The moral hazard of being kind to the indebted

DervProf

julieq wrote: »

To be honest, it's financially illiterate to pay down mortgage debt when it's cheap, at a time when there's a chance of house price falls and the economic situation is uncertain. It is of course classic bear doctrine, but it makes no sense.

I'm a "bear", and I paid down most of my mortgage debt when it wasn't so cheap. I suspect that I'm not alone.

chucknorris

i8change wrote: »

I pay 2.5% for the Mortgage and get 2.5% on my NS&I ISA.

If someone knows where I can get lots more interest guaranteed I may get off my !!!! and move back out the £16-20k I have overpaid.

I could invest in shares via. the other halves wage/pension scheme at a rate of 8% her, 10% her Employer, but the stock market has been flat for the last 10 years and the future is very uncertain so why rush?

I would have to buy an annuity with the proceeds eventually and be ripped off by an annuity provider. I already have a Final Salary pension due, from age 60, that I can live off.

Is there some great guaranteed fortune I am missing out on or is the above just a sweeping statement?

In uncertain times I quite like knowing I could choose to own the roof over my head outright (via. my ISA balance) and live rent free. The worth of cash, shares or pensions schemes seem such a variable.

It's not a sweeping statement, but it obviously applies to those with lower mortgage rates, mine average just over 1% and I am getting just over 3% net on my savings (between isa's, NSI and savings bonds). Although I must admit that as my bonds and term isa's mature that net rate will fall.

Additionally as my mortgages are on investment property I claim 40% tax relief which brings the rate down to just over 0.6%.

Wookster

julieq wrote: »

To be honest, it's financially illiterate to pay down mortgage debt when it's cheap, at a time when there's a chance of house price falls and the economic situation is uncertain. It is of course classic bear doctrine, but it makes no sense.

doesn't quite tally with

julieq wrote: »

There are some risks, but when they're being stated now even by the doommongers at the BBC they're having to use rhetorical tricks like "one in five economists believes a country will leave the eurozone". A few weeks ago it was 50/50, now economists believe there's an 80% chance of survival. That is a massive positive sentiment shift. Honestly, if you stopped listening to the commentary and looked at the numbers, you'd be far happier generally.

First there is a chance prices will fall, then there isn't. Next you're bearish about the economy, then you're positive.

Can you make up your mind please?

RenovationMan

julieq wrote: »

To be honest, it's financially illiterate to pay down mortgage debt when it's cheap, at a time when there's a chance of house price falls and the economic situation is uncertain. It is of course classic bear doctrine, but it makes no sense. You're better off building up cash buffers than pile money into an illiquid asset you believe may fall in value, because even if you own half a house it can still be repossessed and on a forced sale you'll get less back than you've overpaid in, whereas if you have cash you can maintain minimum payments for a considerable period.

I guarantee some individuals have no idea what you are talking about here and miss the point completely. It's not exclusive to this board though as I have also seen it on the DFW and MFW boards.

It boils down to the simple question below:

If I had a £150k mortgage debt and had £30k in a savings account, would I be more secure paying it all onto the mortgage or less?

treliac

I hope to be mortgage free within a year or two and will then be able to do what I want with the income that is currently going towards the mortgage. Doesn't matter what house prices do, I still owe that money and will be a lot better off when I no longer have to pay interest on it.

Thrugelmir

kabayiri wrote: »

Are offsets popular in this forum ?

Yes, but at .35% above base. Not a facility worth having.

So for past 3 years have locked money into 4 or 5 year fixed term ISA's offering over good rates of interest. Lowest we have is 4.4%.

DervProf

RenovationMan wrote: »

It boils down to the simple question below:

If I had a £150k mortgage debt and had £30k in a savings account, would I be more secure paying it all onto the mortgage or less?

Very easy question to answer.......

Less.*


* Although I reserve the right to change my answer if you have other savings, and if so, I'd like to take your savings/mortgage rate into consideration.

Oh, and I might also consider your income and job security.

julieq

Wookster wrote: »

doesn't quite tally with


First there is a chance prices will fall, then there isn't. Next you're bearish about the economy, then you're positive.

Can you make up your mind please?

Oh come on. Those statements are completely self consistent. Clue is in the "Chance of some house price falls" and "There are some risks". You'll have to do better than that if you're going to go for silly ad hominems. I'm generally fairly hopeful we'll see an improvement in sentiment coming into Q2 next year, but that doesn't mean there are no risks at all. What it means is that anyone projecting a straight line down the road to Perdition is likely to be wrong. Darkest hour is just before dawn and all that.

If you believe house prices are going to fall, which by and large bears seem to, then it certainly is is irrational to contract your capital by overpaying a mortgage into an illiquid asset which someone else can force you to sell at a time not of your choosing. The more you think prices are going to fall, the more irrational it is. The reason people overpay is purely emotional - they believe debt to be a monkey on their back and they want to shake it off. If you want security a cash buffer is much more useful, and it allows you to spread risks over a range of different investments.

And Macaque, there is very little (if any) toxic debt associated with mortgage lending in the UK - securitised debt was a US invention - and the setting of base rates isn't directly related to even US "toxic debt" anyway, it's a stimulus measure following a crisis in confidence. And I don't care whether or not churning property was in the past a way of generating profit for some individuals, that is history (no reason why shorting the same market is more virtuous either by the way). We weren't talking about that, we were talking about savers not getting magic above inflation interest rates without risk, which you seem to think is possible just by the BoE deciding it shall be so and changing a number.

Derivative

DervProf wrote: »

Very easy question to answer.......

Less.*


* Although I reserve the right to change my answer if you have other savings, and if so, I'd like to take your savings/mortgage rate into consideration.

Oh, and I might also consider your income and job security.

I'd probably have to agree with this.

If you're getting the same rate of interest (i.e making up the increase in the mortgage), then it makes sense to keep the cash.

I am not one hundred percent sure, but I believe that in the UK your house cannot be repossessed for being in negative equity - only for failing to make repayments. £30k in savings on a £150k mortgage would give you a decent amount of breathing room if you lost all income tomorrow.

ILW

julieq wrote: »

Oh come on. Those statements are completely self consistent. Clue is in the "Chance of some house price falls" and "There are some risks". You'll have to do better than that if you're going to go for silly ad hominems. I'm generally fairly hopeful we'll see an improvement in sentiment coming into Q2 next year, but that doesn't mean there are no risks at all. What it means is that anyone projecting a straight line down the road to Perdition is likely to be wrong. Darkest hour is just before dawn and all that.

If you believe house prices are going to fall, which by and large bears seem to, then it certainly is is irrational to contract your capital by overpaying a mortgage into an illiquid asset which someone else can force you to sell at a time not of your choosing. The more you think prices are going to fall, the more irrational it is. The reason people overpay is purely emotional - they believe debt to be a monkey on their back and they want to shake it off. If you want security a cash buffer is much more useful, and it allows you to spread risks over a range of different investments.

And Macaque, there is very little (if any) toxic debt associated with mortgage lending in the UK - securitised debt was a US invention - and the setting of base rates isn't directly related to even US "toxic debt" anyway, it's a stimulus measure following a crisis in confidence. And I don't care whether or not churning property was in the past a way of generating profit for some individuals, that is history (no reason why shorting the same market is more virtuous either by the way). We weren't talking about that, we were talking about savers not getting magic above inflation interest rates without risk, which you seem to think is possible just by the BoE deciding it shall be so and changing a number.

I thought the thread was about moral hazard. You seem to have ignored that.