50-Year Mortgages That Children Can Inherit(bloomberg.com)
bloomberg.com
50-Year Mortgages That Children Can Inherit
https://www.bloomberg.com/news/articles/2022-07-01/johnson-weighs-50-year-mortgages-that-children-can-inherit
37 comments
They realise, they just care more about their older home owning voters than the younger ones.
What good are rising house prices unless you sell your house, and don't buy a new one? Presumably the vast majority of those older home owning voters still need their sole house to live in, so they don't benefit from rising prices (and may be harmed by them if property values are used to assess taxes).
I think the traditional narrative was that when you were ready to retire, you'd dramatically downscale your housing. Any children you raised were (presumably) moved out, and you no longer had to consider a commute, so you could sell the four-bedroom family house in an older, closer-to-the-city suburb for $N, and buy a two-bedroom condo/house/manufactured house in a further-afield retirement community for $N/3.
easy, you just gotta have more than one house.
Real estate are great investments, just don’t count your own residence as one.
Real estate are great investments, just don’t count your own residence as one.
> when you broadly offer things that improve affordability it just increases prices
reminds me of how 0-interest financing and 72-month loans have pushed vehicle prices ever higher.
I love the F-150 and they’re great trucks but I always felt it’s f*ked up a higher trim can easily cost more than an entry level Porsche
reminds me of how 0-interest financing and 72-month loans have pushed vehicle prices ever higher.
I love the F-150 and they’re great trucks but I always felt it’s f*ked up a higher trim can easily cost more than an entry level Porsche
In the Scandinavian countries (excluding Denmark which is more of an issue of limited land) 50 year mortgages are the norm and they have high rates of home ownership.
Why not go for 1000 years mortgages or more? Serious question. Don’t stop going up in years until the monthly instalments are fractions of a cent. What could go wrong?
You actually can get interest only mortgages, which are essentially infinity-year mortgages. This doesn’t bring the monthly payment to 0, since you still need to cover the interest.
serious answer: you can probably see the issue yourself if you play around with a payment calculator that allows arbitrary terms: https://www.dallasfed.org/educate/calculators/closed-calc.as...
in reality, lenders tend to set higher rates for loans with longer terms. but let's suppose you can get a 5% loan with any term you want. you can see from above calculator that the monthly payment starts to converge to some value when you pick a very long term. for a $100,000 loan at 5%, it looks like that value is ~$416.
once you get close to that value, you're not significantly decreasing the monthly payment anymore. what you are doing is lengthening the period of time where you are paying much more interest than principal each month. with a 1000 year loan at 5%, you would only own 3% of the underlying asset after 30 years. for all intents and purposes, you have created a weirdly structured long-term lease.
I guess this isn't all bad though. if your family manages to hold onto the property for a few generations, they will eventually have an absurdly cheap lease in real terms.
in reality, lenders tend to set higher rates for loans with longer terms. but let's suppose you can get a 5% loan with any term you want. you can see from above calculator that the monthly payment starts to converge to some value when you pick a very long term. for a $100,000 loan at 5%, it looks like that value is ~$416.
once you get close to that value, you're not significantly decreasing the monthly payment anymore. what you are doing is lengthening the period of time where you are paying much more interest than principal each month. with a 1000 year loan at 5%, you would only own 3% of the underlying asset after 30 years. for all intents and purposes, you have created a weirdly structured long-term lease.
I guess this isn't all bad though. if your family manages to hold onto the property for a few generations, they will eventually have an absurdly cheap lease in real terms.
Government gets an indirect property tax in the form of mortgage interest. Maybe less awkward than the central bank owning its own debt. The people get a leveraged inflation hedge. but it seems to be going in the opposite direction making inflation worse.
I don’t understand how the government gets a property tax: the mortgage interest goes to the bank, not the government. What am I missing?
Banks aren’t going to keep 50 year fixed mortgages on their books, unless they are like 8+%. British and European people expect mortgage rates closer to 0-2%. Only government can finance that (with pseudo tax in the form of mortgage interest).
I don’t believe we have anything like the American Fannie Mae / Freddie Mac in the UK.
This sounds like the real estate industry made new friends with financial engineering industry and they are about to have their first baby. Can’t wait to see the results in 7 years or so.
Giving more people easier access to debt is a recipe for disaster.
is this the solution to not being able to afford a house in your lifetime.
how about preventing buy to let, preventing owning more than 2 property, control rents, build more affordable housing.
how about preventing buy to let, preventing owning more than 2 property, control rents, build more affordable housing.
Beautiful title and framing.
