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The US just announced that they are working on a plan to introduce 50-year mortgages. I don't know what this plan entails, but my first reaction to the headline was: “Yeah, this is a bad idea.” But then I thought to myself, why is a 50-year amortization period too long? And is there any magic to 25- and 30-year mortgages?
At the most basic level, you could think of it this way: the average life expectancy of both sexes in America is currently 78.4 years. That means the average American would need to buy a home — with a 50-year mortgage — at 28.4 years old in order to fully pay it off by the time they die. At that point, why not rent?
A more rigorous analysis of amortization periods would likely involve a myriad of trade-offs related to housing affordability, homeownership rates, asset-price stability, household debt, overall financial risk, and other factors. But the primary feature of a long-ass mortgage is that it's alleged to make homeownership more attainable.
The obvious benefit of a 50-year mortgage is that it lowers a borrower’s monthly payment. For example, an $800,000 mortgage at 6% would create the following payments:
25-year amortization: $5,154 per month
30-year amortization: $4,796 per month
50-year amortization: $4,211 per month
But it's important to keep in mind that this is a synthetic affordability solution. It does not address fundamental constraints such as land use, zoning, construction costs, and the overall supply of new housing. Here's an excerpt from a speech that Carolyn Rogers, Senior Deputy Governor of the Bank of Canada, delivered last year:
"...we need to resist the temptation to try to solve the housing affordability challenge by tinkering too much with the mortgage market... leaning too much on measures that reduce the short-term cost of financing could have long-term impacts on the financial health of households, the mortgage market and the economy."
The corollary to these lower monthly payments is that if you can afford a monthly payment of $5,154, you now have the option of taking out a bigger mortgage with a longer amortization period. With a 50-year amortization, that same monthly payment could support a $979,173 mortgage.
But what increased leverage does is drive up home prices even further, in the same way that lowering interest rates creates upward pressure. Imagine that mortgage rates drop from 6% to 3%. This same $5,154 monthly payment would now carry a $1.6 million mortgage with a 50-year amortization period.
I'm not an economist and, from what I can tell, there's no perfect amortization period. But there does appear to be a Goldilocks zone that balances a number of the trade-offs, and it is somewhere between 20-30 years. In fact, as recently as 2008, Canada offered government-backed 40-year mortgages. But then a consensus emerged that they were "really not in the best interest of Canadians."
I know that lots of people would love to own a $2 million home. But economic history has shown us that 50-year mortgages are likely to raise home prices for everyone, slow equity build-up for owners, and increase overall financial risk in the system. As Howard Marks once wrote in one of his memos, “There’s no free lunch in economics."
Cover photo by Kimson Doan on Unsplash
The US just announced that they are working on a plan to introduce 50-year mortgages. I don't know what this plan entails, but my first reaction to the headline was: “Yeah, this is a bad idea.” But then I thought to myself, why is a 50-year amortization period too long? And is there any magic to 25- and 30-year mortgages?
At the most basic level, you could think of it this way: the average life expectancy of both sexes in America is currently 78.4 years. That means the average American would need to buy a home — with a 50-year mortgage — at 28.4 years old in order to fully pay it off by the time they die. At that point, why not rent?
A more rigorous analysis of amortization periods would likely involve a myriad of trade-offs related to housing affordability, homeownership rates, asset-price stability, household debt, overall financial risk, and other factors. But the primary feature of a long-ass mortgage is that it's alleged to make homeownership more attainable.
The obvious benefit of a 50-year mortgage is that it lowers a borrower’s monthly payment. For example, an $800,000 mortgage at 6% would create the following payments:
25-year amortization: $5,154 per month
30-year amortization: $4,796 per month
50-year amortization: $4,211 per month
But it's important to keep in mind that this is a synthetic affordability solution. It does not address fundamental constraints such as land use, zoning, construction costs, and the overall supply of new housing. Here's an excerpt from a speech that Carolyn Rogers, Senior Deputy Governor of the Bank of Canada, delivered last year:
"...we need to resist the temptation to try to solve the housing affordability challenge by tinkering too much with the mortgage market... leaning too much on measures that reduce the short-term cost of financing could have long-term impacts on the financial health of households, the mortgage market and the economy."
The corollary to these lower monthly payments is that if you can afford a monthly payment of $5,154, you now have the option of taking out a bigger mortgage with a longer amortization period. With a 50-year amortization, that same monthly payment could support a $979,173 mortgage.
But what increased leverage does is drive up home prices even further, in the same way that lowering interest rates creates upward pressure. Imagine that mortgage rates drop from 6% to 3%. This same $5,154 monthly payment would now carry a $1.6 million mortgage with a 50-year amortization period.
I'm not an economist and, from what I can tell, there's no perfect amortization period. But there does appear to be a Goldilocks zone that balances a number of the trade-offs, and it is somewhere between 20-30 years. In fact, as recently as 2008, Canada offered government-backed 40-year mortgages. But then a consensus emerged that they were "really not in the best interest of Canadians."
I know that lots of people would love to own a $2 million home. But economic history has shown us that 50-year mortgages are likely to raise home prices for everyone, slow equity build-up for owners, and increase overall financial risk in the system. As Howard Marks once wrote in one of his memos, “There’s no free lunch in economics."
Cover photo by Kimson Doan on Unsplash
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There was talk during the campaign of eliminating Daylighting Savings Time, yet here we are at 4:30pm pitch dark outside. It’s best to wait out the headlines to see where the dust settles with 45/47. While I don’t see how 50 year Amort. is good for the average American long term, I’ll play devil’s advocate and ask wouldn’t it have been nice for Canadians to have the option of locking in in 2021 for longer than 3-5 years?
Reading Abundance & they actually have a nice little section on the 30-year mortgage: The 30-year mortgage was possible only because the federal government guaranteed it. They claim that 30-year mortgage (which truly is kind of a crazy thing when you think about it) would never have stood up in a free market w/o gov't support. They also point to Japan (Tokyo in particular) trying 50 – 100 year mortgages to make housing more “affordable”, which led to a crazy spike in property values, then a big time collapse in values that haven't recovered three decades later. Agree w/ @brandondonnelly.eth that longer mortgages will likely lead to higher property values & more risk in the housing market. https://brandondonnelly.com/how-long-is-too-long-for-a-mortgage
Everything beyond 3-5 years is crazy long in current conditions and honestly always was It’s just one of many smart tricks we use in the economy to prop prices without generating additional value first - not saying it’s bad or good, just observation
For sure.. Abundance highlights some really interesting examples of how we approaches housing *before* it was made into an asset class, which basically coincided w/ the 30-year mortgage. Housing used to be viewed (and priced) more like a thing you buy to use over a reasonably short life (like 5 to 10 years). And obviously we used to build A LOT more houses than we do now, especially in some markets (they call out California in particular). But it's definitely a hard, thorny issue now... One thing Abundance kind of glosses over: they really want to radically increase supply / new builds, which I tend to agree with, BUT, homeowners don't love that idea bc 1) it may reduce the value of their property and 2) they may have a huge skyscraper next door (not to mention traffic & other strain). Austin is a good example of this playing out, for better & for worse. It's one of those things that sounds nice, but when you actually try to implement, it's WAY harder to solve.
Yes, it’s tough. Also bad luck that we made homes more like equity investing and something you own, rather than just look after - but it’s more future looking discussion 😀 Love Austin btw, haven’t been there over 7 years now so it def changed
really gud read. thanks for sharing
30 year mortgage and fanny Mae made the US prosperity possible. Ability to sell the notes to investors was the original fractional ownership of the real world assets.
Thanks for sharing, Reid!
I love it