Yeah homeowners know this, you're buying into an elaborate pyramid scheme. The interest doesn't matter because you can count on the value of the house to far surpass it.
I'm canadian and our entire economy is based off of an artificially inflated housing market. Almost the entire canada pension fund is invested into REITs and the chance of housing ever going down in value is slim to none. The gov will do whatever possible to prevent that. The entire country could be in shambles and the gov will just keep bailing out homeowners and increasing immigration.
Take out a 30 year mortgage and join the club. If you can't beat em join em.
I have a 30 year mortgage on around $450,000 but my condo has already increased by $50,000 in the last year, but I've only lost about $15000 in interest. In 5 years I should be able to leverage the condo into a $1m house with yard, just outside city limits. I deliberately bought on an island that is insanely desirable and all the land is already spoken for. Eventually a developer will want my acreage and I'll cash out again, and then I'll move somewhere cheap and never work again.
The joy is you get to pay pretty much the same each month for the entire 30 years. Insurance and property taxes will increase but that is fairly small increases. Now go look at what rent was 30 years ago. Imagine paying that today instead. Don't pay off your mortgage early, don't refinance (unless you can drop >1.5%), and ride the long con.
They're saying your interest payments may feel like much today, but because the currency devalues over time/inflation, it remaining constant will end up being cheaper in the long run.
Today a 30 year fixed at 6.48% for 400k with 80k down payment is $2,400 / month with insurance and property taxes, but let's just say 2,500. That currently will rent a nice 3 bedroom apartment in mid sized metropolitan areas. In 30 years the mortgage might be 3,000. What would a 3 bedroom apartment be renting for? 30 years ago it was 1,200 ish. So 30 years from now, 5,000 for that apartment?
Mortgages make sense for the long term, not just equity (house value goes up) but stability in your monthly housing budget.
That mortgage will end up costing 862k, not 400k. But let's be clear, 6.5% interest is horrendous, you can get a lower rate sometime in the next decade. This plan makes even more sense if the money you save as the years roll by you invest in retirement instead of getting a boat, motorcycle, or avocado toast.
I don't know how it works in the US but here you remortgage every 5 years with a new interest rate, and as we head into a bad recession, those rates are going to get insanely cheap
Not to mention that hopefully your salary also increases so you can pay to capital if the interest rate is higher than what you can get is you invest it
Compound interest is a hell of a thing. That being said, $320,000 borrowing cost makes me think this guy is doing a 30 year mortgage with the absolute bare minimum down payment. Don't do that if you don't absolutely have to.
Everything's expensive and no one gets paid enough. Houses are especially expensive, and so is rent which makes it hard to save up. Bare minimum down payment and maximum available down payment assistance is basically the only way to get it done if you're not clearing 6 figures.
I clear 6 figures and still had to borrow $100k from dad. I live in one of the most expensive cities in the world though.
Dad bought his acreage for $38,000 with 19% interest back in 1991 and now it's worth almost $1m. And he never finished school - he only got that acreage because his parents helped him too.
Dude has since leveraged that acreage into an impressive classic car collection and close to $1m stock portfolio, so the money I needed was almost nothing for him.
System seems catered to multi generational families at least where I am. Doesn't seem to matter much how much you make...just need to be born into the right family. I know people who make more than me who are stuck renting, and I know people making half as me with a detached house because their parents have money.
Well, no, because the 300k go to the owner of the house. And your house after 30 years is hopefully worth much more than 300k. But I understand your point. It's pretty nuts when you think of it like that.
28 replies
Yeah homeowners know this, you're buying into an elaborate pyramid scheme. The interest doesn't matter because you can count on the value of the house to far surpass it.
I'm canadian and our entire economy is based off of an artificially inflated housing market. Almost the entire canada pension fund is invested into REITs and the chance of housing ever going down in value is slim to none. The gov will do whatever possible to prevent that. The entire country could be in shambles and the gov will just keep bailing out homeowners and increasing immigration.
Take out a 30 year mortgage and join the club. If you can't beat em join em.
