10 ms·

The existence of the 50-year mortgage shows lenders are desperate

26 points by benrmatthews 4y ago

1randomuser 4y ago
bediger4000 4y ago
The author's point is that a 50-year mortgage is a bad deal because almost nobody has a 50-year working lifetime to pay for it, and besides the interest over that time span is absurd. But let's think instead of who a 50-year mortgage is bad for: someone who can't quite currently afford a house. Who is a 50-year mortgage good for (bearing in mind this is a UK thing): anyone in the business of lending. It's a done deal that these will become a commonly done way to buy a house.
- rogerkirkness 4y ago
  These or even longer ones are common in various places.
- chadash 4y ago
  I don’t think this is quite right. If the interest rates are low enough, even the most financially savvy people will take this deal. For example, I have a friend who can easily afford to pay cash on a $1 million house, but he has a 30 year mortgage. Why? Because his mortgage rate is 2.5%. He can take his money and put it into Stocks or other investments and get a much better return than 2.5%. If he were truly risk-averse, he can even put the money in long term treasuries and make more than 2.5. At low enough rates, it always pays to have a loan. It’s (almost) free money. Edit: at current interest rates this advice makes less sense, but even so, it could pay in some situations. For example maybe your mortgage is 4.5% but your student loans are 7.5%. Take the mortgage and pay down those loans. Obviously too much debt is bad, but not all debt.
  - psychphysic 4y ago
    It begs the question why don't banks do that instead of lending it? Well because the bank never had the money they lent you. Central banks let retail banks invent money for the loans[0]. Then incentives then to meet some thresholds on "affordability tests". If they do that loan doesn't use up as much liquidity as it's face value. The net effect? You pay your bank interest on money that cost (used bank resources) less that the face value. [0] https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
    - missedthecue 4y ago
      This is a common misunderstanding of banking. They don't invent money. The money supply "increases" when banks lend because of the double entry accounting system. They give you a loan, you can deposit the money in a bank account, and they have more deposits to loan out. It's literally just lending the same dollar twice, not inventing or creating money. (Well... somewhat less than $2 because of reserve requirements). That's not inventing money.
      - nyokodo 4y ago
        > That's not inventing money. Since the same money can be spent by the borrower and the saver separately and go off into circulation separately then it is creating new money.
      - psychphysic 4y ago
        It's worth checking out the link I provided to the Bank of England's document on modern banking and "loans make deposits", as opposed to your outdated view that "deposits make loans". Fractional reserve banking is not how modern banking works. Banks must maintain a liquidity but otherwise the loans are money they made up, they simply tell the central bank they made a loan.
        missedthecue 4y ago
- UncleEntity 4y ago
  It depends. Nobody says you have to make the minimum payment every month and you’re buying with today’s dollars, err…pounds, but paying with future less valuable money. Pay a little extra in the good times but have a lower minimum payment for when money gets a little tight.
ralusek 4y ago
I think access to debt unlocks the true value of a thing. You tell me what this is worth without constraining it to what you have in your pocket. However, what things like housing and medicine have shown us are that wholly free markets aren't very good with things that people place nearly infinite value on. My life saving surgery will cost me 10 million dollars? Okay, where do I sign. That number might as well be a billion dollars as long as you're giving it to me. Housing is not too dissimilar. A thirty year mortgage is already in comical territory, it's already functionally synonymous with "a lifetime."
- throwaway_4ever 4y ago
  > housing and medicine have shown us are that wholly free markets Both of these examples are some of the farthest things from free markets. Try to build an apartment complex and run a medical service on the ground floor. Them being so far from free markets is the reason they're so expensive.
  - slively 4y ago
    This reasoning that regulation is the cause for the price is way too simplified and isn’t a serious argument. Also even if things are cheaper to purchase without regulation doesn’t mean it’s cheaper for society, hence the entire concept of externalities. Please stop.
    - throwaway_4ever 4y ago
      Regulation prevents supply from meeting demand. Developers can't use plots to develop huge apartment blocks, asymptotically decreasing land cost to a fraction. This causes the supply/demand imbalance to increase prices for decades, leading to people to treat it as a financial asset, accruing wealth. This leads to knock-on effects from interest rates because it's a comparable financial asset. I offer you SF and Houston as cities with regulations extremely correlated to housing prices. I welcome your contradictions to that correlation across the spectrum. What isn't a serious argument is you offering no rebuttal except "Please stop." Your quip about externalities is tangential; externalities should be accounted for a properly functioning market. Nowhere did I make a contrary claim.
alexfromapex 4y ago
I think civilization needs to take a step back and reflect on why we're making debt/credit a necessity to have basic needs like shelter. Also, why are governments not creating sensible upper limits on lending and interest rates? For instance, if I can afford to purchase the raw materials and build a house myself in 10 years with my own two hands, assuming I'm not working a job, then why is a bank allowed to extend interest over 5 times that timespan and make me pay e.g. 1000% of the raw materials price in profit to them? They are preying on peoples' basic need to have a roof over their head.
- __pache__ 4y ago
  ...because not everyone has cash to buy the largest investment of their life...? loans/credit are very useful... profit is great, as long as there's competition, right?
  - throwaway_4ever 4y ago
    > the largest investment of their life That's the problem. Housing has been regulatory captured. Abundant housing contruction due to a free market would allow people to live in dwellings at a slim margin above mass construction. Houston is still $270k homes while adding 20k people a year.
    - splistud 4y ago
  - kelseyfrog 4y ago
    This is an Econ 110 answer to an Econ 473 problem.
    - __pache__ 4y ago
      Go on?
  - ThunderSizzle 4y ago
Ekaros 4y ago
Is 50 year or even 100 year mortgage worse than renting? At least if costs including maintenance are comparable? Depending on location and home maybe. Still, both offer shelter and overall monthly cost might not be different.
blippage 4y ago
The article is behind a paywall, so I couldn't read it. So I'll add my own curmudgeony observations ... Back in the day, Japan had 100 year mortgages. It was a sign that something was wrong. If lenders are desperate to lend money, then that's a huge red flag. The 2008 credit crunch happened because there was too much easy money kicking about. Lenders were desperate to lend, and got involved with wacky lending schemes that went pear-shaped. As one commentator put it about the cause of the crisis: "We shall learn a great deal in the short term, some in the medium term, and almost nothing in the long term". Roll back a few decades, and banks caught a cold on credit card. The credit card business was profitable, money flowed like water until there was a recession and the whole thing turned into a mess. Bankers assured us that they had learned their lessons and the same thing will never happen again. The truth is, though, is that nobody learns anything. All the bankers and the regulators that oversee them, who presumably should be experts and savvy in the matter are completely blind-sided. Why didn't anyone inform the governments that risk is building up in the system. UK mortgages are predominantly variable-rate (at least they were the last time I checked). OK, so the bank lends out a bunch of money. What happens if the interest rate rises? You have to plan for this, as you can't just say that interest rates won't rise. We've had historical low interest rates since about 2009. We're seeing a pick-up in inflation, with central banks seemingly more willing to raise rates. There are also indications that the economy is stagnating. OK, so a stagnating economy together with inflation could trigger higher unemployment, higher interest rates, and thus contraction of consumer spending, and consequently a recession with mortgage defaults. It's not the first time such a thing has happened.
marto1 4y ago
Some years ago Sweden actually limited mortgages to 105 years https://www.thelocal.se/20160324/sweden-limits-mortgage-loans-to-105-years/ https://www.thelocal.se/20160324/sweden-limits-mortgage-loan.... And the word "mortgage" roughly translates to "till death" since that's how they used to work in their inception. So nothing new under the sun again.

