40-year mortgage anyone?

[muppet]

Hi Guys

Anyone keen to get a 40yr mortgage, well then you will have to move to the USA.

40-year mortgages hit the mainstream

They've been a niche product for years -- but so were interest-only loans. Now that Fannie Mae is buying them, 40-year loans could get more popular.

By Bankrate.com

The 40-year mortgage, for years a niche product, is about to become mainstream. Whether it earns widespread acceptance is another matter.

Forty-year mortgages have lower monthly payments than their 30-year cousins, although they cost more over the life of the loan because the borrower pays interest for 10 years longer. With the lower monthly payments, they are seen as a tool to allow people to buy homes that are unaffordable with 30-year mortgages.

"It allows you the opportunity to have a lesser payment, and for many people it gives the luxury of choice," says Jim Sahnger, a broker with Palm Beach Financial Network in Sewall's Point, Fla.

Forty-year mortgages have been rare because lenders couldn't sell the loans to investors through the government-sponsored enterprises Fannie Mae and Freddie Mac. The mortgages remained on the lenders' books, tying up money for a long time. That state of affairs changed with June 2005.

For a long time, Fannie Mae would not buy mortgages with terms longer than 30 years. Fannie Mae stuck its toe in the 40-year mortgage pool a year and a half ago when it started a pilot program to buy the long loans from 22 credit unions. Now Fannie Mae has really taken the plunge, and will buy conforming 40-year mortgages from any qualified lender.

Borrowers will have a choice of a fixed-rate loan or a variety of adjustable-rate mortgages, or ARMs. A spokesman for rival Freddie Mac says the company doesn't buy 40-year mortgages, but is considering adding them to its product line. However, spokesman Brad German adds, "Borrowers looking for lower monthly payments have plenty of other options to choose from, such as ARMs, interest-only loans or combinations of the two."

Borrowers on the edge
The demand for 40-year mortgages has been minuscule, partly because few lenders have offered them. The most-prominent 40-year lender is Washington Mutual. Fannie Mae assumes that more lenders and brokers will offer the long loans now that they can be sold on the secondary market.

Regards

[pixie]

Term Mthly Wkly Loan Total (borrowed $100k at 6%)
15 yrs $843.86 $194.74 $151,894.80
20 yrs $716.43 $165.33 $171,943.20
30 yrs $599.55 $138.36 $215,838.00
40 yrs $550.21 $126.97 $264,100.80

AAAHHHH ! As a person who actively dissuades people from taking out long term loans this article is SCARY.

For want of a few dollars a week (a packet of cigarettes or maybe a couple) people are putting themselves in extraordinary debt over their whole working life. Worse - it will be years before they are actually paying anything meaningful off the principal.

40 year loans, even 30 year loans are (in my opinion) really really bad for consumers! Only the bankers win!

[Josko]

SCARY and highly irresponsible.

If anyone can see a positive in this facility I would love to learn what it is.

[Julian]

It is no scarier and no more irresponsible than a 30 year loan compared to a 20 year loan or a 20 year loan when compared to a 10 year loan, or a ten year loan compared to paying cash.

A 40 year loan is merely one step closer to an interest-only loan, and the advantage of this is that it frees up more cash. The main advantage of a 40 year P&I loan over an interest-only loan is that the banks prefer P&I loans.

The fact that more interest in total is paid is irrelevant. It is like saying if I only drive my car four days a week I will save three days worth of fuel consumption - sure, but I will be stuck at home for three days.

For wage earners, but not investors, it might be wiser to pay off the PPOR as fast as possible. Investors have to factor in the best use of the money. If investors can earn a higher rate of return with the spare cash compared to paying off the loan then this may be a valid commercial decision.

No one can draw a line in the sand and say that one length of loan is responsible and a slightly different length is not.

Notwithstanding any of the above I personally have most of my loans on 15 year P&Is, but I do have one 25 year P&I. This is a commercial decision I have made based on a number of factors.

Julian

[Josko]

Those are good details Julian, especially when compared to being an interest only loan, however I doubt that it is the investor that these loans are being made available for. It would not have a great bearing on investors because an investor would in all likelihood go for the interest only loans.

The greatest impact this will have is on the PPOR purchasers, with the conditions the way they are in the USA property market, in this light it is irresponsible.

[fudosan]

If I stretch the loan a bit further to say 100 years, does it mean now everybody can afford a very large loan to purchase their dream house?

