Cash accumulation equation vs 25 year mortgage

Ripples can still be felt from the sub-prime mortgage crash in the States, lest we forget. Interest rates got too high, repayments became impossible, foreclosures took over, and we're all still feeling the pain. I wonder what the rates were actually at, what the average house price was, and the average payments in relation to the average income?

Here in Australia, interest rates are around 7-8%, "fixed" for a few years before they are legally permitted to shaft you up the ass by bumping it up to who knows what. Budgeting for it to be 10% would be prudent. Does that sound like a lot of interest?

At that rate, St George bank of Australia would give you about $225,000 cash in exchange for monthly repayments of about $2,000 over a period of 25 years, totaling about $400,000 just in interest payments alone. Right now you'd have trouble finding a one bedroom apartment for that in an area that doesn't have to be accessed by helicopter due to it's remoteness.

St George Mortgage Calculator



Meantime, interest rates on savings accounts are pointless, while on a Cash Management Trust (CMT) you could easily get 5.5%, compounded quarterly. Not much to combat rising mortgage rates right, or is it?

Consider what it would take using such a CMT to acquire the same amount as the above mentioned mortgage principle, $225,000, by depositing the same amount as the monthly repayments into an account earning about 5.5% interest, with an opening balance of $67,000:

Cash Accumulation Equation



A CMT earning 5.4% interest could turn an initial investment of $67,000 into $225,000 in 5 years.


Lets extend that projection out to the full term of the mortgage - 25 years:



That's right - 1.5 MILLION DOLLARS!

If you had $67,000, what would you do?


A: borrow $225,000 see what you could buy for under $300K, and spend the next 25 years paying for it

B: borrow nothing, put the same mortgage repayments into a CMT and wait 25 years, let it accumulate to $1.5M

A few points to consider about the cash accumulation technique:

• It would make you a millionaire in your 50's, but you wouldn't own a home


• House prices in outer suburbs of Sydney have doubled over the last 20-25 years


• The average house price in Sydney at the moment is about $500,000


• If house prices continue to double every 20-25 years, it would cost about $1,000,000 for an average house in the outer suburbs, BUT:


• You could buy it with cash and live on the interest on the $500,000 change.
  (Or at least supplement your income with it)


• It all tend s to point towards you owning a million dollar house in your 50's

A few points to consider about taking a mortgage:

• If you want to live in a major city in Australia, you'd have trouble finding anything other than a small apartment for under $300,000


• You'd be paying $2,000 a month for 25 years before you owned it (in your 50's)


• You would own your property, but it would be small, and at least 25 years old


• The bank would have acquired $400,000 of your money, leaving you with no cash reserves


• You will most certainly have to work well into your 60's to have any additional cash for retirement

A perfect world:

Average house prices down around $200-300,000, mortgage rates at about 5-6%. Not going to happen! We have the insatiable fractional reserve banking system to thank for that. Home prices and interest rates MUST rise to keep cash in the economy.

The solution:

Rent indefinitely, or move back to Japan where they learnt from this mistake 10 years ago when the Japanese bubble economy burst and houses are currently about half the price.