We have friends in the U.S. When they want to buy something not cheap, they put it on the house line of credit. Apparently it’s quite high and they don’t care because it’s cheap. It seems to be a constant flow of money against the house and the desire to pay it off seems low.
On the other hand, we, as Canadians, are paying off the mortgage as quickly as possible and lines of credit are something to shudder at.
Having done some basic research, there are FICO scores; mortgage/debt “points” are the U.S. - Canadian seems to be “yes, I’ve got a small downpayment, I qualify for a 25 year mortgage”, an ok credit rating and the banks fork over the dough.
So, in layman’s terms, (and because I don’t want to intrude into their finances or seem judgemental otherwise I would ask my friends), why, if at all, are U.S. mortgages seemingly nothing to hurry paying off?
You could get a lot of answers. But at least part of the answer could be that, in the U.S., mortgages are stacked against being paid off.
There are GOOD mortgages, to be sure. But there are many BAD ones, as well, and some that aren’t so bad but certainly aren’t good. Fact is, lenders don’t WANT someone to pay off the mortgage. They want them to fork over the down payment, and continue to make monthly payments, year after year. If they can sweet-talk you into extending your credit (via a home equity line, for example) so much the better - that’s a whole 'nother interest rate they can tack on and more money to make off of you. Heck, even best-case scenario where it’s 0% additional interest, they’ve STILL extended your payoff date (and thus, have more time to make more money off of you).
BAD lenders want you to make a few payments, get nailed by an adjustable rate (or late fees, or penalty rate increases for late payments, or… or… or… )and stop making payments, and lose the property… which can then be resold to another fresh young face. This is not even classified as ‘predatory lending’, because they don’t manipulate you into missing payments, they just wait for the adjustable rate to come back and bite you. But it’s all upfront, you signed the document, and they never lied and said the payments would be the same forever, so suck it up and deal.
The reason this sort of junk is so successful? Um… simply put, Americans are stoopid when it comes to credit (I’m painting with a broad brush, bear with me). Look at it this way: if you can always get credit, and use that to pay off your previous credit, then what’s the problem? You can live off credit! The fount never empties!
Except it does, eventually… but a lot of people don’t want to accept that.
I don’t know that my perception of the situation is quite the same as yours, Canadiangirl, or perhaps as strongly as you have made the point about the differences between Canada and US on this. That said, there are a few things are different which I’ll quickly contribute:
Income tax implications - it is my understanding in the US interest payments on mortgage payments on a person’s home are tax deductible. This is not true in Canada, so there are no tax advantages here. I suspect this is one of the main drivers. If you’re getting a tax deduction, why rush to pay it off?
Differing mortgage “types” - Historically the types of mortgages offered in Canada have been a less broad range. The “traditional” mortgage in Canada is the type you mentioned, and for most mortgages. As you indicated, there have historically been a far broader range in the US which includes mortgages that are even “interest only” or “reverse amortization” mortgage products. In the short term, this reduces the amount of the monthly mortgage payment. The “interest only” mortgages are appearing in Canada, by the way, so it’ll be interesting to see how much of a foothold they get here.
Cultural differences - Historically Canadians have been savers. This is no longer true. As a nation, we are now a country of consumers.
I’d take issue with that one in that in the US, we’re more of a culture of consumers so that’s no different (if in fact Canadians are as bad as we Yanks are). So I don’t think that explains any difference in borrowing / mortgage styles.
I think the whole “treat your house like a cash cow” is a really, really scary concept. In the short run, it can help your cash flow… your mortgage prolly has a better interest rate than, say, a credit card, but then if you refinance your mortgage to take out cash to pay for the credit card bils, then in 25 years you’re still paying for that big-screen TV that’s been gone for 15 years. Bad Idea (I know someone who refi’ed her house and rolled her car loan into it. She’d have paid off the car by now. She still owes most of its purchase price to the mortgage company).
There are financial planners who say you should never aim to pay off your mortgage. That’s “good debt”. Money you use to pay it down could be used to invest. I can see their point and it’s an argument worth considering. Me though… we’re paying a little extra on our mortgage every month. We have a home equity line of credit that is STICTLY used for major home maintenance and improvements. I don’t want to be paying for that pizza dinner when I’m on social security. I’d like to get rid of this bigass mortgage payment before then, thankyouverymuch. Part of my logic though is, we need to have a fairly substantial estate to leave to take care of Dweezil, and a paid-off house is a big part of that plan.