[Josko]

It is human nature to want once our needs are satisfied. The answer to your question fudosan is no, because you reach a point where your serviceability can only sustain an IO loan.

[Julian]

It is not the offerer of any length of loan that is irresponsible, just as it is not the seller of chocolate that is irresponsible, or the vendor of handguns, or cars, or alcohol, or lotto tickets, or cigarettes.

Irresonsiblity comes from the person that takes up an offer when it is not in their better interest to do so, or the person that is reckless with their purchase when they have it, or reckless in their consumption.

This shifting of responsibility is pathetic. It has its rootes in socialism. The state knows what is best. What a crock. If a child puts his or her hand on a hot stove element they get burnt. This is not the fault of the stove manufacturer, although there are some deranged souls that would have it that it is.

What is wrong with personal responsibility?

Julian

[Josko]

What is wrong with personal responsibility is the same thing as is with every discipline.

Communism, Socialism, Demoncracy, Liberalism are all shades of each other. A matter of who can write the best shade of regulation that serves who better.

It is irresponsible to sell chocolates to a dog, it is irresponsible to sell guns to those that will misuse them, it is irresponsible to sell alcohol to alcoholics, it is irresponsible to sell cigarettes to those that are susceptible to getting cancer.

What purpose does a 40 year mortgage serve anyone that is over 25, 65 being an acceptable age for retirement?

[Julian]

Josko,
You are quite right, of course! How silly of me to think that individuals should make decisions for themselves, and take personal responsiblity for those decisions. We should all have somebody else decide what is in our better interest.
Julian

[Monid]

Thesis, Antithesis and now Synthesis... (Hegel would be so proud)

Why can't it be the case that it is irresponsible to offer the product, and irresponsible to take up that offer as well?

[Josko]

Monid,

You should be a moderator.

I now have to do some research on Hegel thou, thank you for brinnging that synopsis to my attention.

Sincerely,

(:Edited to correct spelling)

[pixie]

Great conversation - my issue with these loans and the comment that the only real winners were the banks, comes down to education. If you think your repayments are an even amount spread out over the term of the loan then it seems reasonable that so many ordinary folk ASSUMED that their principal and interest were being repaid at the same rate. Frankly they didn't understand.
It is only in the past 5-10 years that amortisation tables were even online and not every one has access to them. Or even knows why they should bother.
To show someone what their interest / principal split looks like on a long term loan usually results in their eyes going wide and them saying somelike "I had no idea" that , during the first half of the loan life, they had achieved stuff all financially. To then show them what repaying it off with another $20 or so a week might achieve often gets people excited. To think that you might just pay your home off inside of 10 years or 15 is an aspiration we (pretty much) all have. The light at the end of the debt tunnel.

People don't shop around for a mortgage every few days or even years and thus many feel out of their depth when doing so. At this point they have to place their trust in someone that what is being offered is a good deal. Usually it is the broker or banker.

I have sat quite a few folk down and get a buzz out of showing them such scenarios. The biggest eye opener is when they see that schedule of repayments and see the interest / principal split.

For the record - 4 of my loans were setup at 25 years in spite of my instructing the bank that I wanted 15 years. Under the guise of "leaving me as much flexibility as possible" they set the loans up as longer term. They then wanted to charge me a fee for changing the repayment amount ! How many others would never even notice?

So - whilst I agree that there is thing called personal responsibility and people need to hold themselves to account - I also believe that when making the (often) most important financial decision of your life (which you don't make every day) that a bit more education would go a long way. I don't "blame" brokers and bankers for selling the product if it exists but consider that it isn't really a product that should be in the market place.

[kelster]

For the person wanting to purchase their own property, I would be concerned at the level of interest being charged and the ability to ever make a profit on the purchase or at the very least break even in line with inflation.

However for the PI, such issues are less of a concern. TSB currently have a 40 year mortgage option that could as previously suggested been a viable alternative to an interest-only loan for the more conservative investor. With interest relatively high with respect to rent and cashflow secenarios, the length of the term can provide some breathing space.

A 40 year mortgage at 7.5% works out to repayments around $225-230 per week, whereas a 30 year term at the same rate requires repayments around $240-250. As with any financial product, it will suit some parties more than others.

[artemis]

Many people sell long before the 40 year mark. I think the average length of a mortgage in NZ is under 7 years. So in many, maybe most, cases the borrower does not pay anything like the total interest.