Today, most mortgages have 30 year terms while some have 15 year terms. But on November 10th, Bill Pulte, the director of the Federal Housing Finance Agency, suggested the idea of a 50 year mortgage to President Donald Trump, who quickly embraced the idea, posting it to his Truth Social platform. Both men felt that by spreading mortgage payments out over an additional 20 years, typical mortgage payments could be lowered, making housing more affordable.
Mr. Pulte’s agency oversees Freddie Mac and Fannie Mae — the two key organizations that purchase and securitize mortgages. For a 50 year mortgage product to be viable, his agency would need to instruct Freddie and Fannie to adopt and begin securitizing such mortgages. To the extent that the current administration favors a 50 year mortgage product, we would assume that Mr. Pulte would direct such a change.
The reception to this idea has been mixed and it’s been quite controversial, even within the Trump Administration. The plan was widely criticized on the basis that such mortgages would saddle homeowners with extreme long-term debt, given that a half-century would be required to pay off the loan. Critics also pointed out that the cumulative interest over 50 years would be far larger than that paid on a typical 30 year mortgage. Finally, it is believed that such a product would create additional demand for housing, ultimately increasing housing costs in the long term, negating the idea’s original intention of making housing more affordable.
Our take? We’re far less alarmist. We don’t think a 50 year product is a threat to the housing market or that it will change homebuying in any material way. It could be an interesting option for some homebuyers, but at best, it’ll likely be a niche product.
To what extent could this reduce mortgage payments?
With a typical mortgage, initial payments are mostly interest. And as payments are made through the life of the mortgage, each payment carries a slightly higher proportion of principal relative to interest. For a 30 year loan at a 6.25% mortgage rate, the first payment is approximately 15% principal and 85% interest.
If the loan term is extended to 50 years, the first payment would only comprise 5% principal and the total amount of each payment would be about 10% less than with the 30 year product, assuming no difference in interest rates.
Particularly for first-time buyers, dropping mortgage payments by 10% (or being able to buy 10% more house) is meaningful and compelling.
But would higher interest rates offset this?
The example above assumes that interest rates on 30 year and 50 year mortgages will be similar, but this will likely not be the case. Banks that issue mortgages (and institutions that purchase them) demand higher interest rates on longer-term mortgage instruments. For example, the interest rate on a 15 year mortgage is is about 0.5% lower than a 30 year mortgage. The institutional mortgage market would ultimately determine interest rates on 50 year mortgages, and that remains an unknown factor.
We could anticipate that a 50 year mortgage might carry an interest rate 0.5% higher than a 30 year mortgage. If so, that rate would be 6.75% in today’s environment. The combined higher interest rate and longer maturity would only lower the borrower’s mortgage payment by about 3%. That’s not a material savings, and is certainly not adequate to justify the extra two decades to pay off the loan.
If anything, It’ll be a niche product.
Based on our analysis above, most homebuyers will continue to utilize 30 year mortgages even if a 50 year mortgage is offered. Going forward, there might be some environments in which interest rates on 50 year mortgages could be favorable and some homebuyers could benefit from lower mortgage payments. But, we view those as the exceptions rather than the rule.
What about long-term homebuyer debt?
Critics point out that a 50 year mortgage could leave homebuyers in debt for a very long time, and point out the very slow rate of principal payback in such loan programs. However, very few homebuyers are likely to remain in their homes for a full 50 years. Average homeowner tenure is only about 10 years, with the mortgage balance paid off at the time of sale.
Additionally, as mortgage rates fluctuate, homeowners are likely to refinance their mortgages. A homeowner who initially takes a 50 year mortgage may eventually refinance into a 30 or 15 year mortgage. And if the annual income of homeowners increase over time, a homebuyer who initially only qualifies for a 50 year mortgage may feel comfortable with eventually switching to a shorter term product.
Homeowners also have the opportunity to pay extra principal on their mortgages. A homeowner who finds themselves with surplus cash and pays extra principal on their mortgage will reduce the time horizon on their mortgage. Even modest extra payments may help pay off a 50 year mortgage in 30 years or less.
Finally, know that equity is not built by simply paying down one’s mortgage. It is also generated through property appreciation. On average, real estate appreciates by about 2-3% per year. But with a mortgage, that appreciation is leveraged, providing homeowners with much greater returns on their cash. So even with a mortgage program where principal is paid down slowly (or not at all) homeowners can still build wealth through appreciation.
In conclusion.
A 50 year mortgage is an interesting idea. But there’s a high probability that it may not work — a 30 year mortgage may still be a much better deal financially. But if they are viable, 50 year mortgages are likely to remain a niche product and are unlikely to affect the housing market in any significant way.