I have a 30 year mortgage on around $450,000 but my condo has already increased by $50,000 in the last year, but I've only lost about $15000 in interest. In 5 years I should be able to leverage the condo into a $1m house with yard, just outside city limits. I deliberately bought on an island that is insanely desirable and all the land is already spoken for. Eventually a developer will want my acreage and I'll cash out again, and then I'll move somewhere cheap and never work again.
works until it doesnt
Like any pyramid scheme. For now, I don't believe we will see a collapse in 30 years, given the climate crisis
https://www.bankrate.com/mortgages/historical-mortgage-rates/
About where it should be, really. The kicker is that prices went way up when rates were so low for so long, anf prices are sticky.
Grandparents in the 70s were paying like 12 or 15 percent.
The joy is you get to pay pretty much the same each month for the entire 30 years. Insurance and property taxes will increase but that is fairly small increases. Now go look at what rent was 30 years ago. Imagine paying that today instead. Don't pay off your mortgage early, don't refinance (unless you can drop >1.5%), and ride the long con.
Really, doesn't even take long. When I bought my first place here in Los Angeles, the mortgage was 2.6k, rent 2.2k for comparable places.
Then boom, somehow it's 3.2k rent now and I'm paying 2.6k four years later. That's fucked up, of course, but that's how it works.
what
They're saying your interest payments may feel like much today, but because the currency devalues over time/inflation, it remaining constant will end up being cheaper in the long run.
Economics is stupid.
Economics is fine. Finance is stupid.
both
Economics is just the study of how production happens. Some economic models and theories suck, but it can't "suck" any more than biology or physics.
Finance is the man-made bulshit.
because it is not made for poors
Today a 30 year fixed at 6.48% for 400k with 80k down payment is $2,400 / month with insurance and property taxes, but let's just say 2,500. That currently will rent a nice 3 bedroom apartment in mid sized metropolitan areas. In 30 years the mortgage might be 3,000. What would a 3 bedroom apartment be renting for? 30 years ago it was 1,200 ish. So 30 years from now, 5,000 for that apartment?
Mortgages make sense for the long term, not just equity (house value goes up) but stability in your monthly housing budget.
That mortgage will end up costing 862k, not 400k. But let's be clear, 6.5% interest is horrendous, you can get a lower rate sometime in the next decade. This plan makes even more sense if the money you save as the years roll by you invest in retirement instead of getting a boat, motorcycle, or avocado toast.
I don't know how it works in the US but here you remortgage every 5 years with a new interest rate, and as we head into a bad recession, those rates are going to get insanely cheap
Re financing comes with fees and doesn't make sense to do often. They hide the fees into the new mortgage. Banks don't lower your costs for funsies.
I'm on floating mortgage so I don't think I'm affected - floating just follows the prime interest rate of the BoC + 1.5% or something
Gambling to go with floating but to me its a no brainer that rates will get cheaper
Motorcycles don't have to be expensive. Buy used, repair/maintain yourself and it's not bad
Not to mention that hopefully your salary also increases so you can pay to capital if the interest rate is higher than what you can get is you invest it
Compound interest is a hell of a thing. That being said, $320,000 borrowing cost makes me think this guy is doing a 30 year mortgage with the absolute bare minimum down payment. Don't do that if you don't absolutely have to.
Everything's expensive and no one gets paid enough. Houses are especially expensive, and so is rent which makes it hard to save up. Bare minimum down payment and maximum available down payment assistance is basically the only way to get it done if you're not clearing 6 figures.
I clear 6 figures and still had to borrow $100k from dad. I live in one of the most expensive cities in the world though.
Dad bought his acreage for $38,000 with 19% interest back in 1991 and now it's worth almost $1m. And he never finished school - he only got that acreage because his parents helped him too.
Dude has since leveraged that acreage into an impressive classic car collection and close to $1m stock portfolio, so the money I needed was almost nothing for him.
System seems catered to multi generational families at least where I am. Doesn't seem to matter much how much you make...just need to be born into the right family. I know people who make more than me who are stuck renting, and I know people making half as me with a detached house because their parents have money.
Such is the nature of capitalism. The winners are the ones who were clever enough to be born into generational wealth.
That's why you don't buy a house at first but a small flat. The loan is smaller, the bank receives less.
Once you have paid that off, buy a bigger flat and use the first flat as collateral. The interest rates are better.
https://en.wikipedia.org/wiki/Property_ladder
Interesting
Well, no, because the 300k go to the owner of the house. And your house after 30 years is hopefully worth much more than 300k. But I understand your point. It's pretty nuts when you think of it like that.
Money now > money thirty years from now.
nty my personal discount rate says i’ll wait