Is a 52 year mortgage such a bad idea

nrsql · 10 November 2006 at 1:44PM

Saw an article in the times about how much more expensive a 52 year mortgage is than a 25 year.
It made me wonder if the argument was valid.
They just compared the total amounts paid which of course made the 25 year look a lot better. What they missed was that the buying power of the money paid in the 52nd year would be negligible.
It probably should take into account wage inflation - and really should include a factor for increase in earnings power as you get older.

(The calculations were rather hurried so might be incorrect but the values look about right from my experience)

I calculated that using 5% increase in wages per year (and I think that is low) then the 52 year mortgage will give a total burden similar to that of the 25 year for a 5% interest rate mortgage. And the important bit is that the payments will be lower so less burden in the early years when things are more difficult.
Higher increase in wages will benefit the longer term mortgage, Higher interest rate will benefit the shorter term mortgage.
For a 100k mortgage
For the 52 year the payment is £450.29 a month - equivalent in it's 52nd year to £37.40 a month
The 25 year £584.59 and 17th year £181.26

Of course interest rates and increases in wages are not consistent and this is the gamble you are taking. Also probably your earning power will increase during the 25 years but probably decrease towards the end of the 52 year.

Anyway I think that often the 52 year will work out effectively cheaper than the 25 year and shouldn't be discounted.

Using the same philosopy it's not a bad idea to pay only the interest during times of high interest on the assumption that the effective value of the mortgage owed will be eaten up by inflation.
This comes with a risk warning though - if your earning power does not carry on increasing for long enough you will be in big trouble.

lynzpower · 10 November 2006 at 1:50PM

but surely youd have to get a 52 year mortgage when you are only 13. not possible
therefore the end of the term would be funded by "pensions"

In the situation we find ourselves in with pensions in the Uk I certainly wouldnt want to be taking the risk

or have i missed something here?

nrsql · 10 November 2006 at 1:51PM

And before anyone asks - I pay my mortgages off as quickly as possible.
Although the above sounds ok in theory I don't like the risk.

I suspect that keeping my mortgages as large as possible, paying interest only and investing in the stock market would have been the best plan but I leave that for someone with more courage.

nrsql · 10 November 2006 at 1:54PM

lynzpower wrote:

but surely youd have to get a 52 year mortgage when you are only 13. not possible
therefore the end of the term would be funded by "pensions"

In the situation we find ourselves in with pensions in the Uk I certainly wouldnt want to be taking the risk

or have i missed something here?

Only if you stop working at 65.
Also - by that time the monthly payments would be negligible.
If you take out the mortgage at 20 by the time you reach 60 the payments are the equivalent of £67 a month.
As I say it's a risk but not much.

lynzpower · 10 November 2006 at 1:58PM

if you are well enough to keep working is the other issue. Lots of people Ive worked with are simply not able to keep going in thier 60s due to arthritis,or other later onset conditions.

Personally i wouldnt touch with a barge pole

nrsql · 10 November 2006 at 2:08PM

The gamble is really that at some point in your life you will be able to pay off the mortgage - the longer term benefits by the low early payments.

A better option would probably be starting off as interest only and increasing payments in line with wages - I suspect that would pay off a lot faster than the 25 years for most people.

undercoat11 · 10 November 2006 at 5:26PM

You are assuming that the value of the capital will reduce over time because of inflation. I know people who have only a small mortgage of around £25 - 35,000 and have had red letters about shortfalls on endowments. Some are panicking that they won't be able to pay the mortgage off and need to convert to repayment etc. These people want to retire and get rid of their mortgages. If they are panicking with only a small shortfall, what will today's £250,000 mortgagees be doing in 20 years time?

There is a lot of talk of people carrying on working after the age of 65. However, this assumes that people want to carry on and are physically able.

movieman · 10 November 2006 at 5:29PM

What they missed was that the buying power of the money paid in the 52nd year would be negligible.

On your assumptions it would be negligible. What you miss is the fact that the massive destruction of purchasing power over the course of fifty years is a recent phenomenon, and there's no more reason to expect it to continue than to expect the 'pound in your pocket' to be worth more in 52 years, leaving you paying most of your lifetime income to the bank.

IMHO you're brave to expect a historically unusual situation to continue for another half century. People rarely get what they expect; when my parents bought their house they expected to be paying a large fraction of their income on the mortgage for decades, but by the time they paid it off the cost was a pittance. Today 'everyone' expects their debts to be destroyed by wage inflation... so why should they be any more likely to be correct than my parents' generation?

There is a lot of talk of people carrying on working after the age of 65. However, this assumes that people want to carry on and are physically able.

And that there are jobs available for them to do.

jamesd · 10 November 2006 at 6:09PM

A 52 year mortgage isn't a bad idea provided you treat it as an interest only mortgage with a bit of capital repayment built in.

Assuming 1.5% inflation over 52 years the money at the end is worth 46% of today's value. At 2.5% it's 28%. At 4% it's 13%.

nrsql · 10 November 2006 at 6:16PM

lol - I'm not assuming anything. As I said that would be a risk you take.

The endowments thing is a bit of a red herring - that's just the poor endowment products - nothing to do with the theory.

£250,000 mortgage - so what. What do you think £250,000 will be worth in 20 years time. You could say the same about a £50,000 mortgage 20 years ago.

The most important factor is what happens in the next 5 years or so - after that it doesn't matter so much so you aren't looking at the distant future.

Is it so implausible? Would have had problems a few times in the last few centuries but if you avoid times of correction just after high inflation then you should be ok.
1700's wold have been ok, 1800's a bit problematical, 1900's good.
As I said - it would be a risk but one you can correct if you see things going against you.

movieman · 10 November 2006 at 6:21PM

The most important factor is what happens in the next 5 years or so - after that it doesn't matter so much so you aren't looking at the distant future.

Again, you're implicitly assuming that wage inflation will destroy debt over the next few years... while we're living in an era where more and more jobs are being shipped abroad or given to cheap immigrants. We're seeing a couple of billion new workers entering the global job market, many of them willing to do the same job as British workers for far less money.

Why do you think we're going to see significant wage inflation over the next fifty years, let alone the next five?

As I said - it would be a risk but one you can correct if you see things going against you.

Sure, if you can afford to lose many thousands of pounds by selling into a falling market; if you see things 'going against you' then plenty of others will too, and then house prices ain't going anywhere but down as you all rush for the exits.

Is a 52 year mortgage such a bad idea

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