1) It allows room for people to jump conclusions, get emotional and generates views.
2) The scheme is never explained in the news.
These long mortgages exist in Japan and Sweden at least. Both have 100-year mortgages. It's like renting in that you pay monthly, never fully own. It's like owning that you have owners rights. Your children have a choice when inheriting to continue the deal or give it up.
1) It allows room for people to jump conclusions, get emotional and generates views.
2) The scheme is never explained in the news.
These long mortgages exist in Japan and Sweden at least. Both have 100-year mortgages. It's like renting in that you pay monthly, never fully own. It's like owning that you have owners rights. Your children have a choice when inheriting to continue the deal or give it up.
There is an old, fundamental principle that you cannot inherit debts from anyone, including your parents. Instead, when someone dies outstanding debts are recoverable from their estate, i.e. by selling their assets, which includes property.
They say this is "early stage proposal", which I interpret as being fluff that will lead nowhere.
They say this is "early stage proposal", which I interpret as being fluff that will lead nowhere.
Well, not quite. The principal is not that you CANNOT inherit debts; it's that you have THE CHOICE to not inherit debts. For secured debts, it often makes sense to inherit the debt rather than to lose whatever is securing it (in this case, a home).
Indeed, for mortgages, it's common to have laws which explicitly allow them to be inherited. Otherwise, a death could be a goldmine for creditors and a crisis for people living in relatives' homes. In most cases, so long as the child continues coming up with mortgage payments on their parent's home, they're safe, even if they might not qualify for that loan on their own.
A 50-year loan has upsides and downsides. One of the major downsides is that even with tiny additional payments, a loan would typically be paid off in less than 50 years. It's not clear why someone would choose to have an eternal loan, when it can be made less than eternal for not much less. Even with a 30 year loan at 5%, early payments are about 1/5 principal and 4/5 interest.
The flip side is that with reasonable inflation, effective payments will still become trivial after a few decades. And interest rates have recently been closer to zero. The calculus is different for a 2.5% interest loan.
Indeed, for mortgages, it's common to have laws which explicitly allow them to be inherited. Otherwise, a death could be a goldmine for creditors and a crisis for people living in relatives' homes. In most cases, so long as the child continues coming up with mortgage payments on their parent's home, they're safe, even if they might not qualify for that loan on their own.
A 50-year loan has upsides and downsides. One of the major downsides is that even with tiny additional payments, a loan would typically be paid off in less than 50 years. It's not clear why someone would choose to have an eternal loan, when it can be made less than eternal for not much less. Even with a 30 year loan at 5%, early payments are about 1/5 principal and 4/5 interest.
The flip side is that with reasonable inflation, effective payments will still become trivial after a few decades. And interest rates have recently been closer to zero. The calculus is different for a 2.5% interest loan.
Piker. Japan tried 100 year mortgages: https://www.sciencedirect.com/science/article/abs/pii/106195...
Good for the bakers/lenders as they can collect way more interest for the same property. Wonder how hostile the anti-inflation clause will be.
Good for the bakers/lenders as they can collect way more interest for the same property. Wonder how hostile the anti-inflation clause will be.
I first heard about a "50 year mortgage" in California about 8 years ago. I thought it was a joke about California's high cost of living. With this article, I looked at Google trends[0] and I'm very surprised to see very high interest in this.
What is the benefit of a 50 year mortgage from both sides? Forgive my lack of understanding in this area, but it seems like a debt that will never be paid off, unlikely to mature, or a very, very risky bet someone.
https://trends.google.com/trends/explore?date=2014-06-03%202...
What is the benefit of a 50 year mortgage from both sides? Forgive my lack of understanding in this area, but it seems like a debt that will never be paid off, unlikely to mature, or a very, very risky bet someone.
https://trends.google.com/trends/explore?date=2014-06-03%202...
> What is the benefit of a 50 year mortgage from both sides?
For the lender the benefit is a much larger total amount of interest paid by the borrower over the life of the mortgage.
https://www.calculator.net/mortgage-calculator.html
1) $100,000 mortgage for 30 years at 5% staring July 2022 (with no taxes/insurance/PMI/HOA/other costs [1]) = $93,255.78 total interest paid over life of mortgage
2) Same as #1 except for 50 years = $172,483.26 total interest paid over life of mortgage ($79,227.48 more than #1 above)
For the borrower, the /benefit/ is a lower monthly payment.
Option #1 above -- monthly payment of 536.82
Option #2 above -- monthly payment of 454.14 (82.68 less per month than #1)
[1] leaving out taxes/insurance/etc. is unrealistic, but the question was what was the benefit of 50 vs some other length, omitting these items shows only the difference due to the change in length.
