Understanding Interest vs Capital mortgage repayment rate increase

BikingBud

housebuyer143 said:

Altior said:

Right or wrong in my mind it makes sense to overpay and reduce the length of mortgage rather then reduce the monthly payments and keep to the original mortgage length of 25 years.

Sorry to introduce more complexity, but hardly anyone seems to consider the time value of money. They should. What you can buy with a £ now is a lot more than it will be in 20 or 25 years. 

So in simple terms, the benefit of applying overpayments and maintaining the term you see now (and every subsequent payment). While shortening the term means the benefit is realised in decades time. 

There are a lot of moving parts of course, and future inflation is a big part, nobody knows where that will be in the next few years let alone 10 or 15. Personally I favour reducing the monthly repayments to get the guaranteed benefit now, rather than deferring it for a long way into the future. Even if means the total payments overall will be higher as the additional payments are at the tail of the curve. 

This! It's going to be much easier to pay off £100k in 20 years times just because you will be earning more and inflation has reduced your original loan. I had a £130k mortgage 15 years ago and it was harder to make to the monthly payment then, than the same £130k mortgage is now, namely because in that time minimum wage/take home pay has almost doubled as have the salaries for many jobs. 

I choose to pay a little as possible and enjoy the money now so that longest term is my preference. Obviously there are lots of moving parts, but a mortgage is a very cheap loan and people are really obsessed with clearing it as soon a ls possible, when in reality unless you are close to retirement there is not a huge benefit in plowing all your cash into it. Just my opinion of course.

Time value of money seems to work for investing but how many people are really doing that? Retaining low mortgage payments whilst buying junk, or other consumables that seem to be the "necessary" elements of the disposable society doesn't do anybody any favours.

Whilst it is reasonable to assume that paying 100k off will become easier after 20 years due to inflation especially increased earning power, does the 50k total interest (@4.5% on repayment) or £90k int only, really make it worthwhile? You say "pay as little as possible" the only way to confirm that is by looking at total amount payable but that is not the only relevant factor. 

Being close to retirement is for many a significant driving factor. Not just to consider the mortgage as they approach SPA but looking at all outgoings and determine when you may generate a lower income and then have freedom to decide when to retire, for some that value cannot be calculated in pure financial terms.

Money in my pocket now is my money not subject to some variables of market performance. I've saved over 20k in projected interest by overpaying. Once the fixed rate period ends I will pay off the balloon and reduce my outgoings massively, don't need to work and don't worry about how many days I am working before tax free day!

Altior

The key point for me is that the time value of money MUST be a consideration. Yet it is hardly mentioned on these types of threads, just a given that shortening the term equals less interest. 

Not that it makes smaller payments now necessarily the best option in every scenario.

As we accumulate wealth over a lifetime, most people will face more demand on their finances the earlier in their adult life cycle they are. Most definitely this is my experience, when I purchased my property I practically had no disposable income and was trying to build up a home. Now half my net salary is disposable income and the mortgage repayment is not that significant. It's not just the raw numbers in regard to £, it's when they have more utility for you. 

BarelySentientAI

Altior said:

The key point for me is that the time value of money MUST be a consideration. Yet it is hardly mentioned on these types of threads, just a given that shortening the term equals less interest. 

The time value of money is a complete guess and unquantifiable - apart from the fact that long-term deflation is pretty unlikely.

Comparing return from savings interest against interest paid on a mortgage is known and quantifiable.

How would you suggest mentioning an almost complete unknown in the context of a sensible calculation?  Without relying on "your salary will keep going up" (because it might well go up slower than inflation), "you will have more disposable income" (which hasn't been true in the last few years for most).

It's valid to consider, but difficult to roll into the discussion in a way that is justifiable and actionable by most question-posers on here.

Altior

The significance is not predictable, but it's about as certain as anything that the mortgage principal will erode away in real terms in the long term, due to the value of fiat cash diminishing over time, as it has done over many years of monetary history. 

