Two more building societies increase interest rates

Harry_Powell

Thrugelmir wrote: »

No one would advocate just paying down a mortgage.

Six months salary has always been advisable as an emergency cash fund. Though many no longer adhere to this principle.

What about building up money for retirement? In my view, this comes a close second place to building up emergency savings, though many don't adhere to this principle either.

de1amo

so many ways to 'use' your money and youve lost your job!!!
i sense a lot of people are stretched even on the current svrs and judging by the pre xmas figures on saving and debt no one has shown foresight to save for these hikes.
By the current pension figures no one is putting money in the 'pot'-where is the money going to??

silvercar

Harry_Powell wrote: »

What about building up money for retirement? In my view, this comes a close second place to building up emergency savings, though many don't adhere to this principle either.

That is what puzzles me with the "mortgage free" brigade. Having put a lot of effort into paying off their mortgage in a short space of time, they continue the frugal living to pay into a retirement fund. Really they should have been putting money into both from the start; you could argue that boosting the retirement fund should have been done first, to allow the money to grow.

Cleaver

Mr.Brown wrote: »

Lol. The problem with an offset is that you need something to actually like er do the offsetting bit, like some money... lol.

After having an offset product for a few years now I don't think we could ever go back to a 'normal' product. It must have saved us thousands overall, but more importantly when you check your balance and it's -£xx,xxx it really makes you wonder whether you need things like a Starbucks coffee or that new pair of trainers.

I'm not saying we put our life on hold or anything, but getting an offset mortgage / current account definately made us change our spending habits and made us more determined to pay off our mortgage.

Mr.Brown_4

Cleaver wrote: »

After having an offset product for a few years now I don't think we could ever go back to a 'normal' product. It must have saved us thousands overall, but more importantly when you check your balance and it's -£xx,xxx it really makes you wonder whether you need things like a Starbucks coffee or that new pair of trainers.

I'm not saying we put our life on hold or anything, but getting an offset mortgage / current account definately made us change our spending habits and made us more determined to pay off our mortgage.

Well that sounds like a proper offset, rather than putting some of the outstanding balance on to credit cards.

Cleaver

Mr.Brown wrote: »

Well that sounds like a proper offset, rather than putting some of the outstanding balance on to credit cards.

Yeah, sorry, we're a bit dull like that.

Harry_Powell

silvercar wrote: »

That is what puzzles me with the "mortgage free" brigade. Having put a lot of effort into paying off their mortgage in a short space of time, they continue the frugal living to pay into a retirement fund. Really they should have been putting money into both from the start; you could argue that boosting the retirement fund should have been done first, to allow the money to grow.

I have the same view, they end up after 30 odd years of working, mortgage free and with less pension savings than someone who paid into both. They express the belief that being mortgage free makes them 'safe', but seem to forget that their monthly mortgage payments probably reflect a small part of their monthly outgoings. If they lose their jobs then where are they going to get the money to pay for all these things?

Who is the 'safer' person, the man who has a £100k mortgage and £50k in savings & pension or the man who has few savings and a £50k mortgage. If they both lose their jobs, then the £50k mortgage man will have to survive on his limited savings and then credit. Once the credit runs out he'll have to sell his home to release the equity to pay his debts. The man with the larger mortgage can survive MUCH longer on his savings and so will ride out any dip in his fortunes. If he cant get work for a long time, then at least he has 'wriggle room' to put his house on the market and get a better price, rather than having a firesale.

de1amo

thanks harry--resolved the puzzle i have in life---i am at a crossroads in life and trying to resist the mortgage free brigade--if i die with my mortgage still outstanding i will die happier!!!

Charterhouse

Harry_Powell wrote: »

I hate to answer a question with another question, but in this case it's quite pertinent....

Why have you fixed your mortgage rate, and how long for?

p.s. I also think you've made a miscalculation on your interest rate return. 4.8% taxed at basic rate would return 3.91% and high rate returns 2.93%. So as a high rate taxpayer you'd lose 1.87% of the interest to HMRC (4.8% - 2.93%), so by putting your money into a tax free vehicle (such as an offset or ISA) you would need a 6.67% return on a taxed account to give you the same return as a tax free 4.8%.

I fixed because I do not have assets that pay me a floating rate, so why would I want a liability that requires me to pay a floating rate? Obviously there is a fixed rate that would be high enough that I would rather stay on floating but at any long term, low fee fixed rate below 5% I am happy. Despite working in interest rates I do not believe you can predict the Bank of England's moves over the coming years (as the experience of the last 3 years shows clearly) and my mortgage is too big to gamble with. I fixed for 5 years in summer 2006 at 4.89%.

As Thrugelmir pointed out this means that after paying 40% (or 50% next year) of my interest away on an account, it means I need to earn 8.15 (or 9.78% next year) on an alternative investment. It is likely that the only way I can do this (in the short term and in a medium-low risk investment) is via ISAs and by investing into my pension, as they also give me tax breaks. However I already pay the maximum possible into my ISA every year, and around 20,000 a year into my personal pension (which is also locked up for life, just like a mortgage overpayment).

You really need to go have a look at how much interest even a small overpayment can save you. I overpay, and then I reduce the remaining term of the mortgage so that my new monthly payment stays the same. By doing that I have already shortened the mortgage by 8 years and saved myself over £160,000 in interest. Make sense yet?

Harry_Powell

Charterhouse wrote: »

I fixed because I do not have assets that pay me a floating rate, so why would I want a liability that requires me to pay a floating rate? Obviously there is a fixed rate that would be high enough that I would rather stay on floating but at any long term, low fee fixed rate below 5% I am happy. Despite working in interest rates I do not believe you can predict the Bank of England's moves over the coming years (as the experience of the last 3 years shows clearly) and my mortgage is too big to gamble with. I fixed for 5 years in summer 2006 at 4.89%.

As Thrugelmir pointed out this means that after paying 40% (or 50% next year) of my interest away on an account, it means I need to earn 8.15 (or 9.78% next year) on an alternative investment. It is likely that the only way I can do this (in the short term and in a medium-low risk investment) is via ISAs and by investing into my pension, as they also give me tax breaks. However I already pay the maximum possible into my ISA every year, and around 20,000 a year into my personal pension (which is also locked up for life, just like a mortgage overpayment).

You really need to go have a look at how much interest even a small overpayment can save you. I overpay, and then I reduce the remaining term of the mortgage so that my new monthly payment stays the same. By doing that I have already shortened the mortgage by 8 years and saved myself over £160,000 in interest. Make sense yet?

It makes perfect sense in your case, though I would hazzard a guess that you're unlike most of the people over on the MFW board (or indeed most people on MSE, myself included) in that your income is such that you have £30k of disposible income each year to pay into investments and still have further income to then pay onto your mortgage. There are always exceptions, and clearly your case is one of them.

The other exception, which I stated earlier, is where people have a poor LTV and need to improve this in order to get access to the best mortgage offers. In this scenario it's worth blitzing the mortgage because the returns are more likely to be better than from investing/saving.

I guess I could also add the scenario where people have overstretched themselves financially to buy a better/larger home and have a mortgage that is disproportionate to their income. Though TBH, they probably shouldn't have done that in the first place if it worries them so much, and if it has a detrimental effect on their other finances.

I understand your point about the interest you're saving on your mortgage by overpaying, but you must compare this against the interest you could gain by saving. If the latter is greater than the former (and for most people it would be), then you're losing money by overpaying a mortgage.