Mortgage totals. Why do you pay back double?

fret_wimp

i understand the banks have to make money and all that but what about this:

in daft you can see a property going for 380k (ish). there is a mortgage calculator in the bottom right corner saying you could have this apartment for payments of 1750 per month on a 35 year mortgage.

this ends up at the end of 35 years as being about 730K!!!! Thats well above twice the asking price.

How are banks/lenders allowed to charge 60%+ interest over the life of a mortgage?

Am i missing something here??

loyatemu

interest is calculated annually
its 35 years
it therefore adds up to quite a lot

I'm not defending the banks, but if you can find someone willing to lend you the money on a different basis you'll be doing well.

Ste.phen

That's what the APR works out to.

Say it's 10% APR on 10,000 euro.
Assuming you don't pay any of it off, After a year you owe 11,000, after 2 it's 12100, etc.

In practice you do pay some of it off over time, so the amount they add on each year gets smaller and smaller over the life of the loan.

djk1000

35 years is a long time. The property will be worth about €1.3m, that's a rough guess, property tends to double in value every ten years or so. Also you say the mortgage will cost over €700k, but take inflation over 35 years into account and the value of the €700k is much less.

eve

The banks are also keen to offer you the chance to 'reduce your monthly outgoings' by offering 35 or 40 year mortgages-it significantly increases their profits when compared to a 25 year mortgage.

fret_wimp

as a potential first time buyer, and in a position where buying a property would really aid me at present, the whole suituation makes me sick, so much so that id almost think of moving to poland, as my job can be transferred over there anyway. This is such a rediclious country.

seamus

There are a number of factors at play - profit being the main one. From the bank's point of view, they're investing in you - they're investing in you a mortgage of 380k with the expectation that they will make a return on it over time. A doubling of the investment over 35 years isn't a huge return when compared to stocks or investing directly in property. The way they structure the repayments also means that they get their return very very quickly, and not exactly over 35 years - the interest in front-loaded on to your payments and not spread out equally over the life of the mortgage. After 15 years of paying your mortgage, the bank will probably have retrieved 75% of their interest from you. If you remortgage or sell, the bank get their principle sum back, plus the 75% extra they've already made.

The banks have two huge benefits to it.
Firstly compared to stocks, mortgage business is stable. They are almost guaranteed to double their investment after 35 years (with the doubling almost complete after 20 or 25 years as I outline above), whereas with stocks you could lose the entire investment in 6 months.
Also, the volume of mortgage business is so huge, that the return is fairly substantial. Getting back €20k in interest from a couple in their first year may not look like a huge amount, but when you think that they may have 100,000 similar mortgages, then that's 2 billion a year for doing *nothing*. In reality the figures are even bigger, but you get the idea.

starky

fret_wimp wrote: »

i understand the banks have to make money and all that but what about this:

in daft you can see a property going for 380k (ish). there is a mortgage calculator in the bottom right corner saying you could have this apartment for payments of 1750 per month on a 35 year mortgage.

this ends up at the end of 35 years as being about 730K!!!! Thats well above twice the asking price.

How are banks/lenders allowed to charge 60%+ interest over the life of a mortgage?

Am i missing something here??

fret_wimp wrote: »

as a potential first time buyer, and in a position where buying a property would really aid me at present, the whole suituation makes me sick, so much so that id almost think of moving to poland, as my job can be transferred over there anyway. This is such a rediclious country.

You live in a capitalist country. Banks facilitate the flow of wealth from those that have money to those that don’t. That is the basis of how global banking systems work. Granted houses are over priced here, but the principle of mortgage borrowing remains constant despite the price of houses. No matter how much you borrow you end up paying back a whole lot more. If you want to be part of any capitalist society you will have to accept that banks have the lending power and that they set the interest rates. If your reason for wanting to move to Poland is due to high property prices here then fair enough, I won’t argue with you there. If you got a mortgage there or anywhere where else for that matter you will still have to pay back three times the amount you borrow. Welcome to the world of capitalist financial instruments. :-)

punchestown

starky wrote: »

No matter how much you borrow you end up paying back a whole lot more.

