Wednesday, August 28, 2013

In the years ahead: the biggest financial mistake you might make?

Couldn't help but key in on a line from a Globe and Mail article this week.
In the years ahead, the biggest financial mistake you make just might be failing to think well in advance about a mortgage coming up for renewal.
It is, of course, an article about the damage rising interest rates might do to those in debt.
The era of pleasant surprises for people renewing their mortgages is over.

After five years of trending lower, mortgage rates have reversed course and started to rise. Aspiring first-time home buyers are being priced out of the market by these increases, but at least they’ve avoided a costly mortgage entanglement. Existing homeowners may simply have to pay more.

... how people will afford higher mortgage payments (?)

We’ve been assured by people in the mortgage industry that homeowners can absorb higher mortgage payments. A 2011 report from the Canadian Association of Accredited Mortgage Professionals said there is “very substantial room” for households to pay higher mortgage rates. Will Dunning, CAAMP’s chief economist, said Monday that he stands by that view.

But the issue is not whether you can afford higher mortgage payments. Rather, it’s what you’ll have to sacrifice to make them.

The mere thought is still ridiculous to just about everyone you talk to.  No one can conceive of any kind of dramatic change in rates.

But it's always like that.  

In October 1971, when interest rates were 9.55%...

... people of the day would have thought you were crazy if you were to suggest they would be 20.54% by October of 1981.

Conversely, it you were to tell those people in 1979-1981 that interest rates would have plummeted to 13.75% by October of 1990, they wouldn't have believed you (although they would have cheered the optimism).

Jump 10 more years into the future to October 2000 and rates are an astonishing bargain at 8.08%....

... at least they would have been a bargain to the people of the day.

Jump just over 10 more years to the present, and what to make of the emergency level interest rates of 2.25 -3.25%? Talk to anyone today and the idea of a 6% interest rate is pure fantasy, never mind 8.08%.

If you look at history, the 10 year jumps have brought dramatic change... change which each generation would not have believed at the time.

If the next 10 years brings change again, will it surprise? More significantly, will you allow yourself to be surprised?


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  1. Money should be "Worth" something. Money's value (reflected by interest rates) should reflect the effort required to earn said money. The amount of money one can borrow vs. how long it would take that same person to actually earn that money is out of proportion; which is why we have a housing bubble.

  2. I'm in my mid 50's and when I tell "30 somethings" about the extortionist mortgage rates of the early 80's they look at me with disbelief. Their only comment is usually,
    "Houses were waaay ceeaper then.( like THAT makes a 22% mortage ok!)" or " There's no way they can raise the rates more than 3 or 4 %".

    The next few years is going to be UGH-LEE.