26 points by benrmatthews 4y ago

The author's point is that a 50-year mortgage is a bad deal because almost nobody has a 50-year working lifetime to pay for it, and besides the interest over that time span is absurd. But let's think instead of who a 50-year mortgage is bad for: someone who can't quite currently afford a house. Who is a 50-year mortgage good for (bearing in mind this is a UK thing): anyone in the business of lending. It's a done deal that these will become a commonly done way to buy a house.

rogerkirkness 4y ago
These or even longer ones are common in various places.
chadash 4y ago
I don’t think this is quite right. If the interest rates are low enough, even the most financially savvy people will take this deal. For example, I have a friend who can easily afford to pay cash on a $1 million house, but he has a 30 year mortgage. Why? Because his mortgage rate is 2.5%. He can take his money and put it into Stocks or other investments and get a much better return than 2.5%. If he were truly risk-averse, he can even put the money in long term treasuries and make more than 2.5. At low enough rates, it always pays to have a loan. It’s (almost) free money. Edit: at current interest rates this advice makes less sense, but even so, it could pay in some situations. For example maybe your mortgage is 4.5% but your student loans are 7.5%. Take the mortgage and pay down those loans. Obviously too much debt is bad, but not all debt.
- psychphysic 4y ago
  It begs the question why don't banks do that instead of lending it? Well because the bank never had the money they lent you. Central banks let retail banks invent money for the loans[0]. Then incentives then to meet some thresholds on "affordability tests". If they do that loan doesn't use up as much liquidity as it's face value. The net effect? You pay your bank interest on money that cost (used bank resources) less that the face value. [0] https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
  - missedthecue 4y ago
    This is a common misunderstanding of banking. They don't invent money. The money supply "increases" when banks lend because of the double entry accounting system. They give you a loan, you can deposit the money in a bank account, and they have more deposits to loan out. It's literally just lending the same dollar twice, not inventing or creating money. (Well... somewhat less than $2 because of reserve requirements). That's not inventing money.
    - nyokodo 4y ago
      > That's not inventing money. Since the same money can be spent by the borrower and the saver separately and go off into circulation separately then it is creating new money.
    - psychphysic 4y ago
      It's worth checking out the link I provided to the Bank of England's document on modern banking and "loans make deposits", as opposed to your outdated view that "deposits make loans". Fractional reserve banking is not how modern banking works. Banks must maintain a liquidity but otherwise the loans are money they made up, they simply tell the central bank they made a loan.
      - missedthecue 4y ago
UncleEntity 4y ago
It depends. Nobody says you have to make the minimum payment every month and you’re buying with today’s dollars, err…pounds, but paying with future less valuable money. Pay a little extra in the good times but have a lower minimum payment for when money gets a little tight.

