Low Rates = Massive Mortgage Payoff?

regprentice

two years ago i reduced my term from 25 to 15 years and remortgaged from a 5.88% 25year fix to a 3.0% 3 year gix. When that fix ends i hope to pay off the remaining amount with savings. But having worked through various rate calculators its not really going to matter what rate is in force then as i will have around 10k to pay off...iirc a doubling of interest rates only makes a £10 a month diffrence to my remaining payments at svr.

BUT i think the op's point was are most people thinking this way...i doubt they are. Atm low rates seems to mean people can but a 4 or 5 bed newbuild and lease a 3 series and run up 0% card debt for holidays and sofas and suchlike.

Shimrod

018125 wrote: »

You only overpay a super low interest rate loan if you are financially illiterate.

That's a sweeping statement and also untrue.

I chose to take the certain return of overpaying my mortgage over the uncertainty of investment and whether I would retain my job. I think there are very few people who thought we would still be on 0.5% BR in 2016, and the interest rate drop in 2009 presented an opportunity to reduce debt more quickly. In this low inflation environment, your debt is also depreciating more slowly as most will not be getting 5% pay rises of the past.

wotsthat

Shimrod wrote: »

That's a sweeping statement and also untrue.

I chose to take the certain return of overpaying my mortgage over the uncertainty of investment and whether I would retain my job. I think there are very few people who thought we would still be on 0.5% BR in 2016, and the interest rate drop in 2009 presented an opportunity to reduce debt more quickly. In this low inflation environment, your debt is also depreciating more slowly as most will not be getting 5% pay rises of the past.

It doesn't make sense to pay off a mortgage if you can earn more interest elsewhere. A lot depends on the mortgage interest but, for me under 2.5% I could've made a profit staying in cash.

If you lose your job the cash in the bank gives you a few more options too.

Financially speaking overpaying a mortgage can be throwing money away although I understand a paid off mortgage must feel good.

wymondham

The reason for asking is with such low savings rates surely you're better to pay off your debts?

Crashy_Time

https://uk.finance.yahoo.com/news/falling-interest-rates-could-mean-084530717.html

Thrugelmir

wotsthat wrote: »

It doesn't make sense to pay off a mortgage if you can earn more interest elsewhere. A lot depends on the mortgage interest but, for me under 2.5% I could've made a profit staying in cash.

Interest rates on savings are in decline. Hindsight is a wonderful human tool. The future does look less promising. With interest rates on borrowing becoming "real" again. There's little wage inflation either to erode the debt that people are now taking on board.

kinger101

Thrugelmir wrote: »

Interest rates on savings are in decline. Hindsight is a wonderful human tool. The future does look less promising. With interest rates on borrowing becoming "real" again. There's little wage inflation either to erode the debt that people are now taking on board.

You don't need hindsight to understand whether the available savings interest rates after tax are better than the mortgage interest rate. Just 5 seconds and a calculator. Perhaps less now £1000/£500 of interest will be tax free from April.

Shimrod

wotsthat wrote: »

Financially speaking overpaying a mortgage can be throwing money away although I understand a paid off mortgage must feel good.

The point of my post was about the balance of certain returns against the uncertainty of investment. The gains to be made on interest rates are marginal over paying down the mortgage (unless you have the time and effort to spend shuffling money around several accounts). It becomes even more marginal if you are a higher rate tax payer. To get a worthwhile return, I would have to be invested in the markets which brings an element of risk.

There is a whole financial sector based around swaps, which is all about swapping risk for certainty. There (may) be a price to pay for that security, but it is a consciously made decision - not one that is financially illiterate.

And if I had lost my job, I expect having that cash in the bank would have excluded me from quite a few state benefits until I had burned through it.

kinger101

wymondham wrote: »

The reason for asking is with such low savings rates surely you're better to pay off your debts?

It doesn't matter how low or high the rates are. What matters is whether the amount of interest you earn (after tax) beats the interest rate on the debt. Even with the current 80% mortgages with 2% rates, there are plenty of accounts out there that beat this.

Even current accounts such as Santander beat this (£30K at 3% = 2.4% now for basic rate, 3% from April). Find a regular saver and things are even better.

It makes more sense to hold as cash (assuming you want no risk for stocks and shares), and then revisit at remortgage time depending on LTV.

Spidernick

018125 wrote: »

You only overpay a super low interest rate loan if you are financially illiterate.

I'm not financially illiterate (for from it). If I was on my own I certainly wouldn't be overpaying the mortgage at all. However, I'm not and, whenever I've tried putting money away to be used to pay down the mortgage later when interest rates rise, my wife has always found something to spend it on! As such, for me it very much makes financial sense to overpay on the mortgage.