The 100 year mortgage is our modest proposal to spur homebuying which has virtually no adverse effect. It is based on the dual premise that people will buy if they can afford to make the payments or if the cost to rent is comparable. The 100 year mortgage will provide BOTH incentives.
It is a melancholy object to those who walk through this great town or travel in the country, when they see the streets, the roads, crowded with sellers, followed by three, four or six children, all in rags importuning every buyer for an alms with “for sale” signs. (adapted from “A Modest Proposal” by Jonathan Swift, 1729)
Objections center around the fact that the owner will build very little equity and the debt is passed to future generations. This is mostly true, but there are offsetting advantages.
- Firstly, it provides a greater prospect for home ownership. If a person will rent an apartment which builds no equity, why not live in a home with the same consequence, if the payments are the same—-you’ll probably get more square footage (and can paint your walls purple).
- Secondly, building home equity is still in the cards because home appreciation is still possible—–it is never possible for a rental.
- Thirdly, for the substantial number of homeowners who move after 5 to 7 years, the equity effect is virtually the same. (NAR says the average is every 7 years)
- Fourthly, the tax advantages of home ownership still abide
- Fifthly, you can still refinance at any time
- Sixthly, the reality is most people pay a monthly housing cost for most of their life
- Seventhly, real estate transactions are likely to increase.
The bank that offers this product will own the historical claim of being the FIRST (in this country) and get plenty of free advertising—-extensive news coverage and blogorrhea out the wazoo. Even a spot in Wikipedia. You can’t buy that kind of publicity.
An example of the savings— compared to the 30 year 7% mortgage, the 100 year mortgage will save the buyer approximately $81.50 per $100,000 borrowed. On a $625,000 home with 80% financing, that’s a savings of over $400 per month.
What think thee?
Never-ending mortgage launched (aboutproperty.co.uk): Inter-generational mortgages in the UK by Kent Reliance. Apparently, Switzerland, Japan and Ireland have similar mortgage products.
Til Death Do Us Part (Mayfair Consulting)
Technorati Tags: 100 year mortgage, home buying, mortgage, housing, rent, home buyers, housing bubble, real estate bubble, sellsius
I have my own idea I’m working on to build small affordable houses for one or two people. Currently, in my area, minimum lot sizes require such housing to be built as condos (because the minimum lot size renders the house unaffordable for the vast majority of current renters). For example, you could build four small houses on a single lot but you cannot subdivide the lot, so the houses could be owned only as condominium units where you own the house and have a partial interest in the land. My goal is to put home ownership (however modest) within reach of the average hamburger flipper. Adult hamburger flippers tend to be unmarried and childless, making inter-generational mortgages infeasible for them.
This isn’t as crazy as it might seem on the surface. Here’s why:
1- There is little doubt that very few people under 40 will ever pay-off their mortgage; debt becomes a way of life.
2- There are other investment vehicles that can offer a better than 4.5% after tax return (the costs of funds).
3- Our society has moved from a paternalistic one to an individual responsibility (no pensions, the fear that social security will be gone, invest your own retirement, etc.). In short, this is not your grandfather’s economy.
4- The economy has moved and should continue to move to a leveraged asset economy.
A homeowner should get the 100 year loan, invest the $400/month into a growth vehicle until she has enough money for a downpayment on a rental…Then..repeat.
Brian,
If you say it aint that crazy, we’ll listen. When we read about the 50 year mortgage we thought ‘why stop there?’
If anything the 100 year mortgage is something of a multigenerational loan. There are a few benefits but the a major downside is that amortizing something over such a long period with a guaranteed interest rate is a major plus for banks and lending institutions. Wouldn’t you like to get 7.5% guaranteed for 100 years?
Not only that, this is tantamount to locked in renting. At sky high housing prices in certain areas that will see little to no appreciation in the next five years, you are essentially putting an albatross on your neck and sticking a fork in the ground wherever you are buying. Need to sell? 6% selling cost plus the fact that your home may be worth a lot less. Look at California; many folks have life events including illness and divorce and over 100 years there is a good possibility this will happen.
Investing the difference of owning and renting. Renting is so much cheaper in high priced areas that you can invest the difference and come out ahead in the long run without the burden of owning a very expensive home. This proposition works in 35+ states were home prices are moderate but in high cost areas this is just a recipe for disaster. Want to see an example of this in practice? Google Japan and their 50 year mortgages and see how well their housing market has done in the past two decades. Take a look at a few examples I have on my site of Southern California homes that cost $400,000+ for 800 square foot boxes in non-prime areas. Want to put that money into one of these places?
Interesting concept, appealing benefits, in the end an unwise financial move.
Dr. Housing Bubble
http://drhousingbubble.blogspot.com
I’m commenting
Hi Dr. Bubble,
Thanks for stopping by.
Yes, the 100 year mortgage is akin to the inter-generational loans in other countries. You indicated no help for housing in Japan– but have Switzerland or Ireland or the UK have similar results from these loans?
Also, the lock in for banks for 100 years at 7.5% is not necessarily a good deal is it? What if rates rise to double digits? Then that paper is not as valuable.
I voted in favor of it and now I see Brian Brady likes it? Count me in. I cannot think of a downside. Of course, some lenders (not Brian) will still try to sign people up for 125 percent loans…..