A mortgage of €322,000 paid back over 20 years costs €519,000. The same mortgage amount paid back over 35 years costs €702,000. Anybody taking out a mortgage should have a lump sum saved. Taking interest only or 100% off these shower is a recipe for disaster (as we are witnessing now) and its shocking to think how so many people fail to do their sums before signing up for this.

beeno67

punchestown wrote: »

A mortgage of €322,000 paid back over 20 years costs €519,000. The same mortgage amount paid back over 35 years costs €702,000. Anybody taking out a mortgage should have a lump sum saved. Taking interest only or 100% off these shower is a recipe for disaster (as we are witnessing now) and its shocking to think how so many people fail to do their sums before signing up for this.

While true, remember that the difference, €183,000 will not seem nearly as big in 20 years time with inflation eating away at it. Also to pay back over 20 years means much higher payments for next 20 years. Personally speaking I think long terms are a good idea if you have a secure job and can reasonably expect your salary to increase at a rate greater than the interest rate you are paying.

antoinolachtnai

Hang on.

Interest is rent on money. They are renting you the money at around 5 percent. This is pretty cheap, historically speaking.

If you don't pay interest on the money, you'll have to pay rent on a property to live in. The rent would be at least 4 percent of the value of the property, maybe more depending.

Lending is just a rental business. You have to compare the cost of renting a house over the period to borrowing the money, taking into account that at the end of the mortgage period you will own the property, and in the interim you have strong tenure over the property and might even gain from an increase in the value of the property. You also have some degree of security from rent increases (although like interest rates, rents can go down or up).

punchestown

beeno67 wrote: »

While true, remember that the difference, €183,000 will not seem nearly as big in 20 years time with inflation eating away at it. Also to pay back over 20 years means much higher payments for next 20 years. Personally speaking I think long terms are a good idea if you have a secure job and can reasonably expect your salary to increase at a rate greater than the interest rate you are paying.

Well as someone whose tied to a 20 year mortgage (suffered through the first few years) I would advise the short term pain for the long term gain! Having said that I think anyone taking out a mortgage over 35 years needs their head examined. I know who I would rather see with the 183k and its not those bankers

Afuera

djk1000 wrote: »

35 years is a long time. The property will be worth about €1.3m, that's a rough guess, property tends to double in value every ten years or so.

Where did you get the figures that show property doubling every 10 years? That sounds way above inflation. BTW there are many exceptions to your statement; Japan obviously being the most current example.

Also, lets imagine for a second that it is true that property does double every 10 years. The fact that Irish property prices quadroupled in the last 10 years would mean that for the next 10 years we should expect to see stagnant property prices.

beeno67

punchestown wrote: »

Well as someone whose tied to a 20 year mortgage (suffered through the first few years) I would advise the short term pain for the long term gain! Having said that I think anyone taking out a mortgage over 35 years needs their head examined. I know who I would rather see with the 183k and its not those bankers

But Punchestown it is not really 183k. For example if you took out a 35 year mortgage and ever month put the difference between a 20 year payment and a 35 year payment into an investment fund, you would more than likely gain more than 183k (based on hitorical trends over any 20 year period). On the other hand you could use the extra payment to improve your quality of life now or even put it in a pension, get tax relief on the money and do even better. Banks constantly come out with rubbish about paying off your mortgage early, and "cutting years off your mortgage" take their advice with a grain of salt.

seamus

punchestown wrote: »

Well as someone whose tied to a 20 year mortgage (suffered through the first few years) I would advise the short term pain for the long term gain! Having said that I think anyone taking out a mortgage over 35 years needs their head examined. I know who I would rather see with the 183k and its not those bankers

Anyone who takes out any mortgage with a view to seeing it through to the end, needs their head examined. You should examine your finances every year, with a view to switching your mortgage and reducing your term at least once every five years.

tHE vAGGABOND

if your not happy doing this, you could always convert to Islam, as their banking system seems well cool

astrofool

tHE vAGGABOND wrote: »

if your not happy doing this, you could always convert to Islam, as their banking system seems well cool

There's a number of UK banks that do Islamic banking, basically it amounts to playing with the figures, and charging them more for it (they're actually worse off as a result).

