As I hope I've proven over the months and years I've been doing this, I'm not a cynic.
Nor am I a conspiracy theorist.
I tend to agree with Paul Keating, who is credited either with inventing or just repeating the aphorism:
"When faced with the choice of deciding between a stuff-up and a conspiracy, always choose a stuff-up."
But there's a third option, popularised by the famed Watergate line:
"Follow the money"
It's that line that came to mind when I was confronted with one of the silliest things I think I've ever seen in mainstream finance (don't get me started on silly investing approaches like options, derivatives and CFDs!): the mooted '35 year home loan'.
Say what?
Yes, according to at least two people on Twitter, who claim inside knowledge, Westpac is apparently about to unveil a loan product that lets you pay off your home over 35 years.
Thirty. Five. Years.
You would — quite literally — get less for murder.
That's five years more than the current mainstream maximum of 30 years.
And, in case you've forgotten, it was only a couple of decades ago that the maximum term for a home loan was a measly 25 years.
Yes, in the course of 20 years (or so) the maximum — and so, the default — loan length is now 40% longer than it used to be.
"So what?", I hear you ask?
Here's what:
According to the numbers run in that Twitter thread:
"… a $500k 25-year P&I mortgage at 4% results in monthly repayments of $2,639. The same mortgage stretched to 35 years will have lower repayments of $2,214 (16% lower)…"
I thought, for the purposes of probity, that I should check the numbers.
ASIC's MoneySmart website wouldn't let me choose a 35 year term.
So I tried the banks. No good.
I tried comparison sites. Also no good.
No-one is set up to allow even a manual entry of a number greater than 30.
So it was back to Excel (well, Google Sheets) to run my own numbers.
And yes, it checks out.
If you extend a 25 year loan by 10 years, it does make the loan $400 per month more 'affordable'.
But here's what the marketing material won't tell you:
That 'affordability' comes at the cost of another $130,000 in interest.
Yes, while every single (decent) financial advisor and commentator is telling you to negotiate a better rate and — importantly in this context — make extra repayments to pay your loan down as quickly as possible and save thousands on interest…
… it may just be the case that at least one financial institution is getting ready to 'help' you do just the opposite!
"But hang on…" some of you are saying "… at least some people will be able to buy a house that they otherwise couldn't afford"
Nope.
Not even close.
Because that assumes that offering a 35-year loan has no impact on the behaviour of borrowers.
Let's look at that same situation, above, in a slightly different way:
If you are currently paying $2,639 per month on a 25-year $500,000 mortgage, guess what?
Over 35 years, that same monthly repayment would allow you to borrow $596,000 instead!
Oh, but you wouldn't do that, right?
Except, guess what?
Everyone else will.
And prices will rise.
So you have two choices: either pay up, or get priced out of the market.
Think that's fanciful? How many people do you know who are taking out new 25-year loans, now that 30-year ones are available.
And the data shows that affordability — measured as repayments divided by household income — are little changed over 20 years.
Which means… we're all taking 30 year loans and paying more for our homes.
You really think it'll be different this time?
No, me neither.
Oh, and the bank, which would have taken $292,000 in interest on a 25-year, $500,000 loan is now going to collect $512,000 in interest on a $596,000 loan!
Follow the money, indeed.
Maybe the rumours are unfounded. Maybe Westpac isn't really going to offer this loan.
Or maybe it is.
House prices will almost certainly rise, as a result.
More economic activity will move from spending on goods and services (strengthening the economy) to loan interest.
And more of us will end up raiding our Super to pay off our houses when we retire, weakening the retirement savings system and putting more pressure on an intergenerationally challenged budget.
The move from 25-year loans to 30-year loans was almost certainly a negative for home-buyers specifically and the economy more generally.
A move to 35-years, pushing us ever-closer to — and into — retirement, would be pretty bloody close to outright economic vandalism, making housing ever-more expensive, putting more money in the bankers' pockets, and putting an already-structurally-deficient budget under even more pressure.
Don't have a loan? Don't care about house prices? More interested in share prices and ASX investments?
Guess what? If there's less money going around the Australian economy, companies with operations here are going to find it ever-harder to grow, as consumers spend less, and businesses invest less as a result.
(And if you own bank shares? Maybe there are a few more cents in the tin… until an increasingly fragile economy hits a speed bump and the hangover is worse than after Mad Monday…)
Yep, it's a vicious circle.
Unless…
Say it ain't so, Westpac.
And if it is, over to you, Treasurer Josh Frydenberg and ASIC Chair James Shipton.
Free markets are great. But governments are needed when those markets end up distorting things. Like, say, over 35 years.
Fool on!
