Wednesday, December 2, 2015

Will they Pay You to Take a Mortgage?

Euribor, to which euro mortgages are linked, has hit a new low.  So the question will arise, will the time come when the bank pays you to take a mortgage?  This is not farfetched.

Think about it.  In the next crack-up, the banks will be stuck with bank owned properties on the books at a nominal value of say $250,000.

But we are in deflationary times, so the value of assets will be dropping.  So say now the house payment is $1200 per month at 4% interest... over thirty years that is about $175,000 interest paid on the loan.

Now in deflation you have to think the other direction.  At 4% deflation over thirty years the value of the $250,000 asset, the house is dropping, in monetary terms.

By charging zero interest, the bank has an asset on its books, and it getting its money back from a safe credit bet, you.  You pay about $695 a month for 30 years. Also the longer you take to pay, the harder the currency with which you pay, the happier the bank is.

So zero makes sense, but how about the bank paying you to take a loan?

It will happen.  The gimmick is you will take a loan at zero interest rate, and the bank will "pay you" the difference in deflationary interest say $200 a month, so you net out $495 per month in house payments.

Of course you'll be agreeing to a house at $250,000 when the cash price is more like $200,000, but there will be credit foolish buyers aplenty to take this lousy deal.  You'll also be paying property taxes on the nominal $250,000 valuation, a 20% premium on your property taxes, in an era when those taxes will be rising.

Of course the banks will start with other freebies first, toasters, homeowners insurance, "skip a payment" plans, 10,000 psychological blandishments before they get to hard cash.

Get away from credit completely, cash will be king, and property, paychecks and pensions will be forfeit.  Get self-employed.

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