Weekend Reading – Mortgage amoritization crisis?
Welcome to a new Weekend Reading edition, with a few thoughts and references to any mortgage amoritization crisis happening.
Before some information on that, some reminders:
This was my suggestion to play both equity defence and equity offence with your portfolio as you age.
I recently posted our growing dividend income update here. Onwards and upwards for next month!?
Weekend Reading – Mortgage amoritization crisis?
No doubt some Canadians might be struggling financially now with soaring borrowing costs.
For most homeowners, the standard time to pay off a mortgage is about 25 years.
(I’ll come back to our short mortgage story in a bit…)
Now, in the wake of higher interest rates, I read some reports that some existing homeowners are seeing their amortization period go as high as 90-years as their ‘fixed-payment’ variable-rate mortgages adjust automatically to rising interest rates.
90-years of mortgage debt??
I wrote in this recent Weekend Reading edition that any such debt would be a lifelong prison sentence…
But like Rob McLister wrote about in The Globe and Mail a few days ago, who is an interest rate analyst and mortgage strategist I’ve followed for years, we shouldn’t be worried about any mortgage amoritization crisis even if rates inch higher. They probably will!
“Statistically, the actual number of people who’d take 40-plus years to pay off their mortgage is so small as to be irrelevant. According to data from Mortgage Professionals Canada, the typical Canadian pays off their mortgage in roughly half of that.”
Like Rob, I think most media doom and gloom is overblown.
Sure, some Canadians are in well over their heads based on years of believing and living like money is cheap, but odds are, interest rates should be lower in a few more years. Besides that, folks in time will adjust. Money shouldn’t be cheap. Time to normalize that again.
While borrowing costs are now near rate-levels not seen for some 25 years, if we use history as a guide, interest rates do not drive consistently higher for decades indefinitely. They go up, go down, and up again. Borrowing costs simply don’t represent any sort of exponential graph…
Central banks will bank. I would hope they continue to assess the dynamics of core inflation and the outlook of said inflation to support some form of price stability for Canadians – eventually getting it right.
Just that now, price stability is hard to come by.
Coming back to our situation, and learning financial lessons from others over the years, I’ve rarely heard about individuals regretting being debt-free. Sure, there are opportunity costs when it comes to investing and building assets with leverage, but at the end of the day, I don’t know of anyone personally who regrets getting out of debt and staying out of debt.
“The biggest single point of failure with money is a sole reliance on a paycheck to fund short-term spending needs, with no savings to create a gap between what you think your expenses are and what they might be in the future.” – The Psychology of Money.
I’m not suggesting folks take on any scarcity mindset though…
A scarcity mindset IMO is when you are so obsessed with a lack of something or conserving something — usually time or money — that you can’t seem to focus on anything else. Sadly, our society has evolved to a negativity bias – we seem to be more motivated by consequences over carrots. A scarcity mindset can make us do irrational things…like yo-yo budgeting, fear of taxation and establish other damaging mental blocks.
I guess that’s why we’ve always decided to invest and pay down debt at the same time. Essentially, trying to do two good things, slowly, at once. Your mileage may vary.
While rates are higher now, maybe higher than you expected in a few months too, odds are that interest rates will come down a bit but only in the coming years – so now is the financial time to weather the storm.
My simple advice: make a clear debt reduction plan, if not already done, and keep at it.
And maybe buckle up a bit:
Canadian Job numbers beat expectations by +40k (+60k vs +20k).
Bank of Canada will most likely hike on July 12th.
Tighten the chinstrap on the helmet, it’s going to get a little bit more bumpy.
— Vince Gaetano (@VinceGaetano) July 7, 2023
In summary: crisis headlines come and go, and they might make us react to pretty much anything to get our emotions flowing. Negative vibes can work to a point.
Contrary to what headlines might want you to believe however, our major lenders are not providing 90-year or 80-year mortgages to people when they want to buy their home. The changing amortization period is only happening on existing variable-rate fixed-payment mortgages and to a select, small percentage of all borrowers at best.
Will there be unpleasant mortgage renewals ahead in the coming years for many?
Thanks to years and years of killing debt myself when it was cheap to do so, I shouldn’t be one of them. When in doubt, having less or no debt is never a bad default choice.
More Weekend Reading…
On Jon Chevreau’s site, retiree Fritz Gilbert shared more retirement blind spots.
On Money Architect, an interesting provocation: should you disinherit your greedy children?
Based on a survey that caught my eye, almost half of Canadian investors plan to switch their advisor.
From the article:
“According to the 2023 EY Global Wealth Research Report, 45% of Canadians are looking to add, switch or move wealth management providers, a 24% increase since 2021. Seventeen percent cited market volatility as their primary reason for making a move.”
“When it comes to choosing a wealth manager, investment performance (48%) and fees (40%) were the top factors, followed by brand reputation (31%), range of product (30%) and personal referrals (19%).”
Yes, fees are a factor for sure…
Prospective advisor: my mininum is usually household investable assets of $300,000 and I charge a 1.5% AUM fee, which covers all my services. This rate is my maximum and goes down as total assets break the $500K mark, then the million dollar mark and so on. Do the math – my average clients are paying $5000+ per year for my services. So, our revenue is entirely dependent on long-term client relationships, it depends on retaining you as a client and growing your assets.
Prospective client: $5,000 paid per year, every year? I need some time to think about that…
With so many excellent, low-cost, diversified fund products and new solutions coming out all the time I feel it’s never been a better time to be a DIY investor.
Congrats to DIY investor, Rob, on his dividend income update. Eh?!
Dale Roberts was also busy trying to make sense of the market recently. Not easy to do these days!
Have a great weekend,