Advice Column: Your House Is Not YOUR ATM Machine

Judging by the number of posts that I have done on issues like secured loans, secondary mortgages, refinanced house loans, homeowner loans, etc.., you could be forgiven for mistaking that I wholeheartedly support them. But I do not. It really depends on who is borrowing, how much they are borrowing, what they are paying, why they need the money, …

Politics, Parents and Principal

For today’s post, though, I’d like to share an all too common problem in Taiwan that affects local homeowners, and this is a story that is true. One of my friends went back to visit her mother just last weekend because she had to vote in the Legislative Elections held in Taiwan nearly two weeks ago. On Sunday, I just happened to call her to talk about the rout that one of the political parties had experienced… Instead, I heard this rather disturbing story. (All numbers in NT$ – US$1:NT$32.5 est.).

heloc ads

The Principle Character and Her Principal

The mother (who is single, and has no independent income) was borrowing money as part of a secured loan on the family home. The house had been bought in the late 70’s in Taipei County, and had appreciated considerably over that time (by the order of 10x or more, I reckon).

But the mother had regularly dipped into the equity of the house for various reasons, including paying education fees, investing on the stock market, etc., so despite the value of the house increasing so much, and the initial mortgage being so little, the actual outstanding principal on the current loan agreements amounted to over $1,500,000 (I estimated it to be more than three times the original purchase price of the house).

Borrow and Spend Today: The End Is Nigh

Worse, just the day before the mother had tried to persuade her daughter and son to pay the installments on an additional $500,000 to fund living expenses for the mother (and unknown other expenses). This would have meant that the total amount of the expenses exceeded $2,000,000 and monthly payments would increase to approximately $20,000 per month.

Again, I don’t have access to the actual totals, the interest rates paid, or the terms of the loan(s), so I have no way to know if the amounts are correct or not. But typical mortgages in Taiwan are 20 years in length, and the APR is variable depending on the Central Bank of China’s lending rate. Obviously, secondary mortgages and ‘riskier’ mortgages may attract higher marginal rates than the standard rates (about 4% currently). Simple calculations using common numbers in Taiwan showed that they would need to pay an additional $3000 on the current installments – this is a conservative estimate. Given that they are already paying more than my own mortgage for their outstanding loan (and ours is $16,500 per month), it seems that they’d really be pushing the $20,000 mark.

Your House Is Not YOUR ATM Machine

There are a wealth of companies that in the late 1990’s and early 2000’s made a ton of money encouraging home owners to extract equity from their houses at variously reasonable to expensive rates to cover all manner of expenses:

  • refurbishing
  • new cars
  • foreign holidays
  • consumer items
  • investment
  • paying off credit card loans
  • and any number of other probable reasons

Of course, when house prices were rising by 10% or more annually, this was an easy way to get ‘free’ money. And with interest rates at historical lows, who cared? You simply borrowed the money, waited a few months or years, and sold. Then the additional loans were paid off.

To buy a new house, you could always borrow 100% loans anyway (or more), and with rising house prices, that 100% mortgage would soon be a large fraction of the total value of your house. In fact, you could add all sorts of costs, fees, decoration, equipment, etc. to the value of the house loan in the expectation that next year, your house price would have simply increased enough not to worry about it.

An example: 2001 with a 100% loan on a $200K house becomes in 2002 an estimated 89% loan as you pay off the principal and the house price rises; and so on. The maths works nicely.

The Math Doesn’t Work (Anymore)

The math for most consumers no longer works (if it ever did) when house prices stagnate, inflation jumps, oil prices increase, the economy slows, and jobs start folding. In fact, for many families, these pressures didn’t just come one at a time, but they came altogether. Then interest rates started jumping, too. Even in Taiwan, interest rates have already risen by 25% or more from historical lows. In America and the UK, interest rates are already over 5% on many mortgages. And that’s for standard mortgages.

mortgage rates

(all rates courtesy of

Helocs are being quoted at over 6.5% in the US with some rates nearing 8% on a secured home.

heloc rates

Given that most pundits are expecting interest rates in Asia to return to more historical norms (ie. 5% and above which, in Taiwan, was around 8-9 years ago), interest payments on that extra could add another 10% to the total if the rates continue to rise. Of course, property prices are rather buoyant right now anyway, and when the next batch of presidential elections are held in March 2008, things could move up even more.

While Taiwan is experiencing an upswing again in property, employment, exports, stock markets, currency rates, etc.. the same cannot be said to be true of the US markets. The pendulum starts swinging the opposite way. And all those house loans (that seemed a ‘sure thing’, just a few short years ago) are now turning sour.

For individuals and families, it is going to mean a period of difficulty: less spending power, job insecurity, house prices dropping, perhaps even a recession.

Are you ready for a bumpy ride?

