The moral hazard of being kind to the indebted

PaulF81

EdgEy wrote: »

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.

Up to the point you realise any benefits paid will depend on current assets held. 30K in the bank = no SMI, JSA etc. smaller mortgage and no savings = lots of support from system I am a net payer-into of approximately 35K pa.

Best to pay down and rely on the state imho. The welfare state is there to support you in redundancy, I will be beggared if I am going to pay 35K pa into the system and get nothing out for holding back on mortgage overpayments.

Call it reverse moral Hazard if you will.

Derivative

PaulF81 wrote: »

Up to the point you realise any benefits paid will depend on current assets held. 30K in the bank = no SMI, JSA etc. smaller mortgage and no savings = lots of support from system I am a net payer-into of approximately 35K pa.

Best to pay down and rely on the state imho. The welfare state is there to support you in redundancy, I will be beggared if I am going to pay 35K pa into the system and get nothing out for holding back on mortgage overpayments.

Call it reverse moral Hazard if you will.

Hm. That is actually a very good point - I currently have the same problem with student loans (1.5% pa) which I do not think can be offset against assets for the same purposes. Looks like they may be getting paid off swiftly after graduation so I can sponge.

Perverse incentives. You get the feeling the system is almost set up to have people spend all of their money.

Generali

julieq wrote: »

It's not a question of whether you can get parity in interest rates - if you can then that's great but the more important consideration is the illiquidity of housing and the question of what is going to happen to prices. If you believe prices are going to fall then anything you overpay is going to drop in value, and in order to access it if needed you become a distressed seller and nail yourself onto a bad situation. If you can pay the whole mortgage off there's some sense in it - I did that myself - but there's no point in increasing the proportion of a house you own when someone else can still force you to sell it and dictate the terms.

Mortgage overpayment is an emotional step, not a rational step, it's about the illusion of control and a view that debt or borrowing is intrinsically bad (it isn't). At a time when mortgages are cheap, it's hugely questionable. Paying down mortgage debt would be way down the list of anyone approaching the question from a rational level, because there are hugely more beneficial things you can do with the money, including buffering against unemployment.

And let's get the myth that property owners are "overborrowed" into some sort of perspective. What that is is code for "some people borrowed more than I did, were able to repay before the crisis and are repaying now, but I want them to suffer so I can get my own way". There is no evidence in terms of average multiples or default rates that anyone was or is overborrowed. Rates are not - from the research I posted - a major determinant factor in arrears levels (far more important are life changes). The bears trot this "props" rubbish out week in week out, but it's not sustained by numbers, and if you post numbers pointing this out you end up in a silly set of ad hominems. You may not like the fact that some groups - couples in particular - prioritised their life differently and that is squeezing singletons out of the market, but that is how markets work when supply is constrained. Groups with an advantage enter, others are forced out.

Neither have savers been subsidising the indebted. It is the OTHER WAY ROUND, unless you think there's some sort of magic money pot savers are given when rates rise and it's generated from thin air. If you don't lend you can't pay returns to savers. The overblown prudence that's been demanded as a stable door lock is what is cutting returns to savers.

Another way to look at things of course is that by reducing the principle amount of the mortgage, a forced sale is less likely to happen.

Again, another way to view things is that:

1. Savings are also a debt, it depends which side of the banking fence you are on
2. Loans can be an asset in the same way as above.

With no savings there is nothing to lend, with no borrowers there is no return to savers.

Part of the problem to which our most esteemed simian refers is that by bailing out middle class savers you create a moral hazard whereby savers expect never to lose if they invest in a particular set of asset classes. Similarly, borrowers have had a pretty easy ride in terms of real interest rates being slashed and loans being subsidised in various ways.

IMHO it is no more helpful to refer to debts and savings as 'good' and 'bad' than it is to bulls and bears. An individual poster may wish for an asset to change in price in a particular way but is unlikely to be able to make it happen. You may wish to think of savings and loans in a particular way but it doesn't make it so.

A saver has simply made a loan to someone that feels that they can use it more productively than they.

silvercar

PaulF81 wrote: »

Up to the point you realise any benefits paid will depend on current assets held. 30K in the bank = no SMI, JSA etc. smaller mortgage and no savings = lots of support from system I am a net payer-into of approximately 35K pa.

