While they say that borrowing costs are reaching their maximum, those with a current mortgage are still struggling, because they likely bought thinking that rates wouldn't increase so much and as I have said before, most people didn't collar their loan repayments at all. Why would you with record low rates? I was reading a Finnish news article looking at people who are struggling with their rising housing costs due to the increase in interest rates, and the first example stood out to me as strange.
Actually, two things stood out. The first is that they owe a total of 601,000 to the bank, with 499,000 of that owed on their current home, the rest on their previous home. It doesn't say, but that means that they have either bought a house without selling their last, or sold it at a loss. But, considering that they would have needed a 20% deposit, I will assume the former.
Using that value, it means that they have bought a house that is likely valued somewhere between 600 and 700K to have a 500K mortgage. Depending where you are from, that is either a little or a lot, but in Finland, it is quite a lot. Double mine.
€500,000 ~$550,000 USD or $850,000 AUD
And this is the second interesting thing, because in order to have that kind of loan in the region they live, the house they bought is likely large and built in the last five years. This is no "fixer-upper" kind of thing. And while I am not judging, I suspect that a lot of the house inflation over the last years isn't just down to Covid prices, war and supply chain issues - it is because what we expect a house to be has significantly changed in many regions, not to mention what we put into the homes.
When I was young, houses were houses and a fancy home had a second TV - times have changed.
This aside, I do feel for the family though, because in May last year, they were paying €1410 for their loan, with €1006 directly paying down the principle, and €404 in interest. However today, they are paying €2410 and after fees and loan insurance, just €84 scratches the surface of the principle. Essentially, what a year ago would take 1 month to reduce the principle, it is now taking a full year. At this rate, if they have a 25 year loan, they are going to have that loan for the next 300 years.
I have said many times how people overextended themselves on low interest rates, but it wasn't that they bought more valuable, they just overpaid, which means that recouping the costs will be hard. And, similarly to the changes in the housing style expectation over the last decades, there are also a lot of additional costs that have been added on top that our parents never paid, mostly due to entertainment, like subscriptions, multiple internet connections and more luxurious cars.
Cultural and lifestyle changes driven by consumerism is likely responsible for causing a great deal of financial suffering, because we have been conditioned to be on-demand and not do without. Which makes belt-tightening all the more painful, where people are making cuts of what they used to take for granted, and worrying about things like appliances breaking down and the coming winter.
And this is Finland, which is relatively down to earth in regards to spending and borrowing, and tends to have a higher average education level than most places. So, I am assuming in other countries the situation might be far worse, which would explain why in Australia for instance, there was such a spike in housing prices, were FOMO reigned supreme. Now, they are paying the costs there too, caught well in the red as interest rates rise and the costs of living increase even faster.
While the economy is a mess, a lot of the pain we suffer is self-inflicted, as we have decided that we are entitled to a certain level of lifestyle, regardless of whether we can afford it comfortably or not. So, rather than living within our means, we stretch a little further and then a little closer to that tipping point. When changes to conditions arrive, we are then pushed over the edge and have to scramble on the loose rocks, trying to regain our footing. The result is that even if we survive the hard times, we are in no position to take advantage of the coming good times, and we fall further behind again.
Perhaps rather than buying our "dream house" and risk falling over that edge, we should reconsider the dream itself. For instance, if we shift the focus from the type of house we live in, to the dream being having a house that is our own, we might take a lesser house, but make it ours sooner for less. That means that when those hard times come, they aren't that hard, and when they are receding, we have capital to invest into the rising tide - whether that be into property, stocks or crypto.
For us with a collar on our loan for a few more years, we are going to try and pay extra each month while we can, because we get a little bit of an inflation bonus for doing so. Our money doesn't go very far in the shops, but it does put a dent in our mortgage. If very lucky, things will turn around and we will be able to relax and breathe a little easier financially, whilst also reaping the benefits of continuing to invest and pay down the mortgage, rather than paying predominantly interest only for years on end.
Hopefully, home will be where the heart is, not where the loan is.
Taraz
[ Gen1: Hive ]
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I’m (quite) a bit older than you. When I was young, nobody I knew had a second TV, not even in fancy homes (at least of the kids I knew who had parents wealthier than mine). But the fancy homes did have a color TV, the rest of us only had black and white models. Back in the early to mid sixties, you could buy a plastic screen you that you’d put over the picture tube of your black and white TV that diffracted (I think that’s the term) the picture to produce colors. Really hokey and it tended to display bands or blotches of color unrelated to what was going on. Orange grass, blue people, whatever.
