Myths of Financial Literacy: Mortgages, Interest Rates, and Deposits

Financial literacy among the population is one of the key building blocks of a developed society.

I am often asked about a great many myths. Here are a few of them.

1. "Over the full term, the overpayment on a 7-20-25 mortgage is enormous, so this kind of mortgage is not a good deal. The longer the term, the bigger the overpayment." I won't go into the theory of the time value of money here. Just take the mortgage, and if you have the option of repaying early, put the money into a deposit instead. For individuals, deposit rates can reach 13%, which is higher than the mortgage rate. As long as deposit rates exceed the mortgage rate, keep saving.
2. "In the EU and the US, mortgage rates are 5–7%, while ours are above 10%. Once foreign banks arrive, mortgages will become cheap." I hate to disappoint, but that cannot happen. Because inflation levels differ, over the long term the currency with higher inflation will depreciate against the currency with lower inflation. The gap between inflation in developed countries and in Kazakhstan is quite large, so there will always be a gap in rates. In the short term, other factors come into play as well, and they affect the price of the swap. The difference can reach 8–10 percentage points.
3. "Islamic mortgages don't charge interest. Why don't we have Islamic mortgages?"

The principles of an Islamic mortgage differ from those of a conventional mortgage only in how the lender collects its income. An Islamic mortgage builds the interest into the price of the housing and, in essence, resells the property, whereas in the conventional model the price of the housing is the market price.

4. A depositor kept his money in tenge for a year at 14%. When the tenge was quite volatile and the dollar rose from 340 to 375, he began to talk to me about losses. "I lost 10% on my deposit," he said. "If I had kept everything in dollars, I wouldn't have lost anything." I had to sketch it out for him on a sheet of paper: despite the depreciation, he had earned 4%, while at most he could have earned 1% had he kept his money in dollars.

I won't even mention the various beliefs that circulate about pyramid schemes and the like. We see people who want to become financial and forex traders but have no idea how to assess the risks, and then they take losses. I remember that in 2007–2008 everyone was a realtor and a land baron. It all ended badly. Now the fashion has shifted to finance.