China, for example, has only recently started mortgage lending, and till now, most properties would be bought outright, rather than through borrowing.

Nermal

starky wrote: »

Banks facilitate the flow of wealth from those that have money to those that don’t.

I'd say they do their best to do the opposite.

johnnyskeleton

Nermal wrote: »

I'd say they do their best to do the opposite.

They facilitate the flow of money from those who have it (i.e. savers and investors) to those that don't (i.e. consumers).

antoinolachtnai

Another way to look at it is that they facilitate the flow of money from those who have it to meaningful projects (homebuilding and community development in this case, but also factories, machinery, supply chain, public infrastructure, etc.)

The_Conductor

tHE vAGGABOND wrote: »

if your not happy doing this, you could always convert to Islam, as their banking system seems well cool

There is sweet fanny adams difference between an Islamic bank and a regular bank. While you don't pay interest on funds borrowed- you are considered part of a profitable "business", and thus you pay a "dividend" to the investors in the business (aka the bank). Its exactly the same as interest, in all but name- and a little bit of creative paper shuffling keeps all the transactions in conformity with the teachings of the Koran. Depending on how the bank is structured, in the past it actually worked out very well for the person "borrowing" the money (aka having the money invested in their "business") as depending on how its structured- the dividends have in the past been successfully argued to be a tax deductable business expense. This caused quite a lot of hassle for tax officials- its probably tidied up in the various tax codes at this stage- but it was a great while it lasted. Entirely legal too. Tax avoidance, not evasion. Hmmm......

Humblepie

fret_wimp wrote: »

as a potential first time buyer, and in a position where buying a property would really aid me at present, the whole suituation makes me sick, so much so that id almost think of moving to poland, as my job can be transferred over there anyway. This is such a rediclious country.

fret_wimp i think you'll see in any economically advanced country, this is standard practise. Its life...for everyone. Deal with it...

pauldiv

No you are not missing something - you have been scammed.
You should delve deeper because if you think that is bad you have only touched the surface.
The people who own and run banks run everything.
All during the 30s America was a dust bowl and everyone was told that there was no food and no money.
Then from thin air they found enough money to finance the greatest war machines in history. Thats a neat trick!
The same banks were financing both sides and they made stupendous profits from it all.
So yes i guess banks do need all our money.

beeno67

pauldiv wrote: »

No you are not missing something - you have been scammed.
You should delve deeper because if you think that is bad you have only touched the surface.
The people who own and run banks run everything.
All during the 30s America was a dust bowl and everyone was told that there was no food and no money.
Then from thin air they found enough money to finance the greatest war machines in history. Thats a neat trick!
The same banks were financing both sides and they made stupendous profits from it all.
So yes i guess banks do need all our money.

And they shot Kennedy

pauldiv

No you are not missing something - you have been scammed.
You should delve deeper because if you think that is bad you have only touched the surface.
The people who own and run banks run everything.
All during the 30s America was a dust bowl and everyone was told that there was no food and no money to buy any.
Then from thin air they found unlimited supplies of money to finance WW2. Thats a neat trick.
The same banks were financing both sides and they made stupendous profits from it all.
So yes i guess banks do need all our money and we should just distract ourselves for 35 years and quietly hand over our dosh.

pauldiv

They did - and Lincoln too.

tHE vAGGABOND

and I wont even tell you what they did to setup and forge the whole of 911..

curse those damn banks

antoinolachtnai

You portray the financial system very negatively. The system has many benefits. It distributes resources to places where they can produce a positive result.

The system has been quite successful in Ireland. It has contributed to the greater availability of cash to develop and improve property.