If you’re not, you should start to make preparations: shore up your emergency funds, cut your spending for the short term, pay off the high interest debt as fast as possible, and budget more carefully in the longer term. Trust me on that one: my wife and I had to do this last year when our business went into something of a crunch. It wasn’t easy. But we survived. Things are better now. And they can be for you, too. But it’s a time for action.

And my friend, so far she refused to support her mother by taking on more debt for general life expenses; she has sought advice and suggestions on how to solve the problem permanently, though she faces some difficult decisions and discussions. But this is the kind of stuff that helps to determine what we’re made of.

What would you do if you were the mother? The daughter? Have you had experience of loan problems? Do share… You can always use a ‘nom de plume’, if you wish or email me privately.

Friday’s Reading: Four Good Stories for the Weekend

Great Investment Advice

This article in San Francisco Magazine called “The Best Investment Advice You’ll Never Get” describes how Index Investing started off, it’s a wonderful insight into the world of mutual funds, fees, and passive investing.

San Francisco magazine

The best investment advice you’ll never get – page 1 of 3 For 35 years, Bay Area finance revolutionaries have been pushing a personal investing strategy that brokers despise and hope you ignore. The story of a rebellion that’s slowly but surely putting money into the pockets of millions of Americans, winning powerful converts, and making money managers from California Street to Wall Street. By Mark Dowie

Unfortunately for this writer, this story is a story that has already happened… So can you still make money out of this? That’s an interesting question because if everyone starts chasing the mean, then what will the ‘mean’ really mean? Will greater value be found in ‘managed’ funds again? …

Are you READY to retire?

This article on Extreme Retirement,

Could retirement before you’re even eligible to join AARP be the quintessential impossible dream? Not if you’re consistently disciplined, focused, driven and don’t give a hoot about what the Joneses think of that beat-up Chevy in the driveway, say experts. Whether you work to live or live to work is a question increasingly answered in favor of living by couples who have opted out of the daily grind before the traditional “early” retirement age of 50-something. What’s more, they’re not going quietly, but instead are springing up on Web sites and in media interviews, telling their stories and encouraging others to follow suit.

Dreaming of retiring at 45 or earlier? I’m not. Why? Because I don’t want to retire… I just want to be free to pursue things that I believe are important, not do the tasks that others pay me to think are important! Of course, that includes blogging on this blog: I love doing it. I just wish I could find the time to write even more ‘good’ articles’… so I should retire!

StumbleUpon Trolls: Good for your traffic!

One blog I was reading today suggests an off-beat way to get additional traffic from StumbeUpon. It’s an interesting read, and something that I’m aware of: writing negative stories or giving negative opinions (like editorials in newspapers) often elicits much more of a vocal, even visceral, response from readers. That’s why TV Shows like Mad Money, etc. are popular these days, because they elicit a reaction from the audience. Does your blog do that? Does this one? …

It’s All in the Blogger

After blogging about dismal performance since the sale a few weeks ago, my story has been picked up by John Cow on his blog. Both of these articles suggest what happens when an original owner leaves his/her business in the hands of the new owner: sometimes it doesn’t last long at all.

In the area where I live, I’ve seen new businesses start up, be sold, and close down within the space of two years: I’m particularly thinking of one restaurant near my home where the owner worked hard to create an affordable pleasant lunchbox, and eventually sold the restaurant as a profitable business.

But the new owners couldn’t replicate the lunchbox experience. Fortunately, they had the tenacity and wherewithall to keep going by eventually selling a completely different set of popular food items in Taiwan: Taiwan’s Little Treats. Now they are moving, and I don’t think the new owners will be successful at all. It would be better to start a completely new business for them.

So, this weekend, where there’s money, there’s InvestorBlogger!


Financial Blogs

I’ve been roaming the internet, and discovered that a lot of people are currently using the Internet to help them cure their financial woes, find encouragement and solace, and help plan their financial lives. It’s a really interesting phenomenon that people who would never even tell their best friend how much they make, are now splurging on the Internet the real situation.

I do believe that this will be very empowering. Too often, we are not “permitted” by others to discuss our pay packages, our benefits, (even Google has a stupid clause that precludes discussion of their adsense TOS), our financial situation, our personal financial mistakes, our successes, and whatnot.

I think that the way things are is very unhealthy. We should, have to, be able to discuss these as freely as some people seem to enjoy discussing their sex lives. It will help shift the clouds that surround financial wisdom, dispel the ignorance endorsed by our financial institutions (think credit cards, mortgages, etc..) and engender people to take responsibility for their own finances and the decisions that they make.

We are all responsible for our own financial situation, no matter how good or bad it is. We are all victims of our own choices in these matters.

We all need to realize that we can take back this power, this right, this obligation, whenever we need to.