Shouldn't Interest Rates be Increased?

i, 09 Jan 2009 11:28:14 +0000, Maria

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Why don't you consider a flexible mortgage where you can overpay and get money out. If the interest rates are reasonable this seems a better option than having £30k sitting there doing very little.

I have two businesses and another source of income. One business that doesn't get effected by the economy and one that is very affected by the economy. I've spread my risk. I'm not sure why some people allow themselves to be reliant on one source of income. Being an employee can make you very dependent on one source of income. I don't see the advantage of being an employee unless it's to gain experience before running your own business(es).

What does "reasonable" mean in this context? On the whole, interest rates on flexible mortgages are at a premium compared to inflexible ones, and it's not rocket arithmetic to work out how much it's costing you to prefer one option over the other:

Calculate the difference between the flexible and inflexible mortgage interest rates (call this A), and the difference between the flexible loan rate and the (net of tax) savings interest rate (call this B). Note the ratio A/B. If this ratio exceeds the ratio of the amount of your savings to the size of your mortgage debt, then the flexible mortgage would work out more expensive than the inflexible one coupled with separate savings.

Using some example figures of 5% for the flexible mortgage and 4.5% for inflexible, with 2% on savings, we get A=0.5% and B=3%, hence A/B=1/6. Your savings would need to be more than a sixth of your mortgage debt to make the flexible option better, but even if it is, there is a convenience issue which would -in the grey area- give the inflexible option the edge, and this has to do with how long it takes to get your cash out when you need it. A flexi repayment request may take a while to process, as lenders might like to sit on their cheque letters for a few weeks, whereas savings can often be got at quicker.

Why don't you consider a flexible mortgage where you can overpay and get money out. If the interest rates are reasonable this seems a better option than having 30k sitting there doing very little.

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They weren't available when I last "mortgaged", but are they really that flexible. Can you have a payment holiday for 24 months?

tim

In message , PeterSaxton writes

I go back to 1995 to give an example of 'crazy'. I bought a new Cavalier on a 50% Deposit, the other 50% in two years with zero interest. I also had a TESSA which matured in 1997, which paid off the remaining

I paid zero interest on the car purchase, whilst receiving tax free interest on the TESSA.

It often makes sense to borrow when you don't really need to.

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My mortgage pre-dates flexible mortgages. During the time I have had the mortgage Nationwide introduced an overpayment reserve which means you don't need to make regular payments as long as the total amount repaid is ahead of the original schedule.

I normally only pay once a year and have gone 18 months without making a single repayment. I have never had a single letter or query from the bank regarding my lack of regular monthly repayments.

Except a mortgage, which in any meaningful sense isn't a debt, but is a monthly outgoing similar to paying rent. The main difference is that you get the house at the end.

It might not make sense to take a car loan to borrow 5 grand if you have 10 already. But saying that you shouldn't save because you have a mortgage is silly. People should save "for a rainy day".

Neil

I have a permanent "fee free" (interest charge only) 500 quid overdraft, but I don't see it as sensible to use it other than as a buffer if I make a mistake transferring money to and fro. I'd rather have a buffer of savings than have to rely on the bank "maybe" extending it, anyway.

It reads to me like you have overstretched yourself somewhat.

Neil

Who said £30k? I would consider a sensible buffer to be a couple of months' salary. But then the useful figure increases as the economy gets worse.

Neil

Except a mortgage, which in any meaningful sense isn't a debt, but is a monthly outgoing similar to paying rent. The main difference is that you get the house at the end.

-------------------------------------------------------------------------------------------- Oh dear

IMHO we are where we currently are economy-wise, because of that belief.

tim

Who said 30k? I would consider a sensible buffer to be a couple of months' salary. But then the useful figure increases as the economy gets worse.

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Me!

As I pointed out, in what I do, 12 months buffer is a minimum, 24 might be needed.

We are just going into a down-turn that is going to be bigger than the one at the start of the 90s.

I was fortunate then, in that I managed to keep working in a job some way below my skill set for about half my normal charge rate, but I know several people who found no work at all for 2 years. I would be surprised if that doesn't happen this time.

tim

Or clients..

No, you don't get the house at the end, you get it at the beginning, but you owe the money (usually as a reducing balance) until the end, and you pay rent on the money, not on the house.

It's important to be aware that the idea that you get the house *at the end* is a complete misunderstanding of reality. The lender does not own the house, you do. The point is that if you cannot repay the debt as scheduled, the lender will make you repay the whole debt immediately, and if you can't, then they will make you sell the house (by taking possession and selling it on your behalf) so that you can repay the loan from the sale proceeds. And if the sale raises less than you owe, i.e. if you're in negative equity at that point in time, that's too bad, you will *still* owe the rest. If it raises more (positive equity), you get to keep the rest.

If that was true, you would get the deeds at the start, and not have to ask their permission about silly things such as taking in lodgers.

The fact that the lender can sell your house (and not try too hard to get the best possible price either), sort of suggests that the house may not quite be 100% yours.

Because of that belief being held by banks, yes, in a situation where they couldn't sell the houses they reposessed for the value they were purchased for. By an individual the situation is rather different. Practically, if you default on your mortgage payments you lose your house[1]. If you default on your rent, you lose your house. Same kind of impact both ways.

Neil

Sorry!

Each to their own. It so happens that I have a buffer of about 15k at the moment, though this is mainly as a house deposit when the market conditions suit. However, it's helpful that while they don't suit, it's a fallback on which I could live for some months, or even longer if I could get a low-paid (e.g. supermarket cashier) job to fill in until I could get back into my "proper" line of work.

Were it not for its purpose, though, and the fact that it only exists because I *don't* have a mortgage, I expect I'd hold a couple of months' salary at most, and would put the rest against the mortgage.

Neil

A mortgage isn't a debt? I disagree.

Why have money doing very little?

Why don't you rely on cash flow?

Are you saying you think it's better to have £10k in the bank earning very little than use it to pay off a mortgage?

If I need to spend anything extra I use money coming in and pay less off the mortgage.

I would have thought that's the opposite of overstretching.

Where these billionaires have gone wrong is to borrow as much as possible in an attempt to make more revenue but once things change they find that the value of debt doesn't reduce as quickly as the value of assets and their wealth is at the margin.

My income is mainly based on knowledge, experience and hard work rather than having access to vast debt. I know which I would prefer.

There might not be enough if I have a one-off big uninsured expense. Or I might lose my job.

Now? Yes. That way if I was to lose my job I have a buffer of cash there to tide me over for the time it takes to get me a new one, without having to renegotiate my mortgage/rent.

I'm guessing you have the easy ability to do more work to get more money (or vice versa) in a given month, which probably means you are a contractor or consultant of some form, and probably self-employed. I'm a salaried employee (don't get paid overtime), and thus don't have that option.

Neil