How Do You Treat Your Mortgage
If you won the lottery tomorrow, would you pay off your mortgage?
Most people would. After all, isn’t it “The Canadian Dream” to own your own home – and own it outright with no mortgage payment or lien encumbering the deed to your property?
Can you imagine how much more money you would have if you weren’t required to send a check to the bank every month for that big, fat mortgage payment to keep a roof over your head?
Imagine the sense of liberation you will have after 25 long years (300 months!) of monthly mortgage payments! It would feel as if a thousand pound weight just rolled off your shoulders!
All your money and the house will finally be yours! You would be loaded – filthy rich, indeed! A mortgage is a debt and debt is a bad thing! Right? Of course you would pay off your mortgage – it’s the smartest thing to do, right?
Hold on a minute!
It is crucial that you understand what is really happening here.
You need to figure out why you are doing what you are doing! Your burning desire to satisfy your mortgage is not about economics or finance – it’s about emotion.
You “love” the idea of owning your own home. You “hate” having to pay your mortgage payment. If you are like most, you may even “fear” your mortgage. Your drive to pay off your mortgage early is fueled by emotion, not by good financial sense!
A mortgage is a financial tool, not an emotional state of mind, so why are you making decisions regarding your mortgage based upon emotion? And why do you feel the way you do about your mortgage? Could it be that your perception of mortgages is a learned perception, influenced by your parents and grandparents?
Think about this – just about everything you have ever learned about money, you learned from Mom and Dad. When you told them that you were planning to buy your first home, they said, “Better make a big down payment, and keep that mortgage payment low! You better pay extra to pay it of just as soon as you can! You don’t want to be a slave to that mortgage for the next 30 years! You don’t know what you are getting yourself into!” This is precisely what my parents said to me.
My parents were wrong!
Because, as a result of their advice, I lost thousands of dollars by paying extra toward my mortgage in order to “beat” the interest and pay off my loan early.
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We were taught that mortgages are “bad”, require us to work extra hard to pay them off early, or that we should avoid them completely if at all possible. But what they never told us is why they felt this way about mortgages! It is important that you first understand their perspective in order to clearly understand why their financial advice is bad for you.
Let’s take a look at mortgages through the eyes of our parents and grandparents.
Back in the 1920s, homes typically cost around $5,000. That sounds like pocket change until you consider that the average annual household income in 1925 was only $1,434. Just like today, very few could afford to purchase their homes outright, so they borrowed money from the banks to buy their homes.
Times have changed drastically and so have lending laws. Back then, banks had the right to demand full repayment of mortgage loans at any given time. If you failed to repay your loan when it was called due, the bank had the right to seize your property, force you out of your home and sell it to satisfy the debt.
On October 29, 1929, when the US stock market crashed, millions of investors lost huge sums of money. To make matters worse, the money they lost was not theirs to begin with – it was borrowed money. Back in the ’20s, investors commonly purchased stock with money borrowed from stockbrokers, from what was called a “margin account.” Under laws and rules in effect at that time, you could purchase $100 worth of stock for a payment of just $10 to your broker; your broker would then put up the other $90.
When the Crash hit, 30% of the value of everyone’s stock portfolios was sheered right off the top. A typical brokerage account previously worth $100 was now worth only $70. The investor was left holding the bag, having borrowed $90 to buy the stock! The Crash led to a “margin call” where the broker
would demand that the investor come up with more cash because his account had exceeded the “margin limits.”
If the investor couldn’t cough up the cash, the broker would begin selling off the investor’s stocks until enough cash was generated to meet the margin call. This is the last thing an investor wanted the broker to do! Stocks were already down in value 30% – this was the worst time to sell! To avoid having his stocks sold, the investor would go to his bank and withdraw enough cash to meet the broker’s margin call. The investor had to move fast, because under stock exchange rules, margin calls were required to be fulfilled within 24 hours (nothing like a little pressure, eh?) In the days following the Crash of ’29, swarms of investors went to banks to make cash withdraws. Within a very short period of time, the banks’ cash supplies were depleted.
When the banks ran out of cash, word spread like wildfire and panic set in. Bank depositors stampeded the banks, demanding their money, but the banks were unable to meet their demands because the cash supply had completely dried up. To get more cash, banks started calling their loans due. They sent word to their borrowers demanding they satisfy the full balances owing on their loans immediately. The homeowners didn’t have the cash, so the banks foreclosed on the homeowners’ properties, forcing millions of families from their homes and into the streets.
The banks’ plan of raising cash by calling mortgage notes due backfired. Nobody had the money to buy the homes repossessed by the banks, so the banks were essentially left holding worthless real estate. Unable to meet the demands for cash by their depositors, US banks began closing their doors, many of them to never open again.
The Crash caused a domino effect – investors couldn’t meet margin calls, brokers couldn’t find buyers for the stocks and with no one willing to buy, brokers had to continuously drop the stocks’ prices.
More than half of US banks failed. Tens of millions of Americans lost their jobs as companies declared bankruptcy. Millions were rendered homeless. Thousands committed suicide.
This domino effect of financial catastrophe spilled over countries boarders and virtually no one was immune to the havoc that ensued.
Who weathered the Crash of ’29 without feeling the fury of its devastating impact?
