Longer amortization will not help much

As a former real-estate agent, I am always interested when the government announces items connected to real estate. The recent announcement that they would allow 30-year mortgage amortization in some cases to help with affordability is another in a long series of decisions that will have little to no effect.

I checked on my mortgage spreadsheet. I set up a mortgage for $430,000 at six per cent (semi-annual compounding). No particular reason for these numbers, this is just for illustration purposes.

At 25-year amortization, the monthly payment would be $2,751.17.

At 30-year amortization, the monthly payment would be $2,557.74.

Obviously, that’s a little better than the 25-year amortization, but, really, what difference does that make? Maybe a few people could squeeze into qualifying who couldn’t under the 25-year amortization, but only a few.

To extend the exercise, I recalled how in Japan they had an experiment with 99-year or 100-year amortizations. (The grandkids would pay it off, the theory goes.) My understanding is they have given up on this experiment, but consider these numbers:

At 50-year amortization, the monthly payment would be $2,240.17.

At 100-year amortization, the monthly payment would be $2,129.37.

Maybe that $600 difference between a 25-year amortization and the 100-year amortization might help with qualifying, but … are we seriously thinking of doing something like that?

Wouldn’t there be other serious consequences to that kind of long-term indebtedness? Probably an interest-only mortgage would work almost as well. Just pay interest, and never pay it off. (An infinity amortization.)

We need to go back to the drawing board. We need better solutions. (That also probably means better politicians.)

Pastor Don Johnson

Grace Baptist Church of Victoria (Independent)