The True Cost of your Credit

The current house price boom has perhaps passed its peak as I write this, but that doesnt stop the mortgage companies from offering yet more new and tempting products that look like good deals for a consumer. But be warned - The standard mortgage, running over 25 years is set like that for a reason! When you see companies offering 40 year mortgages or low start mortgages, or perhaps even interest only mortgages, you should understand these shiny new products may have a nasty sting ion their credit tail!

Perhaps the ultimate expression of lending absurdity is Japan, where at the peak of their last boom, Grandfather - Father - Son mortgages were common. These committed unborn future generations to mortgage payments incurred by their predecessors a situation thankfully illegal in most parts of the world!. Could it ever happen here Probably not, but the extension of standard mortgage terms on lower interest rates are not actually a good thing for the ordinary Joe, even though they are touted as being more affordable, and should be viewed with deep distrust, simply because it means YOU WILL PAY MORE over the life of the loan. Dont believe me Try working out the math, instead of simply looking at the monthly repayment figure.

Using the good old loan calculator on www.nodebtever.com we can see that a standard $100,000 loan at 5% over 25 years will cost you over $175,000. Thats a big $75k in interest. What about the same loan over 40 years at 4% Thats cheaper, right WRONG! Youll pay over $200,000 over the period - an extra $25k or so! And if interest rates stay at 5%, add another $30k to make $55k of extra costs for you!

A repayment mortgage will suffer an additional penalty on a longer loan - the amount of capital you pay off each month is adjusted to take account of the fact that it now runs over 40 years, not 25, and this means you build up equity in your property far slower than in a shorter loan.

So whats the advice If you cant afford a house on a traditional setup, rent. The price will undoubtedly come back into line with wages at some point. If you already have a mortgage, overpay when you can - the difference over the years can amount to TENS of thousands of dollars!