Tag Archives: 40-year mortgages

Federal Government Strengthens Mortgage Rules

Late last week the Federal Finance Department announced some tightening of mortgage rules, hoping to avoid the risk of a U.S. type housing bubble.

The biggest one is that 40-year mortgages are out. That is, the 40-year mortgages no longer qualify for mortgage insurance when there is less than a 20% down payment.

Now don’t be thinking that’s really sad. We’ve talked about the financial risks of that length of time already. Reducing a $200,000 mortgage to 35-years increases the payments by $40, but saves almost $50,000 in interest. So it’s a good thing – but didn’t go far enough, in my opinion.

The second rule change is that there needs to be at least a 5% down payment. Fair enough – because someone with no money down is buying a nightmare and it’s often speculators who contributed in huge ways to the U.S. housing meltdown, thinking they could buy it and flip it, without ever sticking a dime into the house.

The third one is that not anyone can get a mortgage. There needs to be a minimum credit score. But NONE of the media stories had the score. It took me some time to dig it up out of the regulations.

It’s a minimum score of 620 to qualify. Now nobody needs to panic. 620 is not anyone who has decent credit. That starts around the 700 mark, but it’s a very low threshold to avoid a lot of the subprime mortgages that set off the U.S. market. And subprime mortgages have been growing at 50% in Canada. The score is too low but it’s a great start by the Government, even if it’s a ways too low.

Say It Ain’t So!

One of the worst imports we’ve got from the U.S. is the recently marketed 40-year mortgages. But according to the last RBC Homeowner Survey, almost half of all first-time homebuyers are taking this term!

Here’s the bottom line: It’s purchasing a dream home and making it into a financial prison.

Let’s look at the implications for a minute: Just a relatively small $250,000 mortgage over 40-years stretches the payments by another 15 years and drops them only $235. That might seem like a good idea until you do the math, because this small amount of breathing room each month comes with a very high cost of over $177,000 in extra interest.

On this $250,000 mortgage, the total you’d be paying back is $660,000. Now remember that this is net income you use to pay your bills. So in a tax bracket of around 30% you’d need to earn just under one million dollars just to pay off this mortgage. And after ten long years of payments, you’ve barely paid off $20,000 of principal!

Oh – and if you’re past your 20s, a 40-year mortgage likely means you’ll die never having paid it off and having made payments for an entire lifetime. THAT is not a recipe for financial success.

We do whatever it takes to get that home and stop thinking, planning and being realistic about the debt we’re taking on. And I guarantee almost everyone who needs to take a 40 year mortgage won’t be saving anything for retirement or an emergency. Every new homeowner also needs the money for the tax adjustment, legal bill, interest adjustment, buying a lawn mower and the basic homeowner stuff and that $5,000 or $6,000 goes on a credit card or line of credit and immediately forces another $200 payment.

-purchase a home for a lower selling price
-pay off one of your current bills to get your budget in line
-save a little longer, harder and more to increase your down payment by another 5%
-will your parents help out? NOT with a loan – that’s just making something bad – worse but with a gift of some down-payment to help you not kill yourself with payments and debt?
As with any borrowing: Just because you can – doesn’t mean you should!

Here Are Five New Insights That Are Definitely Worth Knowing About:

Shell has just rolled out “Pay By Touch” biometric payments. We talked about it a few months ago and now it’s here. Yes, you just need to give them your fingerprint as payment, which is hooked to your credit card. Right now, don’t look for it here, it’s just in Chicago area Shell stations and stores.

E-bay recently started their very own gift cards, for sale through 10,000 grocery stores. But you can also get them on-line to e mail to anyone you choose for amounts under $500. But I have a question: With tens of billions of gift cards sold each year, stores get a commission for selling them. What? You thought they sell them to help you out? Nice try. So when we buy the directly from the retailer how come we don’t get a discount?

There is now something called a virtual or disposable credit card. It’s a one-time use card. You get a temporary number that’s linked to your real credit card number and it’s governed by your same cardholder agreement. But it makes nervous people happy as they can use it on-line, and with merchants they don’t really trust. Right now they’re issued by Bank of America and Citigroup. But I never understand why so many people spend all that energy worrying about this kind of stuff. Repeat after me: By law, you are NEVER on the hook for any fraudulent charges on your account. Relax…

An RBC Survey last fall reported that about half of all new mortgages made in Canada are 40-year terms. Great news for lenders – probably the worst news for those who actually do it. It’s financial suicide: On a $200,000 mortgage the payment might drop $160 a month, but you’re adding $173,000 of interest. I can think of at least five or six ways to make a 25-year mortgage work, instead of this, and it’s not a stretch to figure there are hundreds of things I’d rather do with $173,000 interest than gifting it to one of the mega banks!

Last month, Visa issued a $19 billion public offering. That was one of the biggest private offerings ever, and on March 18th, the first day of trading, the shares opened at $44. By the end of that day, they were at $56. Debt really does pay if you’re a shareholder, but NOT if you’re broke and paying the interest on the other end of the food chain!