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By Jenny Barclay
Here in Spain the concept of a mortgage period of 20 or 25 years is something
new. The general feeling by the banks is that want their money back more
quickly than banks in countries in which they are accustomed to longer
periods. The borrowers are also accustomed to the idea that the guiding
principle is to pay off the mortgage as quickly as possible.
First Timers
The problem for all those people starting out on the property ladder is the
amount of money that has to go out each month to put the roof over one’s head.
At least this is true for the early years, but not necessarily as the4 years
go by, since the advent of inflation. Cases that we studied showed e.g a
couple, whose monthly income was £400, having to pay £150 per month in
mortgage payment. Although the interest fluctuations since then have meant
varying payments, as a percentage of their current monthly income of £2,000
per month, the mortgage does not now seem so horrendous.
Varying interest rates
The mistake made by many lenders in boom times is to conveniently forget the
possible variation in interest rates during the early years. While a doubling
of the payment in the case mentioned above would not be a disaster now, had
it occurred during the early years it could have lead to foreclosure, and
them losing their dream home. In our study we found various examples of
interest rates going from 3% to 16% in very short periods of time. Maybe the
lenders should have insisted on doing the relevant calculations, assuming a
high rate, to check if the borrowers could afford the payment during the
first few years in the event of this occurring. Asking the potential borrower
would not necessarily have produced a sensible result, as many that we spoke
to said, “It’s OK, we’ll manage somehow.” Unfortunately, for thousands of
borrowers, this turned out not to be the case. One case showed an initial
payment of £269 per month, on an income of £800 per month, which ballooned to
£690 per month on an income of £900 per month, with devastating consequences.
How long a repayment period ?
Many years ago, a borrower, my father, tried to convince lenders of the idea
of a much longer repayment period. In fact so long that he gave the idea the
name, infinity mortgage. The idea was to pay the interest, at whatever the
actual rate would be, but not to repay the capital. Naturally in the staid
world of banking this fell on deaf ears, and several so called bankers
laughed at the idea. Eventually he was able to persuade an institution to go
ahead with his proposal, and he purchased a house. He is now nearing
retirement and still has not paid off the mortgage, and continues to pay the
interest. He is happy with the idea that, when we inherit the house, we will
have to pay off the capital, and so are we.
The current position ?
The house is now valued at £280,000. My father’s income is £5,300 per month.
And the mortgage payment ? The last time we spoke of the matter it was the
mighty sum of £7.92 per month. The capital to be repaid ? The not
insignificant amount of £1,900.
Whether your local currency is pounds sterling, euros or dollars, the
principle is still the same. While the motivation at the time, as a penniless
masters student, was to keep every payment down to a minimum, the capital
repayment would not exactly have broken the bank once a few years had gone by.
When he reached the point of what would have been the normal repayment
period, and received advice from all and sundry that perhaps he might slip
into the bank with a bit of loose change, and pay off the capital, he
declined. He rather liked the idea of his infinity mortgage being just that,
or at least being with him until his death. In that he will succeed, you know
what some of these old folk are like.
© Jenny Barclay
Jenny Barclay majored in math. and economics, and obtained a masters in
viability of banking institutions. She is currently studying Spanish in
Andalucia, Spain. This article may be reproduced on websites subject to
credit being given to the author, and a link to her website.
http://www.regent-estates-group.com (http://www.regent-estates-group.
com)
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