I don’t know about this, maybe I’m just a little too conservative. I thought one of the benefits of the 30-year mortgage was that, roughly speaking, for most homebuyers that means they’ll enter retirement just as they pay off their mortgage.
Of course, with Americans moving relatively often, for many of them whether it’s a 10-year product or a 30-year product, they may never pay it off.
How about a “portable home mortgage” like what E-Trade (I think) had available briefly a few years ago. The idea is you lock in a loan for a 30 year period, and you can take that loan with you to your next home. As long as the next home has at least the same amount of equity, why not? The downside for the banks, of course, is that they don’t get nearly as much business.
Like anything new, it has to be tried to measure its impact. Inter-generational loans have existed in Europe but we do not know their impact, if any, on home ownership. We can only guess the advantage is to the consumer rather than the banks because no bank has offered the product. Banks surely have considered it.
The portable home mortgage is a great idea.
100 years is old news. 101 is the new 100.
http://www.themortgagereports.com/2007/03/so_your_governm.html
From a lay-persons perspective this is a very tough idea to get ones arms around. As someone that’s owned propery once, sold it after 7 years, and has been renting since, my reaction is that this would indeed just drag out whatever equity I am building.
Many a young person learning about home ownership really doesn’t fully grasp the positives and negatives. The most important rule I took away when buying was that if you are not going to STAY in your new home long enough then your just paying interest payments and you may as well rent.
Tough to see how a 100 year mortgage gives anything to the new homebuyer that moves after 8 years.
All top producing realtors and mortgage
loan officers are great networkers. Remember, oftentimes, It’s not what you know, but who you know that counts! Network marketing is very successful because of the trusting personal relationships …
I own LenderLister.com and list wholesale loan programs for a living.
The 100 year mortgage is very exciting! I know my website visitors/mortgage brokers would go crazy over it! I think it could stimulate the mortgage business and our economy right out of the slump were in.
Great Idea!!
Jack Getter
http://www.LenderLister.com
I think that it does make sense. After all most people give there property onto their siblings. So a 100 year mortgage can see a family own a piece of property over time.
Though a 100 year mortgage provider better not tell its clients how much it will earn during that 100 year period - namely a fortune!
How did we get to the point that people think a 100 year mortgage makes sense? Buying a home has always meant owning it someday, when did that change?
First off, a few “facts” you left out.
1. Owning a home is not cheaper than renting, especially if you never really own it. Being able to paint the walls purple is nice but it doesn’t override the simple fact that maintaining a home can be expensive and very time consuming. Water heaters wear out, air conditioners break, lawns need mowing, driveways crack, etc. Not to mention the various other expenses that come along with owning a home, like insurance and property taxes and home owners association fees and what seems like a never ending list of people with their hands out.
2. If you own a house and want to move, you have to sell it. That can be a HUGE problem if the property values have dropped. The days of property always appreciating in value are dead and gone. If you rent, you just walk away.
3. The tax break thing is highly overrated. Paying 1000s of dollars a month to a mortgage company so you can save a few hundred on your taxes seems rather backwards to me. Wouldn’t it make more sense to put that money in something that could actually make money instead of just saving a little?
Giving people a way to buy things they can’t afford (because they are priced 10x more than they should be) doesn’t seem like it is fixing the problem, it seems more like it just getting more money out of my pocket and putting it in the pocket of someone else. If we stopped this kind of nonsense, maybe the prices would come down to a sane level and people could, like my parents and grand-parents did, actually own their homes instead of paying eternal homage to the bankers and mortgage companies.
One thing’s for sure: The Automobile
This little jewel keeps getting more expensive every year; the former 18/24-month auto loan is now approaching 60 months; auto makers may have had to juggle their inventory a bit from time to time, but when excess inventory was worked through, the succeeding year’s prices would continue to increase, for one reason or another, just like the home building industry. One of the major components of the existing home market price increase is its utilitarian comparison to new construction and its cost increases. Just for comparison, consider a few of the following: a sewer connection for a new home (locally) is about $6-8k whereas it “used” to cost “only” $1k. Now take the water service and meter: that’s up to about (locally) $5-6k. Take drywall, WOW, what a price change that’s been. Take plywood and the like, WOW, again! This scenario can go on, but as we are all affected with price increases, modifications in life mannerisms must change. I find many American ideas coming to pass after I’ve heard about similar concepts being in place in Canada, Asia and Europe. The American way is not always the better way. Think about it….
I though the general idea was to eventually own the property you live in. Maybe the issue is really not earning enough income to be able to afford to live inthe community you actually work in.
It is now very difficult for the general public to qualify for a mortgage loan now that the sub-primes are gone. Even with the drop in home equity the last couple of years, most people are not very excited about the traditinal 30yr mortgage. These are some wild financial times and I don’t think things will ever go back to the way they were 20 years ago. We need some fresh home lending ideas that are going to be practical, no matter how outrageous they may sound. We need a home loan revolution and I think the “Centurion Mortgage” is a concept whose time has come.
Swiss banking and credit rules are very tight and conservative. This is because they learned from the past on bad lending. Why do I mention it? 100 year mortgages are a norm in Switzerland where real estate is very expensive. By the way, current interest rates in Switzerland are around 3%.
Thanks Enrique for the information. And how do the people of Switzerland like the 100 year mortgage? Is it popular?