Mama Zappa, the point that I was trying to make was that there may have been historical differences, because Canada used to be, on the whole, a country of savers, not spenders. As a result, there may be differing views on how acceptable it is to maintain high mortgages on the family home. It is no longer so much the case that Canadians are a country of savers, and that as a result, those cultural differences may well be disappearing.
I bought a house about 18 months ago (I live in Minneapolis).
I have two mortgages against the house, one for about 80% of the purchase price that’s a 30-year fixed note at 5.375%, and a second 15-year note for about 12% of the purchase price that’s at 7.29%.
As it stands right now, I have really absolutely no reason to pay either of them off any faster then I have to, for a couple of reasons:
Every penny of interest I pay on both of these loans is tax-deductable, which essentially lowers the effective interest rate by a couple of points on each.
Right now, the savings account I have at my bank (just a regular savings account, nothing fancy), gives me a 5.5% rate on my money.
So, even without the tax break, I earn more by having my money in savings then I would save by paying down the main mortgage. With the tax break factored in, it’s probably about a break-even proposition on the second note. However, keeping the money in my savings account allows me to have that all-so-important short term savings and “Oh Shit” fund. (which came in real handy last year when I had to replace my car)
Even so, I am paying a bit of extra towards the second loan every month (between $50-100/month depending on what other expenses I have)
I can’t speak about the morgages but I can on credit in both countries.
It took some time for me to get my first proper credit card in the states. I had to start with a bank account for several months, then a department store card, then a secured credit card with a crap interest rate. After a year of that I applied for a regular card and got it. $500 limit, crap rate. Within a few years I was getting better rates and higher limits.
A month after I moved to Canada (of which I had zero credit in this country) both my wife and I had a Visa card through my bank because my banker vouched for us. $1000 limit and an average rate. At this point we didn’t have a ton of money with us in our account. Perhaps a few thousand. I was working but my wife was not yet.
Quite a difference in how credit and banking is handled in the two countries.
We were told, as long as everything goes well with our bank account, we can apply for a house loan next year and our banker would most likely be able to get one for us. Not bad for starting our credit from ground zero. Even if it takes two years, I think you’d be hard pressed to pull that off in the states.
In the states my wife and I had to work REALLY hard to be approved for a small house loan. Our credit rating was average to good at the time.
So, do you use the interest your pay on the mortgage as an income reducing deduction?
What exactly are mortgage / credit “points”? And how do they affect your ability to get credit?
The only observation I’m making recently is that the younger set seems to think debt is no big deal. Hubby & I have a mutual hatred for debt of any kind. We use a credit card for daily living but it’s paid in full every month. And it gives us Air Miles for which we would never save enough points to actually go anywhere however we cash them in for grocery money over Christmas (about $200 worth) and it doesn’t cost anything so why not?
It just seems, whenever friends want to buy a new motorcycle, redecorate the house, etc. this line of credit seems to be handy. And they don’t seem to care if they get it paid off or not.
There are two issues at hand. The first one is living within your means. Obviously, taking out debt to support an extravagant lifestyle is not a good idea. If those friends are just digging themselves deeper on their house in order to buy shiny new toys, then they’re going along the path towards permanent indebtedness and financial ruin
The second one is how to best allocate assets, assuming you’re budgeting for things correctly. If a homeowner wants to spend money on something, it can be in his best interest to do so out of a HELOC (Home Equity Line of Credit), and invest the money in something thatt yields a higher return. A HELOC at, say, 7%, tax deductable and some stocks at 8+%, with only capital gains tax to pay, is a net win in the long run.
The homeowner takes on more risk, but not necessarily unmanageable risk.
I agree with you that the vast majority of people are not actually doing any financial planning, just cashing in on their house appreciation.
Another piece of the picture. Many US homeowners have grown used to the value of their home increasing much faster then the inflation rate. So the idea of not paying down much of the mortgage isn’t a big deal. You just sell the house in 10 years, and walk away with the appreciation. That same increase is a big chunk of what has lead to things like interest only loans.