Ignorant Homeowners?

Nice-House Jonathan Chevreau of the Financial Post says “The No. 1 financial tip I can dispense is to pay off your mortgage as soon as possible.”

That’s definitely not the worst advice in the world (although some might feel that certain tax sheltered or high-return investments are preferable).

Jonathan, however, goes on to say that “homeowners are getting more ignorant.”  He says, “The rise of interest-only mortgages or 40-year amortization periods can only be possible in a world where consumers are oblivious to the arithmetic of compounding interest.”

Well, that may not be the case.  In fact, our 40-year “am” clients know exactly what they’re getting into–because we tell them.  They’re not oblivious at all.  They simply want more house, or need to lower their payments to meet debt service ratios.

In addition, most plan to pre-pay their mortgages well before their amortization period.

It’s an instant gratification society we live in.  People don’t want to wait 20 years to afford their dream home.  Right or wrong, they want it yesterday, and long-am and interest-only products permit that.

  1. I must be ignorant since my mortgage has a 40-year amortization.
    Then again I wonder how ignorant I would be if I uprooted my wife, kids and livelihood to move from Calgary to a city where I could buy a house with a 25-year amortization.

  2. I also must be an ignorant fool because I choose to have a 35 year amortization. I can barely even use a calculator online to see how much it COULD cost.
    With the options to change my payment by up to 25% per year and lump pay up to 20% with no penalty who cares about amortization periods?
    I decided on the 35 year to keep the payment low during the time my spouse was in school. After a few years when she has an income that’s stable and finds where she wasts to make a career we can save and lump pay or just adjust our payment. Damn ignorance. It also protects us in case one of us loses a job or has other serious financial trouble. This ignorance sure is blissful.

  3. I’m so ignorant with my 40-year mortgage that I can’t even laugh at that Traciatim–even though it was hilarious. T.

  4. Its hard to say he right…but if you look at his track record…go to cash in 1999 because of the YK2 BUG, then (after the market was up 20%) Get back into the market lat Dec 1999 only to have a market melt down in 2000. Who knows! His advice is right about 50% of the time. Like most reporters who have no financial background he is one of Canada’s best!
    He has not taken any financial courses that I am aware of, and like and like some brother in-laws knows everything!
    Ps. He really is the best… the other reporters have even poorer track record!

  5. Yep. I’ve read many of Chevreau’s pieces as well and like his unequivocal style (when he’s right). This is more a debate on his point about long-term amortizations than a review of his work in general. Have a great evening,
    Rob, Asst. Ed. CMT

  6. Traciatim is absolutely correct.
    The amortization period is irrelevant. I have a speedy 25 year amortization but I also make a fair bit of extra payments.
    Since I can’t really predict my future extra payments, I really don’t know what my true amortization is.
    Mel – I hate to be picky but most blogs have their most recent comments at the bottom of the list. Have you considered that setup?

  7. Hi Mike,
    You’re right in that amortization is less important if you know you’ll make extra payments.
    To play devils advocate, though, it’s worth noting that many people aren’t as disciplined as you and Traciatim. While most “plan” to pre-pay their mortgage, only a minority of homeowners actually do so to any great extent.
    Have a good night,
    P.S. Thanks for the great idea about comment order. As you can see, we have magically transformed the comments into ascending order. (actually we just clicked a button.)

  8. Thanks for the quick response. You’re right – most people don’t ever make extra payments.
    p.s. now I’m kind of thinking I like the comment order the other way… :)
    Just kidding – I think it’s better this way.

  9. Thanks for the quick response. You’re right – most people don’t ever make extra payments.
    p.s. now I’m kind of thinking I like the comment order the other way… :)
    Just kidding – I think it’s better this way.

  10. I tend to agree with Chevreau on this one.
    For those that can’t afford a house with a 25-yr amortization…there’s always the option to rent until you can.
    When I hear the “well, I live in such-and-such a city, try affording a standard mortgage here” argumment, it makes me wonder, even more so, why they don’t rent since it tends to be MUCH more affordable (and invest the difference). It’s part of the reason why home prices are escalating to unaffordable prices in the 1st place.
    I suspect these same people will be mighty disappointed when, in 5-10 years time there mortgage is at (or above) what their home is worth. This is not sustainable. Just ask the US.

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