A 50-Year Mortgage Won't Make Homes Affordable
Ultra-long mortgages create the illusion of affordability but lock borrowers into decades of extra interest because leaders won’t fix the supply crunch.
Last week, Director of the Federal Housing Finance Administration Bill Pulte revealed a plan to offer 50-year mortgages to the public. The 30-year fixed-rate mortgage, created in the 1930s, helped generations to slowly build home equity, providing them with a store of wealth even if they never invested elsewhere. Over time, lenders rolled out alternative mortgage structures—15-year fixed-rate loans, adjustable-rate mortgages, interest-only mortgages—but none rivaled the 30-year mortgage. Now, policymakers are proposing we stretch mortgages to 50 years, mainly to make today's sky-high home prices look more affordable.
House prices shot up in the great inflation of 2021, and remain at very high, unaffordable levels. A 50-year mortgage makes a house appear marginally more affordable by slightly reducing the monthly payment. However, it vastly increases the interest paid over the life of the mortgage.
For a $400,000 mortgage at a 6.5 percent interest rate, the monthly payment on a 50-year mortgage is $2,254.87 compared to $2,528.27 for a 30-year mortgage. And yet, this modest decrease in monthly payments will be offset by a dramatic increase in interest payments: from $510,177.95 on a 30-year fixed-rate mortgage to a staggering $952,920.53 on a 50-year mortgage.
Most people balk at paying two or three times the home's price in interest. Some commenters online liken 50-year mortgages to "debt slavery." That isn't far off: Early payments on a 50-year loan are almost all interest, so equity builds painfully slowly, and it's not until you've owned the house for a few decades that you have a decent amount of equity.
This isn't automatically a bad thing. Because early 50-year payments are mostly interest, they function a lot like interest-only loans, which appeal to borrowers who expect irregular income and can pay down principal later. An interest-only mortgage does require some discipline, because if you don't diligently pay down the principal, you will owe a balloon payment at the end. But it is a good way to bring down monthly payments if you do have the discipline. However, borrowers without extra cash flow will simply make the minimum payment and end up paying the full $950,000 in interest.
There are additional benefits. Given the choice between a $2,254.87 mortgage payment and a $2,254.87 rent payment, the mortgage wins: It stays fixed for decades while rent rises. Also, as the owner of the property, the mortgage holder is entitled to any appreciation in the property's value. Over the course of 50 years, inflation alone makes it likely the home will appreciate, even if you build little equity from payments. Of course, house prices may go down, leaving the borrower with losses and debt. But unlike the adjustable-rate loans of the mid-2000s, fixed mortgage monthly payments won't rise, giving long-term stability even if prices dip.
The typical consumer of a 50-year mortgage is not expected to understand these nuances. Most buyers drawn to 50-year loans are just trying to reduce their monthly payments and will absorb the massive interest costs. Longer loans usually carry higher rates, which would erase even the small monthly savings provided by a 50-year mortgage, with an interest rate likely higher than that of a 30-year mortgage.
Other countries have tried ultra-long mortgages—Japanese banks issued 100-year mortgages during the real estate bubble of the late 1980s and early 1990s, and Swiss banks are still issuing 100-year mortgages to this day. (Swiss housing is very expensive.) The idea isn't new. The move here appears to be an attempt to boost demand in a sluggish housing market, but it dodges the real issue: Prices are high because we don't build enough homes.