Best to pay down and rely on the state imho. The welfare state is there to support you in redundancy, I will be beggared if I am going to pay 35K pa into the system and get nothing out for holding back on mortgage overpayments.

Call it reverse moral Hazard if you will.

£30k in the bank or reliant on benefits. Bit of a no brainier, far better to have the money to spend as you wish.

Benefits may pay your mortgage, but only for a limited time and upto a limited amount. Plus they will only pay your interest not the capital repayment part of your monthly payment. It may pay your council tax, but the disposable income it will give you is around £100 a couple plus £50 a child, very roughly. Try living on that!

pqrdef

kabayiri wrote: »

JulieQ makes an interesting point about the illiquid nature of a house and overpaying on the mortgage restricting your flexibility. This is where products like offset mortgages make more sense. Are offsets popular in this forum ?

Any mortgage that's flexible enough to allow you to take back your overpayments is really just a savings option. But then, net debt is the key thing, and savings are just another way of reducing net debt.

People have always borrowed for their homes and then piled money into savings, even when there was a wide disparity in interest rates. It wasn't irrational even though the cost was high. Generally people planned to start with a high net debt and end up with a high net surplus at retirement age.

Question is though, if you've got an unexpected windfall of disposable income as a result of the gift of low interest rates, is it rational to sink it into reducing your net debt faster than you otherwise would have?

If you do go the Cameron route, whether you do it by overpaying or saving is merely a technical digression.

But Gideon and Merv don't want you to reduce your net debt at all. They need you go out and spend, and stuff your house like a Harveys advert and create jobs for the unemployed.

Just because the government wants something is no reason to do it. But it also makes sense for the individual. The fact that debt costs is no reason not to have it, and the fact that it now costs a lot less than usual can hardly be a reason for going mad reducing it.

pqrdef

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?

Whatever. Makes very little difference whether you do or you don't. Not to you, not to the banks, not to the economy.

When faced with big questions, people usually prefer to digress into trivial details.

The big question is, now the mortgage is so cheap, do you need the savings at all, or should you go out and spend them?

PaulF81

silvercar wrote: »

£30k in the bank or reliant on benefits. Bit of a no brainier, far better to have the money to spend as you wish.

Benefits may pay your mortgage, but only for a limited time and upto a limited amount. Plus they will only pay your interest not the capital repayment part of your monthly payment. It may pay your council tax, but the disposable income it will give you is around £100 a couple plus £50 a child, very roughly. Try living on that!

You need to look into SMI then. Its not tested against your current rate and most people are net beneficiaries. we would receive 1200 a month in benefits and not have £210 to pay in council tax if I didnt have any cash in the bank. That 30K isnt going to last long if you are solely relying on it monthly either.

silvercar

PaulF81 wrote: »

You need to look into SMI then. Its not tested against your current rate and most people are net beneficiaries. we would receive 1200 a month in benefits and not have £210 to pay in council tax if I didnt have any cash in the bank. That 30K isnt going to last long if you are solely relying on it monthly either.

Limited to £200k, only interest only, any extra is credited to mortgage, rate is currently 3.63% and there is a 13 week delay before payment starts. an only claim for 2 years.

StevieJ

macaque wrote: »

julieq


Using spare cash to pay down a debt is financially literate. It would only 'finanically illiterate' where that cash could earn more elsewhere. Since banks are borrowing at 0.1% and lending at 4-10% your suggestion is clearly nonsense.

My motgage rate is 1.45% and my Cash balances are earning 4.4% - 6.2% (Fixed Isa's and NS&I), clearly not total nonense Now if you are talking about credit card card type debts, fair enough.

RenovationMan

pqrdef wrote: »

Whatever. Makes very little difference whether you do or you don't. Not to you, not to the banks, not to the economy.

When faced with big questions, people usually prefer to digress into trivial details.

The big question is, now the mortgage is so cheap, do you need the savings at all, or should you go out and spend them?

Sorry, I have no idea what you're talking about and how it relates to my post?