Interest rates will rise faster and higher than anyone expects

movilogo

No, the real reason that lots of people switched to IO and started saving the money they're not repaying in savings accounts that earn more than their mortgage interest.

That won't work because the absolute amount of interest in mortgage will be more than what they can acrue via savings (unless they invest in some developing world country with 20% interest rate).

So, if someone is having extra cash, unless it is put into business/stock market (thus yielding a much higher return), it is better to payoff mortgage as much as possible in the first place.

wotsthat

movilogo wrote: »

That won't work because the absolute amount of interest in mortgage will be more than what they can acrue via savings (unless they invest in some developing world country with 20% interest rate).

Not quite. Average mortgage rate is 3.25% which means that some pay more and some less.

Those paying less can get a risk free ISA at 3.1% - 3.3%. It's entirely possible for your lender to give more in savings rates than they charge in mortgage rates.

The differential is slim but the question is not whether it's possible but whether it's worth the hassle.

DervProf

movilogo wrote: »

That won't work because the absolute amount of interest in mortgage will be more than what they can acrue via savings (unless they invest in some developing world country with 20% interest rate).

So, if someone is having extra cash, unless it is put into business/stock market (thus yielding a much higher return), it is better to payoff mortgage as much as possible in the first place.

It depends.

100K mortgage @ 1%, that's £83.33 per month or £1K per year interest only.

Same mortgage on repayment will be £378.38 per month.

If you switch to IO, you have a spare £295 per month. Put that into a savings account that pays enough, and you'll end up with a nice lump sum which you can use to make a payment off the mortgage capital.

The problem is that to gain a financial advantage, the rate on your savings has to be higher than your mortgage rate. You also need to consider any costs involved in switching to IO, and also make sure there is some flexibility, and no penalty in making the capital repayments. There are other factors to consider too, is your mortgage rate fixed ? The same with your savings ?

I say that in the current climate, it is only going to be relatively few people that could gain from doing the switch, and even then gain may not be worth the hassle. And for those that would gain a decent amount, would they even be aware of this "trick" ?

If you are taking out a mortgage, and want the ultimate flexibility, then I can recommend offset mortgages. I had one (still have, but it's almost finished), and it allows loads of flexibility on overpayments, offsetting etc. You can adjust your payments to suit your finances and the level of interest rates. I don't know if mine ever allowed a complete switch to IO though. I think that the particular account I have is no longer available, and I'm sure post 2007 the deals and terms have changed.

BTW The downside of offset mortgages has usually been that their interest rate is a bit higher than "normal" mortgages, so they are only a good if you do use their facilities (ie you have, or are going to have savings).

chucky

DervProf wrote: »

Anyone can work out (well, they don't even need to work it out really) that if you can earn 10% in savings, and borrow at 1%, then the savings will pay for the loan. When the figures are closer, then it might still be that it pays to switch to IO, but is the saving really worth it ? Do lots of people really do this ?

dervprof and cherry picked examples - seeing that he struggles with concept of capital repayments on interest only mortgages.

got to love his persistence.

hillcats

IMHO I think the rate rises will come soon and when they start they will continue at a steady increase of 0.25% every 3rd maybe 4th month or so until we get back to the norm of around 5.50% then I think we will exceed the norm and climb towards the 9-10% interest mark as we all have to pay for this mess somehow...

julieq

Well you can think that, but it's nonsense. Higher interest rates don't "pay" for this mess. In fact if they rose that quickly without a generally based recovery they'd make the problem worse because they'd brake the economy, probably tip it back into recession and the tax receipts needed to pay for excessive public spending - the actual problem, not the illusory one that bankers "caused" - will drop.

Anyway, it would take 10 years at your rate of increase to get to 10%. By which time we'd have enormous wage inflation too (or else rates wouldn't increase anyway.

I'm sorry, but interest rates are going nowhere in particular for years to come and rises are not going to trigger price falls for housing. If we were going to have falls they'd have happened during the worst banking crisis in history, but basically they didn't.

Heyman_2

The minutes from this month's meeting are due out this week.

Unless something drastic happens I can't see them raising rates before the end of the year, possibly not until well into 2012.

pop_gun

i use to think interest rates would rise, but i know they CAN'T, as the interest payments on the national debt would spiral out of control.
IMHO interest rates won't rise for the next 2 decade if they ever do again (think japan).

peakoil_2

I think rates will rocket up as fast as they dropped down, thats why I really want to sort myself out with a 5 year or more fix. we just have to find the right house first. been looking all weekend and seen a few but nothing grabs at us.

mbga9pgf

pop_gun wrote: »

i use to think interest rates would rise, but i know they CAN'T, as the interest payments on the national debt would spiral out of control.
IMHO interest rates won't rise for the next 2 decade if they ever do again (think japan).

Only on refinance of gilts. Wouldnt make a jot of difference to existing contracts I am afraid. And even then gilt yeild is not directly linked to base as far as I understand.