Sounds like something an early hacker would do :D
I haven't heard of that one, but I remember a couple people having screen magnifiers that would sit in front of the television so they could see it. I did a quick search and I think they are called Fresnel lenses.
We had a black and white TV and remember it and only realised when you went to a friends house who had color what you were missing out on lol. Our tv shut down at midnight and you were left with the test pattern until morning.
It sucks but that is why variable interest rates suck. I saw quite a few videos online about how getting fixed rates are the best thing to do when the interest rates were low. After all, nobody knows when the rates will turn around. It's just easier to have a few variables in your control rather than leaving it up the banks/governments.
I feel that the variable rate is a trap that once they have enough caught, they start artificially increasing it to maximize the gains.
Yes. I feel that it is also a trap but people take that risk when they sign the contract. I prefer a fixed rate one.
Yeah people are definitely up shits creek on so many of these loans it’s crazy. The wild thing about it as well is that for the most part people aren’t even earning the money they would need to pay these damn loans back, it seems a lot like 2008 all over again, people getting obscene loans for no damn reason.
We are so lucky with our mortgage, we locked it in as a fixed rate and we want to move but the problem is it would double or triple our mortgage lol so we are waiting our time for the right opportunity and also shopping within our budget.
It’s so important to be able to pay a little extra on the mortgage! We pay 50$ extra a month directly to the principle, it’s a little different than that, I just rounded up to the next 100 on the payment. I think it was like x46 and I rounded it up to 100 just to even it out. We don’t notice the extra money per month and it helps knock down the principle a little bit every month which helps us out in the long run for sure.
Bide your time a bit longer if you can, because after things break, the reset will happen and those who held through will have options. I think.
I can't do the math in my head, but if in the course of a year, one extra payment amount can be made straight onto the principle, it makes quite a difference to the end of the loan time.
1000 payment (interest+principle) x 12 + 1000 off principle extra
On a 25 year loan, it is something like 4 years shorter after all the compound interest savings?
With interest rates as high as they are now, it probably makes sense to pay up as much extra as you can without incurring a penalty. Low interest rates have ruined price discovery for 15 years with the covid years being extra terrible.
Yes - Price discovery is not driven by actual value, but sentiment only and we are sentimental fools.
That might make a good post title ^ :D
Did you see my post today? I recently got a loan for an auto purchase. They were saying how great the 7.5% rate they got me was. I told them pretty candidly that it was horrible. Hard to get excited about being bent over!
7.5 is crazy high! I have a loan on the car too unfortunately, but it is half that.
Yeah, it is. They ended up getting me down to 6.09% which is still horrible to be honest.
The banks own most of our homes. For those who can afford to pay for their house, they have more freedom
More freedom and more opportunity to invest extra.
Sometimes I wish I would have just gotten an apartment, but I was coaxed into buying to appease the lady. The house is a huge money sink. You're essentially passing all the value to the banks. I could live in a shed and be happy. (Especially if I didn't have to pay taxes, insurance, etc.)
While our mortgage really isn't bad, the cumulative effects of all other costs hurt. I'd say our overall payment has increased at least 40% in the last 5 years.
It does expand costs a lot - there are so many "extras" that are needed for a house. However, it might also come with some benefits for the kids too.
I think some time in the future I'd like to move to a more rural area. I had a blast in that environment when I was a kid.
I am quite chaffed with the position I find myself in currently as I may owe on two properties with rising costs I have seriously cut back on any spending. The one property is hopefully being sold soon even though it is not a train smash as that mortgage ends next year in March. The one area I did spend was renting the appliances instead of replacing them due to constant load shedding knowing they would break. Why don't people think ahead planning for a worst case scenario as i think many have had such a cushy life they don't know what a genuine struggle really is and need to grow up. Maybe after this they will appreciate what they have and change what matters most in life.
So when you are renting, they just replace the dead machine? That is interesting! Thankfully not an issue here... yet.
