Wednesday, October 11, 2006

Fools and their money

Another day, another step toward complete financial ruin.

Not for me, of course, but two stories I read today in the daily papers have me convinced that people's zeal for real estate has them blindly making some truly baffling decisions.

First, Garry Marr of the Financial Post's story about Genworth Financial (it's behind CanWest's iron-clad subscriber wall, but you can get the gist of the story on Jonathan Chevreau's Wealthy Boomer blog here) announcing that they will be the first to offer 40-year mortgages in Canada.

Given that Genworth was also a pioneer of sorts when they unveiled 30 and 35-year mortages earlier this year, I'm not surprised that they've upped the ante to 40 years. It's to their benefit that you pay them for longer. But what truly struck me dumb is that in the article, the Genworth rep says the only reason they offered the product was because of the positive response to the previous, 35-year term: a full 20% of Genworth customers now opt for the 35-year term.

That's absolutely astounding to me. I've said it once and I'll say it again -- there's an alarming lack of understanding about the way money works in this country, and the financial services industry is profiting handsomely because of it.

I had just about recovered from the thought that people will now literally be passing their mortgages on to their children when they die, when I read more distressing real estate news in the Globe. Non-conventional, high-rate mortgages to people who don't qualify for conventional loans are increasing to the tune of 50% per year in Canada, a story by Heather Scoffield reveals. More than 85,000 people signed up for the products in 2005.

40-year mortgages? Let's put it this way. If I told you you had to keep paying me money until the Leafs win the Stanley Cup, would you sign up for that?

Didn't think so.

The bottom line is quite simple, really: If you can't afford a house, don't buy one. Don't talk yourself into thinking that paying $700,000 for a $200,000 loan over 40 years is somehow a good idea.


Anonymous said...

Think of it this way, it's like they are "renting" where the payments never end. Then you buy some type of mortgage insurance to pay off the house when you die. Simple!

mcx said...

This is true, I spoke to a manager of a major sportswear chain shop once and he'd worked in Richmond and in Peckham. He said they don't bother with sales or special offers in Richmond as sales actually go down during that time as few people there want to be seen picking up bargains.

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