ralusek 4y ago

I think access to debt unlocks the true value of a thing. You tell me what this is worth without constraining it to what you have in your pocket. However, what things like housing and medicine have shown us are that wholly free markets aren't very good with things that people place nearly infinite value on. My life saving surgery will cost me 10 million dollars? Okay, where do I sign. That number might as well be a billion dollars as long as you're giving it to me. Housing is not too dissimilar. A thirty year mortgage is already in comical territory, it's already functionally synonymous with "a lifetime."

throwaway_4ever 4y ago
> housing and medicine have shown us are that wholly free markets Both of these examples are some of the farthest things from free markets. Try to build an apartment complex and run a medical service on the ground floor. Them being so far from free markets is the reason they're so expensive.
- slively 4y ago
  This reasoning that regulation is the cause for the price is way too simplified and isn’t a serious argument. Also even if things are cheaper to purchase without regulation doesn’t mean it’s cheaper for society, hence the entire concept of externalities. Please stop.
  - throwaway_4ever 4y ago
    Regulation prevents supply from meeting demand. Developers can't use plots to develop huge apartment blocks, asymptotically decreasing land cost to a fraction. This causes the supply/demand imbalance to increase prices for decades, leading to people to treat it as a financial asset, accruing wealth. This leads to knock-on effects from interest rates because it's a comparable financial asset. I offer you SF and Houston as cities with regulations extremely correlated to housing prices. I welcome your contradictions to that correlation across the spectrum. What isn't a serious argument is you offering no rebuttal except "Please stop." Your quip about externalities is tangential; externalities should be accounted for a properly functioning market. Nowhere did I make a contrary claim.

alexfromapex 4y ago

I think civilization needs to take a step back and reflect on why we're making debt/credit a necessity to have basic needs like shelter. Also, why are governments not creating sensible upper limits on lending and interest rates? For instance, if I can afford to purchase the raw materials and build a house myself in 10 years with my own two hands, assuming I'm not working a job, then why is a bank allowed to extend interest over 5 times that timespan and make me pay e.g. 1000% of the raw materials price in profit to them? They are preying on peoples' basic need to have a roof over their head.

__pache__ 4y ago
...because not everyone has cash to buy the largest investment of their life...? loans/credit are very useful... profit is great, as long as there's competition, right?
- throwaway_4ever 4y ago
  > the largest investment of their life That's the problem. Housing has been regulatory captured. Abundant housing contruction due to a free market would allow people to live in dwellings at a slim margin above mass construction. Houston is still $270k homes while adding 20k people a year.
  - splistud 4y ago
- kelseyfrog 4y ago
  This is an Econ 110 answer to an Econ 473 problem.
  - __pache__ 4y ago
    Go on?
- ThunderSizzle 4y ago

Ekaros 4y ago

Is 50 year or even 100 year mortgage worse than renting? At least if costs including maintenance are comparable? Depending on location and home maybe. Still, both offer shelter and overall monthly cost might not be different.

blippage 4y ago

The article is behind a paywall, so I couldn't read it. So I'll add my own curmudgeony observations ... Back in the day, Japan had 100 year mortgages. It was a sign that something was wrong. If lenders are desperate to lend money, then that's a huge red flag. The 2008 credit crunch happened because there was too much easy money kicking about. Lenders were desperate to lend, and got involved with wacky lending schemes that went pear-shaped. As one commentator put it about the cause of the crisis: "We shall learn a great deal in the short term, some in the medium term, and almost nothing in the long term". Roll back a few decades, and banks caught a cold on credit card. The credit card business was profitable, money flowed like water until there was a recession and the whole thing turned into a mess. Bankers assured us that they had learned their lessons and the same thing will never happen again. The truth is, though, is that nobody learns anything. All the bankers and the regulators that oversee them, who presumably should be experts and savvy in the matter are completely blind-sided. Why didn't anyone inform the governments that risk is building up in the system. UK mortgages are predominantly variable-rate (at least they were the last time I checked). OK, so the bank lends out a bunch of money. What happens if the interest rate rises? You have to plan for this, as you can't just say that interest rates won't rise. We've had historical low interest rates since about 2009. We're seeing a pick-up in inflation, with central banks seemingly more willing to raise rates. There are also indications that the economy is stagnating. OK, so a stagnating economy together with inflation could trigger higher unemployment, higher interest rates, and thus contraction of consumer spending, and consequently a recession with mortgage defaults. It's not the first time such a thing has happened.

marto1 4y ago

Some years ago Sweden actually limited mortgages to 105 years https://www.thelocal.se/20160324/sweden-limits-mortgage-loans-to-105-years/ https://www.thelocal.se/20160324/sweden-limits-mortgage-loan.... And the word "mortgage" roughly translates to "till death" since that's how they used to work in their inception. So nothing new under the sun again.