Northern Rock hides a housing disaster

Spot on MD. Mortgage equity withdrawal (MEW) is on the rise again as these figures from the Bank of England show :

Accounts from debt charities indicate that many people are taking on more debt to pay existing debt. It's a downward spiral.

Financial difficulties are becoming acute for 2.5 million households in the UK :

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...but the management and the stock market don't know all this? I don't think the shares moved much on the latest results.

Tiddy Ogg.

Not cheaply, but quickly, better to shake down the defaulters and offload their properties in a buoyant market than a cooler one.

Why? If you owe on a relatively high interest credit card that you are paying off only slowly if at all, xferring it to cheaper debt is what you should do.

Yes, that's what you should do, but not if you're planning to pay it off over the same long term as the rest of the cheap debt, otherwise it can become more epensive.

Adding the cost of, say, a car to your mortgage will cost you about

2.75 times as much in total interest payable if you pay it off over 25 years at 6% than using a car loan over 3 years at 20%. E&OE

"Ronald Raygun" wrote

If the level of "expense" is OK for the original "cheap debt", then surely it should be OK for the extra?

In other words, if you think that the "cheap debt" is too expensive for the new borrowing, then it must also be too expensive for the "rest of the cheap debt"!!

"Ronald Raygun" wrote

So - you are suggesting that, if you are buying a 200K house and a 20K car (say), that you should pay for the

20K over 3 years at 20% and the 200K over 25 years at 6%, rather than the total of 220K over 25 years at 6%?

What if, instead, you were buying just a 220K house (& no car)? Should you still pay back 20K over 3 years at

20% and 200K over 25 years at 6%, or is paying back 220K over 25 years at 6% now OK?

Does which is "best", depend on what you were buying with the money?

No, I'm simply pointing out that it would work out cheaper in the long run to do so, not suggesting that you necessarily *should* do so.

What I'd be inclined to recommend is to put the car on the mortgage, but then to make accelerated repayments so that after 3 years the level of debt is down to the same as it would have been had the car not been bought. In effect, to get the car loan at 6% over

3 years.

No, but you could, say, pay back 20k over 3 years and 200k over

25, but both at 6%.

No, it depends on how much cashflow is available to pour into the repayments.

You should pay it back as quickly as cashflow allows. It isn't a good idea to have a mortgage and large amounts of savings in the bank.

I thought someone woukld say that,and of course its absolutely true. But my point is that the simple fact that people are rolling high interest loans into low interest ones, isnt by itself a cause for concern. By itself, with no other corroborating evidence, its a sign that people are financially astute. I suspect that what you say does tend to happen, but the bare facts as presented don't back up the point that is usually made, about recklessness.

Agreed, with emphasis on *by itself*.

Not bloody likely.

I think you need to look at it backwards. Most people are financially uneducated, and thus all too apt to be ushered, nay, herded, into the position of increasing their long term debt by eager financial "advisers" keen to flog them re-mortgages.

I dont disagree. But again, just to make the point, a single statistic that says 'X million of debt from credit cards was xferred to mortgages this year' doesnt prove anything about recklessness or financial ineptness.

Indeed it doesn't prove that, but instead we take it as given that ineptness exists, and then the statistic that a lot of debt has been moved that way becomes worrying.

"Ronald Raygun" wrote

You need to consider very carefully though, exactly what you mean by "cheaper"!

For instance, suppose your current salary/wages are

20Kpa and they will increase at 6%pa in the future. If you borrowed 20K now at 6%pa interest, then you would pay back exactly 100% of a year's earnings in total. That might be 35.3% this year, 33.3% next year and 31.4% the year after, if you borrowed over 3 years. But even if you borrowed over 25 years (or even more!), the total proportions of salary will always add up to 100%.

However - and here's the crunch - if you borrowed over just 3 years paying 20% interest, then you'd pay back a total of a lot more than just 100% of a year's salary!!

This shows that you'd end up paying back "one year's salary" if borrowing at 6% over 25 years, but much more than 100% if borrowing at 20% over 3 years -- and ">100%" might be considered **more expensive** than "0%" !!

It's an interesting (no pun intended) way of looking at it.

By measuring cost in terms of salary instead of actual pounds, you are reducing the interest rate of the long term loan to salary inflation plus zero (which you could consider to be effectively a "free" loan). Then the short term rate, at salary inflation plus some 13.2% [1.20/1.06 = 1.132], will always have, in the same terms, a positive effective cost.

"Ronald Raygun" wrote

Oh teehee!

"Ronald Raygun" wrote

Exactly. But even if salary only increased at (say)

4%pa, the comparison is similar - the 'long-term' loan only "costs" an effective 2-ish%pa, but the '"short-term' loan "costs" around 15%pa.

Whatever the rate of salary increases, the lower interest rate loan is "better" even if the term is lengthened substantially!

Do you still think that taking that

20%pa car loan is good value? ;-)

What if we get deflation?

It could be. Depends on how long for. Given a pair of high/low rates, and a duration for the high rate, one can compute the duration break-even point for the low rate, beyond which the low rate loan will be more expensive and below which it will be cheaper. The zero low rate just moves that point into Buzz Lightyear territory.

"Ronald Raygun" wrote

What if the person dies just two years later? [In which case it would have been much better to pay

2 years of a 25 year loan, than 2 years of a 3 year one!]

There are always unusual occurrences which will change the perspective.

Yep! Thats something I always factor into my decision making when buying something ???

Not really Tim - overpaying your mortgage is definitely a good move - your first example would save quite a few quid in interest.

I have another theory, probably just as worrying... How much MEWing is going into further property deals rather than cutting down the weekly payments?