The Future of Housing - Part 9
Over the last 9 weeks we’ve discussed various issues surrounding housing affordability and we’ve offered some ideas and some possible solutions.
The final piece of the puzzle, in my opinion, is the introduction and societal acceptance of Generational Finance Solutions.
Currently the standard home loan mortgage term is 20 years, 30 at the maximum. Why does that have to be the case? I understand that banks want some certainty their money will be returned before the mortgagee kicks the bucket, but there are other options.
Why can’t mortgage lending be 50 years or even longer? Financial institutions state they do not want to be selling the home of a deceased estate, yet reverse mortgages where loans can be drawn against a house for retirement living costs put the bank in the same financial position, and that doesn’t seem to be an issue. Plus linking mortgage repayments to life insurance and superannuation is also another method of guaranteeing the repayment of longer term home loans.
But why? Well longer term loans mean lower weekly repayments which will assist affordability. For example, the weekly repayment difference between a 20-year loan of $400,000 at 5.00% and the same loan over 40 years is $2,640pm compared to $1,930pm, which is a difference of $710pm.
However, I do place a caveat on this approach. At between 40 & 50 year terms (dependent on individual market conditions), the amount of loan repayments starts to equal and drop below the current rental rate. The impact of that would see an increased demand for owner occupiers and a reduced demand for rentals. Provided overall supply of homes maintain pace with demand (both rental and owner occupier) then the impact on pricing will be contained. However, when demand outstrips supply there may be a greater impact on those who are stuck in the rental cycle unable to save sufficient deposits, and that requires a solution to the deposit problem.
Now any economist worth their salt will tear my theories to shreds, luckily I am no economist and as such can throw wild ideas about. But other countries do offer what I call “generational” finance terms and places like Japan allow mortgages to be passed down through estates.
Anyway, food for thought.
John Rosel