Mortgages: ‘Till Death Do Us Part’
It was early in the evolution of commerce dating back 3000 year to ancient Babylon, that funding the purchase of land over a long term with interest, was by way a means of acquiring title if one did not have the initial capital.
A ‘mortgage’ was taken over the title until the debt was paid back in full.
Wind the clock forward 3,000 years and in principle, nothing has changed.
The word ‘Mortgage’ is actually a derivative of two Latin words:
Gage: Engagement or pledge
Effectively an engagement until death!
Most people nowadays understand a ‘mortgage’ as a ‘debt’ contract between the ‘purchaser’ of an asset i.e. land or home, and the bank, usually in the form of a loan over a set term i.e. 25 years.
In Australia, purchasing the family home has always been the ‘Great Australian Dream’. Post WW2 saw the beginning of the ‘Baby Boomer’ era (1945 to 1964), People married, purchased a home, brought up their family in this home, then spent their working life paying it off!
And they died owning this home, with little or no debt. It became their ‘cycle’ of life. Ask the parents of these ‘baby boomers’ for ‘advice’ on how to make money and they will invariably tell you (like they told their children), “get a job, put your money in the bank, and get a mortgage!” They knew no different.
For most working class people (80% of the workforce), that was their sole investment strategy. In the 50s, the average retirement age was 65, and the average life expectancy was 74. Average time in retirement was 8 years.
A government pension was sufficient.
Life was simple.
A home in Brisbane in 1970 cost $10,000, and if you purchased it with an interest only loan, in 2016, you would still owe 100% of the original mortgage! However, do not be alarmed, you can now clear this ‘mortgage’ with the simple swipe of a credit card! Of course, if you sold the home, you could clear the ‘mortgage’ and still pocket a handsome profit.
Now, in 2016 with the changes in lifestyle, and life expectancies now averaging 81, people are considering all their options when it comes to buying a home. For many in the larger cities, purchasing a property is now not always an affordable option, so they either buy further out, or worse still, commit up to half their wage in paying for their mortgage! Many will just remain caught up in this rent cycle.
- What should we be doing going forward?
- Are things going to be any different?
- How should we structure our debts?
In reality, nothing will change. Many will continue to stay traditional, and do what ‘everyone else is doing’. Like guinea pigs on a spinning wheel, spending their working life servicing their debts.
In the future, many of will go into retirement still with a ‘mortgage’ and insufficient income to fund a lifestyle that they have taken 40 years to get used to… However that’s ok, because now, we are trending towards ‘reverse mortgages’ (more ‘engagements till death’!)
A ‘reverse mortgage’ is the bank giving you back your capital, secured against the equity on your home and charging you for the privilege of doing so, so you can live ‘comfortably’ in retirement…by inadvertently going into more debt!
At the time of death, the ‘mortgage’ is cleared (usually) by the beneficiaries selling the house, clearing the debt via life insurance, cashing in the remaining super, or entering into an arrangement with the bank to refinance the debt, perhaps by taking out a ‘new mortgage’ and so keeping the ‘debt cycle’ spinning, except that in this case, only the ‘guinea pigs’ have changed.
Different scenarios suite different people, there is no ‘one solution fits all’ but there are so many different options to explore.
Tips: Use a mortgage broker to explore all your mortgage options
Traps: Avoid the trap of the debt wheel.
Whichever way you go about managing debt, consider the time end effort you’re committing to, not forgetting that life is more than money.
Disclaimer: Any advice in this publication is of a general nature only and has not been tailored to your personal circumstances. Please seek personal advice prior to acting on this information. Opinions constitute our judgement at the time of issue and are subject to change. Neither, the Licensee or any of the National Australia group of companies, nor their employees or directors give any warranty of accuracy, nor accept any responsibility for errors or omissions in this document.
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