Good luck selling the property and hopefully you get a great price. :)
Yes they have to fix or replace at their cost. It goes against what we know by owning it outright being cheaper but we have had so many appliances break it actually works out being the best option currently. Most appliances only last a few years before they need some work which is never cheap and virtually the cost of a new one anyway. Hopefully it will sell quickly to a business due to it's location and what it offers.
I saw a video discussing a recent spike in auto reposessions. People have been borrowing for cars and motorized toys more and more. Now the bubble prosperity is bursting, and those monthly payments are no longer so affordable. The US is riddled with consumer debt, but easy credit in addition to money supply inflation has been creating an illusion of prosperity for years. The response to the 2007/2008 collapse was to double down on the policies that made it possible, and now we have had too many cracks in the facade of fiscal stability as interest rates were forced higher by economic reality. The experts say everything is under control and we are headed for a solf landing. I have my doubts about technocrat confidence though.
There have been some interesting reports on car debts and the practices used to trap people into a car they can't afford, wait for them to default, then sell it again to the next sucker. Rinse and repeat.
It is insane that we allow it to happen. Bitcoin was released as a response to these events and perhaps next time, people will actually support it.
The incentives and mandates from the US federal government for hybrids and especially electric vehicles is also apparent on the secondhand market. These cars depreciate at least as fast as gas cars, and often faster. The electric trucks can't do real truck stuff because the range takes such a hit when loaded up or towing a trailer. But our all-knowing political class just continues setting arbitrary mandates without any regard for what people want or need. And the debt bubble grows with each new car as people chase the new things they are told they need.
Wow that's a dramatic increase in a house payment!...and I was shocked the other day to see sugar, which has stayed consistently low during these inflationary measures spike a whole buck for a bag. I guess they were making up for lost time. I guess I am lucky to have a fixed rate, I can still afford the sugar. (Though I probably won't need any as I stock pile during the holiday season when the prices are on sale)
Pretty crazy.
Every week I go shopping and it is going up, while they say in the news inflation is steady. Not only that, there is the shrinkflation on the product sizes too - pay more for less.
Are you baking something? :)
No, just happen to see the sugar in the center aisle the other day for 3.19 a bag. I only bake mainly during the holidays, pumpkin pies, bread and pumpkin cream rolls sometimes. I make them all from scratch and homegrown pumpkins, which places them in high demand. If I have a lot of pumpkin frozen for the year sometimes I bake the bread and take it with me for when I pick the kids up to take them to school, they love the pumpkin bread. There's a joke in the family that if I wanted to pick a fight all I'd have to do is bake pumpkin bread and toss it into a room...lol.
As a homeowner myself, i too could feel the effects of rising interest rates. We just had a recomputation and our monthly mortgage sadly increased. What i like to add which some people may not be aware off is that during the early years of a home loan. 95% of a repayments value only goes to interest and not the principal amount.
For most yes. I think ours is different - I should do a post on what it is, putting in some basic numbers to show.
Would love to see that post once its out. Feel free to mention me. Im curious to see how it is in other countries.
Now that I am reaching 40,I have that choice too. I have not traveled much. And if I buy home, it would not serve purpose as I would be paying mortgage forever and after death someone else not my own child would benefit it. If I travel and see the world, not sure if I would be able to do that but I would be partially happy. Will power is drained by parents and I am not motivated for either as I lived like robot. I guess universe has to push me to make a choice and that too in a way I can understand.
It is a hard life because there are constant opportunity cost factors to consider. Travel is great, but living without money in this world sucks for most people who do it. Owning a house is great, but is also not for everyone, and the limitations it imposes can suck too. It is a personal decision, but for me, I am hoping that at least my daughter's life is better.
There was a time when my friends and I were talking about the rate at which people take loans. It is too much and I know that it is as a result of how the economy is.
The interests on these loans are too much. They are too high and I feel it is not nice.
In a perfect world, we would be able to live cozy and warm in the forest, with enough to eat and drink and not have to worry about a loan at all :)
happy who doesn't have to deal with a mortgage. And he lives, for example, in a vice-generation house 😅
My wife and I were just talking about inheritances and how her parents will leave her something (not necessarily much) and mine have left nothing. For my daughter, I want to leave her something.
Today housing is a very difficult task. Many peoples are living below the poverty line.
It is a sad world and the different gaps are growing. The best we can do is be our best.
Festivals now, 401Ks whenever. I am the experience spender!