For the lender the benefit is a much larger total amount of interest paid by the borrower over the life of the mortgage.
https://www.calculator.net/mortgage-calculator.html
1) $100,000 mortgage for 30 years at 5% staring July 2022 (with no taxes/insurance/PMI/HOA/other costs [1]) = $93,255.78 total interest paid over life of mortgage
2) Same as #1 except for 50 years = $172,483.26 total interest paid over life of mortgage ($79,227.48 more than #1 above)
For the borrower, the /benefit/ is a lower monthly payment.
Option #1 above -- monthly payment of 536.82
Option #2 above -- monthly payment of 454.14 (82.68 less per month than #1)
[1] leaving out taxes/insurance/etc. is unrealistic, but the question was what was the benefit of 50 vs some other length, omitting these items shows only the difference due to the change in length.
> For the lender the benefit is a much larger total amount of interest paid by the borrower over the life of the mortgage.
I'm just a layperson, but I don't think this is how lenders typically look at ROI on deployed capital. they can only lend so much. unless they are having trouble finding enough qualified people to lend to, I would expect them to maximize yearly returns on capital rather than absolute returns over the full term of a loan. if the interest rate is the same, wouldn't a 50 year mortgage be strictly worse from this perspective?
I'm just a layperson, but I don't think this is how lenders typically look at ROI on deployed capital. they can only lend so much. unless they are having trouble finding enough qualified people to lend to, I would expect them to maximize yearly returns on capital rather than absolute returns over the full term of a loan. if the interest rate is the same, wouldn't a 50 year mortgage be strictly worse from this perspective?
In the U. S. at least many if not most lenders sell the loan after it is made. So their business model isn't about collecting interest every year but collecting a cut of the loan when the loan is bundled into a mortgage backed security when third party investors buy the loan.
> Option #1 above -- monthly payment of 536.82
> Option #2 above -- monthly payment of 454.14
It's frightening to me how people would be willing to pay that much more in the long term for a relatively small change in monthly payment.
It's frightening to me how people would be willing to pay that much more in the long term for a relatively small change in monthly payment.
it's probably a bad idea for most people, but not for the reason you gave. one way of looking at very long term mortgages is that they are a bet on how long you will actually own the property. keep in mind that, historically, the value of a nominal dollar has halved every ~20 years. if that trend continues, the monthly payment by the end of the mortgage period will be less than a quarter of the initial real value. whether you're a "loser" for paying all that extra interest depends on what happens to the value of the house, what you did with the extra $80/month, etc. it's not inconceivable that a person/family who holds the property for a full 50 years would be better off than if they had structured it as a 30 or 15 year mortgage.
the bigger risk is what happens if you don't end up holding onto the property for a full 50 years. it will take a longer time to start building equity vs a 30 year mortgage, and the upfront interest payments are already (imo) a significant problem with 30 year mortgages. it's hard to know for sure you will live in a place long enough to break even on these types of mortgages.
the bigger risk is what happens if you don't end up holding onto the property for a full 50 years. it will take a longer time to start building equity vs a 30 year mortgage, and the upfront interest payments are already (imo) a significant problem with 30 year mortgages. it's hard to know for sure you will live in a place long enough to break even on these types of mortgages.
A variety of countries have longer dated mortgages than 30 years, and 30 years in the US is arbitrary.
Many people from Western countries don't know that the US mortgages mostly top out at 30 years and find that just as peculiar, just as OP's article about the UK is peculiar. Sweden has mortgages that are between 30 and 50 years and their recent law limits them to 105 years as the maximum.
It has nothing to do with more recent housing affordability trends.
It's arbitrary.
Longer mortgage = more debt paid to lender, and another demand driver towards more lack of affordability.
Many people from Western countries don't know that the US mortgages mostly top out at 30 years and find that just as peculiar, just as OP's article about the UK is peculiar. Sweden has mortgages that are between 30 and 50 years and their recent law limits them to 105 years as the maximum.
It has nothing to do with more recent housing affordability trends.
It's arbitrary.
Longer mortgage = more debt paid to lender, and another demand driver towards more lack of affordability.
> It's arbitrary.
It's not that arbitrary when considering human lifespans and working years. (Assuming the intent is to actually pay off the debt).
It's not that arbitrary when considering human lifespans and working years. (Assuming the intent is to actually pay off the debt).
It’s like fighting inflation by giving out money.
Canada offered 40 year mortgages (federally insured) and then quickly stopped when prices jumped with people maxing out their “lower payments”.