Mortgage advice deja vu

[Richard Hakluyt]

Makes one wonder why banks lend to people to buy a property, since there are more profitable ways of investing the money. Must be altruism; they will recieve their just reward in the next cycle of existence 

[DGuller]

Makes one wonder why banks lend to people to buy a property, since there are more profitable ways of investing the money. Must be altruism; they will recieve their just reward in the next cycle of existence 

At least two reasons.  They can't invest the money themselves, and they have fractional reserving working for them when they deal with traditional savings and loans.  At least that's my understanding of it, I can be wrong.

[crazy canuck]

After I bought our new house I am once again experiencing the reality of a mortgage.  I am sticking to my same policy of pre-paying as much as possible as soon as possible and I am constantly amazed at all the people that advise me that I am doing something silly - that I should be taking advantage of this cheap financing and use my money for other investment purposes.

When I point out that this cheap money will likely become expensive money during the term of my mortgage they dont have as many glib answers.

If there was a guarrantee that this cheap money would remain cheap then I would be more tempted but that does not seem to be the prevailing view.

[viper37]

Makes one wonder why banks lend to people to buy a property, since there are more profitable ways of investing the money. Must be altruism; they will recieve their just reward in the next cycle of existence 

they don't make money on mortgages.
The mortgages is there to get you inside their bank.

Once you're there, you put some money into an account, wich they invest or loan at higher interests.
They charge you monthly fees.
They will offer you overpriced insurances.
They will offer you credit cards.
They will...

[Richard Hakluyt]

Last mortgage I took out was with a bank that I don't bank with; this is quite standard in the UK, maybe not elsewhere.

We also have to account for German bonds, which yield a mighty 3.16%!! There is quite an appetite for security rather than potential profits out there.

[crazy canuck]

they don't make money on mortgages.

I dont think that is accurate.

[viper37]

When I point out that this cheap money will likely become expensive money during the term of my mortgage they dont have as many glib answers.

If there was a guarrantee that this cheap money would remain cheap then I would be more tempted but that does not seem to be the prevailing view.

You know, you're not silly

Every individual has its own relation to risk.

I wouldn't mind using my mortgage for investments, as I think it could be a good move (just not right now).  But I wouldn't advise my father to do the same, and I wouldn't advise some members of my family to do the same, while I'd recommend it for some others.

The principle is sound, depending on many factors.
How much you're paying now (interest rate), how much you can reasonably expect to gain via your investment strategy (borrowing at 2,5% to put that money in bonds giving you 0,75% because you're scared of the stock market is not a bright move), the variability of interest rates, etc, etc.

There's never a clear cut answer that will fit in any time period to any individual.

The only golden rule: any money you invest is money you can afford to lose.

[Malthus]

He has a point--but only so far. If you have to get a mortgage anyway, it's usually the cheapest money most people can get. And the US tax code makes it very useful as a way to offset other incomes. If you have a lot of equity and can afford the payments, then getting a mortgage and using the cash to invest in something with a yield as high or higher than your mortgage interest kinda makes sense on paper. You take on the obligation, but you also take on assets with an offsetting return that is more than the obligation. Even for Canadians, if the yield is high enough. If the assets you invest it in are fairly liquid, then there's always the option of cashing them out and eliminating the mortgage if you have to.

There's always going to be that sense of putting your home at risk--I wouldn't do it if that makes the person uncomfortable. Being afraid makes people make bad decisions with their investments.

It's something I might consider under certain circumstances, maybe. I'm not doing it now though. Whatever equity I have is still in my house.

Yeah, it's the rah-rah boosterism of only one strategy I'm laughing at - especially given that the assumptions that strategy was explicitly based on (that mortgage risk and the risk of equities losing value are both negligible) have both been demonstrated to have been wrong.

Sure, the main question is not biting off more mortgage than one can chew, but after that for the personal investor, there are a buncha factors I'd consider:

1. The tax treatment of investment income vs. the tax treatment of mortgage interest - this varies by jurisdiction;

2. The different interest rates available and the *risk* associated with them - is the mortgage fixed-rate, variable or renegotiated periodically? Generally, rates from more speculative investments (for example, equities) will be higher over the long term but risks in the short term are likely to be higher;

3. Liquidity. Money you put into the mortgage is not very liquid - that is, if you want that money back, you must either sell the house or take out further loans against it. It is often much easier to sell investments like equities if you want money *right now*.

There is going to be no "right answer" for everyone. I'll tell you what I do - I try as best I can to diversify; I take half my surplus income and use it to make extra payments on mortgage; I take the other half and invest it in various vehicles that give positive tax advantages (I'm Canadian, so that amounts to RRSPs, RESPs, and TFSAs) - part in equities, part in bonds, and part in safe but staid GICs.

The notion that it is always and invariably correct to put money in equities because you can make more on equities over the long term then reinvesting in your mortgage, without carefully weighing the risks and rewards, is IMO foolish, and does not comport with the most basic advice - not to put all of one's eggs in one basket.

[viper37]

I dont think that is accurate.

let me rephrase it then: they don't make much money on mortgage.

My own mortage is at 4,5%.  At the same time I took my personal mortgage, my company borrowed for "an incredible rate of 8%".
My personal credit margin was around 6-7%, I think.

But what they always hope to gain with a mortgage is getting your feet in the bank to invest there (the 401k for the US, REER for Quebec, etc).  And all the byproducts.
Just remember that on every investment they make for you, they will perceive management fees.  There they make money.

A bank makes as much money on a mortgage compared to other products that a lawyer will make on public service instead of private practice.

[DGuller]

When I point out that this cheap money will likely become expensive money during the term of my mortgage they dont have as many glib answers.

If there was a guarrantee that this cheap money would remain cheap then I would be more tempted but that does not seem to be the prevailing view.

I'm not sure what you mean by this.  Do you have an adjustable rate mortgage?

[Malthus]

The only golden rule: any money you invest is money you can afford to lose.

How many people can afford to lose their homes and retirement savings? They are also "investments". 

[Malthus]

Makes one wonder why banks lend to people to buy a property, since there are more profitable ways of investing the money. Must be altruism; they will recieve their just reward in the next cycle of existence 

they don't make money on mortgages.
The mortgages is there to get you inside their bank.

Once you're there, you put some money into an account, wich they invest or loan at higher interests.
They charge you monthly fees.
They will offer you overpriced insurances.
They will offer you credit cards.
They will...

Heh, using mortgages as a "loss leader" makes no sense. The amounts of money involved in mortgages are orders of mangnitude greater that the fees received from credit card debt and the like. 

In my case, I use different banks anyway, and I pay off my card all the time.

[Grey Fox]

They must make money somehow because one thing is sure Canadian banks make money & lot of it.

[MadImmortalMan]

They make a ton of money on mortgages. Look at the average amortization table.

[crazy canuck]

When I point out that this cheap money will likely become expensive money during the term of my mortgage they dont have as many glib answers.

If there was a guarrantee that this cheap money would remain cheap then I would be more tempted but that does not seem to be the prevailing view.

I'm not sure what you mean by this.  Do you have an adjustable rate mortgage?

No its a fixed rate mortgate.  But when it comes to renogotiate the mortgage after the 5 year term expires I dont want to take the risk that interest rates will be considerably higher.

So lets say, not actual numbers but for argument sake, that I pay off 300,000 over the next 5 years in extra payments and at the end of the 5 years my mortgage payments jump 5% or more over what I am paying now.

I will be happy that I repayed that 300,000 rather then paying for what will become rather expensive money unless I can find an investment that will give me a better return (after calculating the money I save on my current interest amount and the hit I avoid after the term ends).