In comparison, the way things worked in the 80s in Ireland was much much worse. Monthly payments were very high then as well, as a result of very high interest rates.

What other means of distributing capital would be better? A government committee?

The_Conductor

antoinolachtnai wrote:

What other means of distributing capital would be better? A government committee?

That is pretty much what we had in the 1980s. A net result of that was public debt of about 145% of GDP alongside private sector debt of about 36%. The country was bankrupt for all intensive purposes, and completely incapable of raising funds internationally as our sovereign debt was accorded junk status.

Curiously enough- we now have pretty much the inverse situation- private sector debt of roughly 148% of GDP, alongside public sector debt of roughly 41%. The government is in rosy good health- but the public at large are creaking under the burden of our debts.

Until such time as the private sector manages to get its debt under reasonable control (which by international norms would be considered to be 65-70% of GDP)- the government cannot rightly expect its tax collection mechanisms to function in a coherent manner.

Was the government committee distributing capital more effective than the current system? Perhaps not- but it was more equitable. We might have been broke- but for the most part we were all in the same boat. The current mess is at least partly as a result of the vested interests using psychological mind games to persuade people to part with silly amounts of borrowed cash, for grossly overpriced assets. There is going to be a hell of a hang-over from our party- which is going to last for years to come. Anyone who expects a bailout is going to be sadly waiting. Some simple remedies which might help those worse off- such as a revisitation of our bankruptcy laws have been ruled out of bounds (particularly after the 2006 bills).

There is a perception out there that the government favours big business, and in particular the banks, over and above the public at large. Unfortunately, I'd be inclined to agree with it to some extent. Big business is far better at lobbying than the average member of the public- whose main mouthpiece these days seems to be limited to the Joe Duffy show.......

antoinolachtnai

Was the government committee distributing capital more effective than the current system? Perhaps not- but it was more equitable. We might have been broke- but for the most part we were all in the same boat.

Was everybody being broke was better than just some people being broke?

We had to build a lot of housing for a young population in a short period. That's a large part of the reason why private indebtedness is so high. This is not a good thing, but I think it would have been a lot worse had the funds not been available.

The_Conductor

antoinolachtnai wrote: »

Was everybody being broke was better than just some people being broke?

We had to build a lot of housing for a young population in a short period. That's a large part of the reason why private indebtedness is so high. This is not a good thing, but I think it would have been a lot worse had the funds not been available.

In my opinion- the reason that private debt is so high- is not that we had to build such an amount of housing in a short period of time (though we had not been building sufficient housing for a long time), but rather because the money was too freely available- leading to the biggest boom and bust cycle that this country has ever seen. We would be totally up the creek had funds been totally unavailable- but the optimum solution would have been some sort of control on liquidity- which unfortunately was politically unpalatable for our politicians.

The 1980s were an awful time- unemployment was at catastrophic levels, there simply wasn't economic activity there for the government to tax, the only viable future anyone had was to emigrate- I've got a US B2 visa of early 1980s vintage. Our best export was, as it had been for the previous 130 years, people. The late 1980s and 1990s were a miracle in comparison- the strict laws dictated to us by the World Bank- while unpalatable, worked.

I am not saying we were better off in the 1980s at all- I am simply observing that we have created a generation of the dispossessed- thanks to bizzare lending practices of many of our financial institutions. You can't even walk away from your mistake- as you can do in most OECD countries- as big business are far more effective at safeguarding their corners, than the government is at safeguarding the public at large.

I don't have a solution- the complete disolution of government would result in anarchy- which certainly isn't palatable either. Reform of the bankruptcy laws ala what they have in the states, would encourage the type of risk taking that in a business context is looked upon so fondly- but ultimately has lead to their mortgage crisis. Its obviously not a golden solution either. Maybe if a few banks were allowed go up the wall and nationalised along the lines of the Swedish model, a greater degree of future prudence might be exercised- then again it might not?

S.