Another Interest Rate Prediction

Dan:_4

tbourner wrote: »

Or overpaying your mortgage as people should!!

Why should I?

I never planned to make such a saving, plus it will still be paid off by the time I retire at 60. In the meantime im gonna enjoy the windfull, you only live once and all that!

tbourner

Dan: wrote: »

Why should I?

I never planned to make such a saving, plus it will still be paid off by the time I retire at 60. In the meantime im gonna enjoy the windfull, you only live once and all that!

You don't have to! Most people have learnt from the boom years follwed by the now busting years that overpaying would have been a good idea rather than squandering the spare money created by low rates. If interest rates suddenly go up to stupid figures again people that could have saved themselves by overpaying would be in the poop.
Obviously it depends on your age, equity, job and many other factors though, wasn't pointing at you directly just generally people should overpay wherever possible.

Dan:_4

tbourner wrote: »

You don't have to! Most people have learnt from the boom years follwed by the now busting years that overpaying would have been a good idea rather than squandering the spare money created by low rates. If interest rates suddenly go up to stupid figures again people that could have saved themselves by overpaying would be in the poop.
Obviously it depends on your age, equity, job and many other factors though, wasn't pointing at you directly just generally people should overpay wherever possible.

Yep your totally right, overpaying is of course the most sensible thing to do while we have these low interest rates.

When rates start to rise I will quickly get a 5 year fix product.

Generali

RenovationMan wrote: »

I'm sorry if this has already been posted:

http://www.icl-ifa.co.uk/2010/07/interest-rate-prediction/

"The publication of the latest GDP figures last week suggested that the UK economy was recovering at a healthier than expected rate. This resulted in suggestions that interest rates might need to go up sooner than previously thought, to prevent the economy overheating."

The well respected Ernst & Young Item Club has entered the debate with a prediction that the Bank Rate will need to remain at 0.5% until at least 2014. This prediction follows one from the newly formed Office for Budget Responsibility (OBR), who believe interest rates will need to start going up again next year.

The Item Club have based their prediction on the scale of planned government cuts which are likely to hold back economic growth over the medium term. At the same time, they say that inflation will remain above the government target of 2% for CPI for the next 18 months, with high energy prices and the VAT increase supporting this.

So, assuming that the 0.5% Bank Rate remains in place for another three years or more, what does this mean for your Financial Planning?

It suggests that the return from cash, particularly in real terms after inflation, is going to be dismal. Some good deals can be had from fixed term cash deposits, but savers are going to need to erode their capital or take greater investment risk to deliver the income levels they were used to only a couple of years ago.

Low interest rates will mean lower expenditure on debts, including mortgage repayments. The next few years will be a great time to reduce outstanding loans.

Another consequence of low interest rates is that the return from other investment asset classes is likely to be more modest. This could result in investors adopting a more global approach to investing their money, as other economies recover at a more exciting pace and create opportunities for greater returns."

This pretty much gels with what I said on a thread last week, that the BoE will allow rates to remain over target over the next few months because they know that the government cuts and tax hikes will hold back growth.

Of particular interest to me was the section I have highlighted in blue which discusses personal financial planning. It seems that my decision to buy a really expensive home and ramp up my mortgage debt was the right choice instead of what I was originally doing which was to have a very low mortgage and extensive savings.

A stagnant housing market with flat house prices coupled with low interest rates is the perfect time to jump up the housing ladder and then make overpayments to increase equity while house values are maintained. With discipline and hard work, by the time interets rates start getting back to normal (BoE 5%), I'll have paid down my mortgage to a 'normal' level and yet be living in a property I could never have dreamed of owning just a few years ago.

Beware of 'confirmation bias', that is seeing in all news confirmation that your trade is correct.

If things start to go against you and you move fast you should still be able to trade back down and end up in a better place than where you started. If you see every piece of news as confirming what you did as a fantastic idea then you increase your chances of losing money.

RenovationMan

Generali wrote: »

Beware of 'confirmation bias', that is seeing in all news confirmation that your trade is correct.

If things start to go against you and you move fast you should still be able to trade back down and end up in a better place than where you started. If you see every piece of news as confirming what you did as a fantastic idea then you increase your chances of losing money.

Thanks Generali, an apt reminder for many on this particular board that just reading one set of statistics that proves your position means that you only get half the story and you take twice the risk.

In my case, I do have a strategy in place if interest rates go up as dramatically as they went down that doesn't result in me having to trade down my house. However, every month that we have low rates is another month towards me meeting my goal and another step towards financial security.

StevieJ

Generali wrote: »

If only the rich voted Tory they'd never get in!

Rich is a highly subjective description.

julieq

tbourner wrote: »

Obviously it depends on your age, equity, job and many other factors though, wasn't pointing at you directly just generally people should overpay wherever possible.

Overpaying (reducing mortgage) is certainly not a "should do", because once overpaid, the cash disappears into bricks and mortar, quite possibly a declining real term asset. It's actually a very poor strategy, the only reason people seem to do for emotional reasons, to get the debt monkey off their back.

Saving or investing an offsetting fund is far more sensible. You get the benefits of being mortgage free while still having easy access to the money if you need it.

SimbaSimon

julieq wrote: »

Overpaying (reducing mortgage) is certainly not a "should do", because once overpaid, the cash disappears into bricks and mortar, quite possibly a declining real term asset. It's actually a very poor strategy, the only reason people seem to do for emotional reasons, to get the debt monkey off their back.

Saving or investing an offsetting fund is far more sensible. You get the benefits of being mortgage free while still having easy access to the money if you need it.

That depends entirely on the mortgage agreement. I can currently overpay as much as I like and get it back just by filling in a form. If I need access its still available and in the meantime its saving me money.

Generali

StevieJ wrote: »

Rich is a highly subjective description.

Very true. The fact is that very large numbers of people with below average incomes and wealth vote Conservative however.

tomterm8

Yeah, and some millionaires vote labour. People are odd.