The True cost of Credit
The current house price boom has perhaps passed its peak as I
write this, but that doesn't stop the mortgage companies from
offering yet more new and tempting products that look like good
deals for a consumer. But be warned - The standard mortgage,
running over 25 years is set like that for a reason! When you
see companies offering '40 year mortgages' or 'low start'
mortgages, or perhaps even 'interest only' mortgages, you should
understand these shiny new products may have a nasty sting in
their credit tail!Perhaps the ultimate expression of lending absurdity is Japan,
where at the peak of their last boom, 'Grandfather - Father -
Son' mortgages were common. These committed unborn future
generations to mortgage payments incurred by their predecessors
(a situation thankfully illegal in most parts of the world!).
Could it ever happen here? Probably not, but the extension of
'standard' mortgage terms on lower interest rates are not
actually a good thing for the ordinary Joe, even though they are
touted as being 'more affordable', and should be viewed with
deep distrust, simply because it means YOU WILL PAY MORE over
the life of the loan. Don't believe me? Try working out the
math, instead of simply looking at the monthly repayment figure.
Using the good old loan calculator on www.nodebtever.com we can
see that a standard $100,000 loan at 5% over 25 years will cost
you over $175,000. That's a big $75k in interest. What about the
same loan over 40 years at 4%? That's cheaper, right? WRONG!
You'll pay over $200,000 over the period - an extra $25k or so!
And if interest rates stay at 5%, add another $30k to make $55k
of extra costs for you!
A repayment mortgage will suffer an additional penalty on a
longer loan - the amount of capital you pay off each month is
adjusted to take account of the fact that it now runs over 40
years, not 25, and this means you build up equity in your
property far slower than in a shorter loan.
So what's the advice? If you can't afford a house on a
'traditional' setup, rent. The price will undoubtedly come back
into line with wages at some point. If you already have a
mortgage, overpay when you can - the difference over the years
can amount to TENS of thousands of dollars!
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