mortgages enabling people to enter the market. What I probably should have said, in my original post, is that if someone needs a 50 year mortgage to enable them to get into the real estate market they should think twice. It takes a long time to build any equity with that long a mortgage - assuming of course that the property appreciates at or near the rate of inflation.

[AltaRed]

That is all we need. Find some way for people to be indebted longer to maintain current lifestyles. It would be the rare individual who would take the difference and invest it.. instead of spending it on lifestyle.

I was also fortunate enough to accelerate repayment of a mortgage so that I could start investing more, and sooner than I would have otherwise.

[steves]

Or, 10 years back, that longer amortization allowed you to qualify for a real estate purchase 40% bigger than a 25 year would and thus have benefited even more from the RE boom.

[arthur]

A smaller carrying cost would allow a person to enjoy a much better residance than he could normally afford, accepting the fact that he would neevr outright own the property, but is enjoying taht property for the period that he occupies it.

Some people lease cars, take expensive Holdays, shop at Harry Rosens, others would rather have a very nice condo and give up the enjoyment of other life style toys.

Higher end properties are more resistant to market fluctuations, Brampton properties could drop 20%, Leaside and North Toronto hold their values and continue to appreciate.

My youngest son and his Girl friend can live on next to nothing, non drinkers or partiers, no car,but banks will only lend a certain amount even though they could carry much higher payments.

I would use an RRSP to fund him, but then I would not be able to deduct Mortgage Interest, and he does not want us Buying and then he woould rent, wants the place in their own names.

[bcjmmac]

Not sure if they're available in Canada YET, but an interest only mortgage should generate lower mortgage payments than a 50 yr one. Since you don't really generate any equity for the first decade or more with a 50 year amort, you would probably be further ahead with the interest only option. When finances permit, a switch to a convention mortgage could be made.

Ref a 50 year mortgage being a good idea 5 years ago due the current run up in values - 20/20 hindsight isn't a reliable/recommended way to plan the future. You could also have leveraged all your money in tech stocks in 97 - just in time for the bust. Real estate is not immune to big drops in prices. I have lived through some & once got out just before a 30% overnight drop when a major local employer unexpected announced a closure.

[arthur]

I understand that there are some Banks that are planning to offer Mortgages with 40 not 25 year amortizations, are there any available now??

[millergd]

Housing is gee, like, ya know, so affordable now!!!! Where can I buy one, like, right away?


It's been available since Genworth announced it earlier this year. CMHC followed suit quickly thereafter.

http://www.financialwebring.org/forum/v ... ion#197808

~millergd~

[arthur]

I am thinking of releasing Cash Equity by taking a mortgage, amortizing over 40 years, take the proceeds and buy two condos, one for each boy, as an alternative to Renting.

The Money will be theirs eventually, this way they are able to get a place now.

I am not concerned about Payments, we have a very good Income Stream that will automatically make the payments.

Just Blue Skying, also looking at a Condo in Florida.

[patriot1]

You mean double your RE exposure right at the start of a worldwide RE bear market?

Go for it.

also looking at a Condo in Florida.

You won't have to look very hard.

[arthur]

patriot, you cannot cover all RE as a Bear Market, some areas will continue to grow, the demographics are skewed a certain way.

My area will continue until we finally freeze development, that will mean less supply for growing demand, prices will continue up.

I am looking long term, I don't care about a few years out, a way to put some cash to work, money flow is there, it just will go to a differant destination.

[brucecohen]

money flow is there, it just will go to a differant destination.

If the cash flow is there, why are you considering a 40-year amortization that requires default insurance on the full amount of the mortgage?

Off the top of my head, the only prudent candidate I could see for a 40-year am would be someone with little cash flow now but very strong prospects for the near future. For example, a newly graduated medical doctor or in-demand engineer whose income and net debt position are likely to improve substantially over the coming years, providing flex to pay down the loan.

Assume:
Mortgage = $100,000
Rate = 6%
Payment = Monthly

With the standard 25-year amortization:
Monthly payment = $639.81
1st year cost = $7,677.72
Principal repaid = $1,799.70
Interest claimed 77% of 1st year cost

With 40-year am ignoring cost of default insurance:
Monthly payment = $545.09
1st year cost = $6,541.08
Principal repaid = $631.68
Interest claimed 90% of 1st year cost

[Norbert Schlenker]

also looking at a Condo in Florida.

http://www.youtube.com/watch?v=tkuW8bCjC6c

[arthur]

Renting costs about $1,400 a month for a so so apartment, so, if we put a $150,000 against a $350,000 apartment, Sons make the monthly payments, get a much nicer place to live in, we lose about $7,500 a year in lost interest x 2=$15,000 - deductible mortgage interest of $10,000 x2=$20,000 =$15,000 after tax= Wash.

Mental Gymnastics.

[lystgl]

- deductible mortgage interest of $10,000 x2=$20,000 =$15,000 after tax= Wash.

deductible? Only if it were to earn income no?

[arthur]

I thought it could be deducted against Regular income?

[lystgl]

I thought it could be deducted against Regular income?

Are you renting these condos to your kids? Even so, there is still the possible "arm's length" problem, isn't there?