Weekend Reading – Mortgage amoritization crisis?
Hey Everyone!
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…
Source: https://twitter.com/JimChuong/status/1677084025536626689/photo/1
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…
Source: Ratehub.
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.
There needs to be life-work balance after all.
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?
Yes.
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…
Example:
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,
Mark
Mark
My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I'm looking to start semi-retirement soon, sooner than most. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.
The current mortgage rates are a shock to most people who have seen so many years of low mortgage rates but they sound not too bad to me. I had a renewal coming up in 1982 during the all time peak interest rate period. The renewal was at 19 3/4%! I quickly calculated the monthly payment for the upcoming renewal and realized I could not afford the payments and was at risk of losing my home.
However, there were new houses being built in the area and to sell off the remaining inventory that was just completed, the builder bought down the mortgage rate and was offering what I thought was a bargain at 14 3/4% for 5 years. I quickly put my current house up for sale and bought one of the new ones with the lower mortgage rate.
Since mortgage rates continued to drop after 1982, I switched to a Variable Rate mortgage at the next renewal and took advantage of the falling rates and prepayment options. Having been burned once at 19 3/4% and the possibility of losing my home due to a high renewal rate, I did everything I could to pay down the mortgage as soon as possible. As rates fell, I kept the monthly payments the same to pay off more principal on each payment and put any spare cash against the mortgage.
I also had some TD shares that I wanted to keep for the long term and the dividends. When the mortgage amount got down to an amount that was equal to value of my TD shares, I sold the TD shares, paid off the mortgage, got a Line of Credit against the home at a good rate and re-purchased the TD shares on my Line of Credit. This turned the remaining mortgage amount into a tax deductible loan against shares producing dividend income – the dividend income also reduced the net interest amount being paid and if interest rates took off again, my back-up plan would have been to sell my TD shares. Once the Line of Credit was paid off, I transferred the TD shares into my RRSP and continue to enjoy the Dividend income…
I recall my parents being VERY worried about inflation in the early 80s. I was a young guy then…
Fast forward to today, yes, 6-7% mortgages are not ideal but seem modest / not so bad by historical standards. I do believe most Canadians have been thinking money is supposed to be cheap. Those folks are in for a shock.
To others that have been planning for this, I believe they are the smart ones: living below their means and keeping some extra money handy just in case.
Readers will know I’ve/we’ve had a long-term plan to both pay down our mortgage over time while investing – with the goal to be debt-free and have a healthy portfolio to consider starting semi-retirement with. Those days are getting near.
I also have TD shares and continue to hold them for dividend income and some upside capital appreciation.
Keep me posted on your plans! Sounds like you’re in great financial shape now.
Mark
When I had to re-mortgage the house in 1990 the rate was >14%.
My main focus was to get rid of it ASAP. Luckily I had taken shorter terms so the rate kept dropping.
There was a Swiss farmer who rented some land from me and we got along quite well. He told me that over in Switzerland buying a house was a multigenerational investment. In other words the kids would still be paying for the house when the parents passed. Of course that was when families were not just one or two children so there was always someone who wanted to keep the “family” home. Now-a-days with smaller families there may be less incentive to “invest” in a family home, especially when that means less “fun” money for ice cream (and many other things).
How many houses will remain the family “home” when the parents pass or age considerations oblige them to move?
Different optics make for different reasoning to the worth of a house/home.
RICARDO
P.S. I like ice cream
Thanks for the mention, Mark. This post about greedy children pressuring their children for an their inheritance has attracted a surprising amount of attention.
“pressuring their *parents for their inheritance*” Sorry for the poorly edited comment!
Ha, got it! Thanks for the article. Interesting stuff!! (On a personal note, just want my parents to enjoy what they’ve built – spend it all if they choose – I’ve always planned for financial independence and never counted on any inheritance!).
Cheers,
Mark
I have never regretted paying off our mortgage quickly. It is incredibly liberating not to have any debt. We bought our house in 1988 for $ 123,000 and the interest rate was 11%. I think my wage was around $ 6.00 per hour at the time. When we renewed 5 years later the interest rate was 13.25%. We paid off our mortgage in 10 years because that was our main goal. We made lump sum payments when we could. I was fortunate to get modest annual bonuses at work and when I did we split the money 3 ways – 1/3 to paying down the mortgage, 1/3 to investing, 1/3 to fun stuff like travel. Once the mortgage was paid off any bonuses were split 2 ways – 1/2 to investing, 1/2 to fun. I am very aware that we have been fortunate to have stable decent paying jobs throughout our working years which is certainly not the case for many young people nowadays. I really feel for the younger generations as the dream of owning a home is almost unattainable without either help from parents or moving to a much cheaper location.
Kim, awesome. Really liked your 1/3 x 3 model 🙂
My wife and I do the same for the most part – kill debt and invest, at the same time. We live off the rest.
We are also fortunate (but have worked hard) to obtain good paying jobs but the time will come, eventually, (soon?) to scale back and enjoy time a bit more.
I also feel for younger generations wanting to own a home but at the end of the day, you need shelter but not home ownership to be happy and secure. Renting is not a waste IMO.
Are you staying put, for now? Downsizing soon? Other?
Thanks for your detailed comment.
Mark
Hi Mark, We’re staying put for now but I foresee that in about 5 to 10 years we will downsize to a rancher or a condo (something on one level). I don’t want to leave it too long and then hit a certain age where it’s absolutely overwhelming to consider moving. Thanks for your reply and for your posts – I really enjoy reading them and find them very informative. We’re ahead of you in our journey by a number of years but your articles are relevant for all ages. I just wish I had clued into the high MER fees on mutual funds earlier on in our investing path. Oh well, no sense in looking backwards since I can’t change the past. But I definitely have invested more wisely (with respect to fees) for the future.
Ya, I could see that. My parents (mid-70s) just moved to a single-floor, semi-bungalow. Perfect for them I think, simple too.
I appreciate your kind words. I try and write content for all ages although I’ve had a slight bias to semi-retirement and retirement articles in recent years given where my head is at and based on questions/comments/suggestions I get from many, many readers.
One constant to your point is on the subject of money management fees. Some fee-only advisors can add great value but for the most part, many Canadians do not need to be paying a money manager, thousands of dollars per year, to invest with them. I prefer to keep that money in my pocket. 😉 I’m very happy to read and hear more Canadians are considering the same!!
Thanks again for your readership. A good, new article coming up!
Mark
Whilst I feel immensely better not having debt than I did having debt, it was kinda fun strategizing ways to pay down the mortgage as fast as possible. Our primary method was overtime cheques went into the RRSPs and tax rebates went to the mortgage. Once the limit was reached, they went directly onto the mortgage. Having a spreadsheet to show the total interest decreasing with each extra payment was very helpful to motivate us.
Excellent. Having tools like spreadsheets to monitor payments and for motivation is great!
Mark