Those who owned their homes free from a mortgage. These few fortunate individuals were immune from the banks’ collapse. With no loans to repay, they succeeded in keeping their homes. They may have had no work and little food to eat, but they kept a roof over their families’ heads as their neighbors went broke and were forced into homelessness.
My grandparents lived through the Depression, and were raised with the Depression mind set that mortgages were a bad thing. This belief was passed down to my parents, who then passed it along to me.
And yet, a small group of Americans (the wealthy!) insist on carrying home mortgages even when they can afford not to. Why would they voluntarily place themselves at such risk? Don’t they know what they are doing? The truth may surprise you.
They wealthy know exactly what they are doing.
These people are among America’s elite: the wealthiest 1% of the population. Not only do they know what they are doing, they understand why they are doing it. The wealthy understand things about how money works which most of the middle class do not.
America took her hard knocks in the ’30s and learned her lessons well. Both the US and Canada have never seen such financial devastation as happened in the ’30s. However, it cannot happen again because of the safeguards for consumers that have long since been put into place by both Canadian and US governments
This is not to say that a Depression cannot occur again – but that a Depression like the 1930s cannot occur again.
Should financial disaster strike, the causes will be significantly different.
Let’s consider some of the safeguards for consumers today:
1. Banks are no longer able to cancel your mortgage. This means that if you have a mortgage, you are no longer at risk that the bank will suddenly mandate that you pay the loan in full or take your home. If you are current on your loan payments each month, no bank can force you to pay off the entire remaining balance upon demand.
2. Consumers can no longer buy stocks with only 10% down. The maximum margin limit is 50%. It is zero for speculative investments (such as internet stocks.)
3. The Canadian Deposit Insurance Corporation. CDIC is a Canadian Federal Crown Corporation, created in 1967. Before this, consumers were unprotected in the event their bank went bust – this is no longer the case. Today, consumer accounts up to $100,000 are protected, providing consumers with security they did not have in the ’30s. Since the birth of the CDIC, no one has lost their life savings due to bank failure because they are now protected by insurance.
There have been 43 financial institution failures since it was formed. The last was in 1996 when Calgary-based Security Home Mortgage Corporation closed its doors. About 2,600 Canadians had deposited $42 million in the firm. All but $10,000 of the deposits were insured and CDIC paid back all insured deposits within three weeks of Security Home Mortgage’s closure.
4. The major lesson that governments learned after the stock market crash of 1929 is that the best way to prevent economical disaster is to grant banks all the cash they need, rather than withhold currency like the US government did in 1929. Back then, the government believed that flooding the banks with cash would result in inflation. Instead, the government created the worst depression in history. Hard lesson learned, but learned all the same.
5. Competition in the mortgage industry has dramatically increased. If Bank “A” won’t provide you with the loan you seek, odds are in your favor that Bank “B” will. Additionally, new, innovative loan programs now exist, which make mortgages more affordable and flexible than ever before, significantly reducing the likelihood of consumer default.
For those of you who are still hell bent on getting rid of your mortgage, let’s paint the most extreme picture of financial disaster.
If something so cataclysmic happened to our world – whatever that may be, our financial markets would ultimately crumble. And by markets I mean all markets – real estate, stock and bond markets, etc. If that happened, the real estate that we owned would be worthless. The mortgage market would be in tatters. (No one would be coming to collect on the mortgage because nothing would have value anymore and everyone would be out of work). The GICs in our friendly bank would be worthless because the financial institutions and/or governments “guaranteeing” them would not be around. In fact, there would be looting and pillaging in all urban centers here and abroad as everyone tried to get food! “The law of the jungle” would be the order of the day.
Now if this sounds as extreme and far fetched to you as it does to me, our reality will continue on as has for the past hundreds of years. We will continue to dream and work to accomplish those dreams. We will look for love and love and be loved.
In fact, we will live and die…and the cycle will repeat itself again and again and again…
However, what we do during our brief stay on this earth will have a profound effect on us and those we love and have in our lives.
We have the ability to dream big dreams and make those dreams into our realities. Or we can dream and never quite seem to get a grasp on the brass ring to achieve the good life.
The choice is ours. We have the intelligence, we have the knowledge all we must now do is act.
So what is the point of all this?
Well, those who tell you to pay off your mortgage are basing their beliefs and advice upon their fears! They fear that having a mortgage might cause them to lose the roof over their heads.
These fears were well justified – fifty years ago. Today, however, these fears are largely unfounded.
You will note, I said largely – but not entirely. Still remaining are additional aspects of mortgage loans we haven’t discussed yet. Two of them are:
1. The challenge of affording monthly mortgage payments;
2. The interest to be saved by not making that monthly payment.
Do you worry that you might not be able to make your mortgage payment each month? Is your job in jeopardy due to corporate downsizing and the instability of today’s job market? This can be a very real problem, because the bank can foreclose on your home in the event that mortgage payments are not made on time.
If you were suddenly to lose your job, you may not be able to make your house payment and you could potentially lose your home.
Wouldn’t it then make sense to eliminate your mortgage?
Believe it or not, the answer is NO!
Even though on the surface it does not make sense, the truth is that the less money you have, and the more worried you are about the possibility of losing your job, the more important it is that you keep a big mortgage on your home! I realize that this sounds absurd, but it is true, and it is imperative to your own financial health that you understand this point as gospel truth!
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