Therefore if your mortgage payment is £1000 today, and still £1000 in 20 years, the real terms cost of that payment will have has diminished considerably. For example, the BoE states a £1000 repayment in 2004 would only be £573 in real terms today.

If people purely compared the predicted total cost when comparing an overpayment applied to reducing the term compared to reducing the monthly, it completely ignores that extremely important variable. 

BarelySentientAI

Altior said:

If people purely compared the predicted total cost when comparing an overpayment applied to reducing the term compared to reducing the monthly, it completely ignores that extremely important variable. 

So using it in the test of "what should my overpayment do" rather than "should I make an overpayment"?

I can see that.

BikingBud

Altior said:

The significance is not predictable, but it's about as certain as anything that the mortgage principal will erode away in real terms in the long term, due to the value of fiat cash diminishing over time, as it has done over many years of monetary history. 

Therefore if your mortgage payment is £1000 today, and still £1000 in 20 years, the real terms cost of that payment will have has diminished considerably. For example, the BoE states a £1000 repayment in 2004 would only be £573 in real terms today.

If people purely compared the predicted total cost when comparing an overpayment applied to reducing the term compared to reducing the monthly, it completely ignores that extremely important variable. 

We know that our spending power will be lower in future that's inflation but where does your growth come in?

My wage may be static and I need to pay more for everything else as they have inflated yet my wage hasn't. I still i still need to earn that £1000 + tax and pay the mortgage to that sum, even if it only has the buying power of £573 compared to today.

As I said before: 

Time value of money seems to work for investing but how many people are really doing that? Retaining low mortgage payments whilst buying junk, or other consumables that seem to be the "necessary" elements of the disposable society doesn't do anybody any favours.

Put some figures into that last statement as I don't currently see it.

Hoenir

For most people the greatest challanges they will will face during their lives is the three D's.

Death , Distress ( Financial ) and Divorce (Relationship). All 3 can blow even the best laid plans off course. 

An era of low interest rates has most certainly made investing mainstream. Though one questions the depth of comprehension of many.  As far from being a precise science. 

Altior

BikingBud said:

Altior said:

The significance is not predictable, but it's about as certain as anything that the mortgage principal will erode away in real terms in the long term, due to the value of fiat cash diminishing over time, as it has done over many years of monetary history. 

Therefore if your mortgage payment is £1000 today, and still £1000 in 20 years, the real terms cost of that payment will have has diminished considerably. For example, the BoE states a £1000 repayment in 2004 would only be £573 in real terms today.

If people purely compared the predicted total cost when comparing an overpayment applied to reducing the term compared to reducing the monthly, it completely ignores that extremely important variable. 

We know that our spending power will be lower in future that's inflation but where does your growth come in?

My wage may be static and I need to pay more for everything else as they have inflated yet my wage hasn't. I still i still need to earn that £1000 + tax and pay the mortgage to that sum, even if it only has the buying power of £573 compared to today.

As I said before: 

Time value of money seems to work for investing but how many people are really doing that? Retaining low mortgage payments whilst buying junk, or other consumables that seem to be the "necessary" elements of the disposable society doesn't do anybody any favours.

Put some figures into that last statement as I don't currently see it.

It's a completely unrealistic example, most people would struggle with a real terms fall in income of near 50%.

Sorry for repeating, however the time value of money is a consideration in the decision making. It doesn't dictate the answer, it should help inform the decision. Most people wouldn't put spare money into a cash bond with no access that only paid out in 20 years' time (for example). It's not quite as simplistic as that, but it's analogous to the effect of shortening the term via overpayments toward the front end or middle of a mortgage term in most cases. I do appreciate there are other possible considerations. 

BikingBud

Altior said:

BikingBud said:

Altior said:

The significance is not predictable, but it's about as certain as anything that the mortgage principal will erode away in real terms in the long term, due to the value of fiat cash diminishing over time, as it has done over many years of monetary history. 

Therefore if your mortgage payment is £1000 today, and still £1000 in 20 years, the real terms cost of that payment will have has diminished considerably. For example, the BoE states a £1000 repayment in 2004 would only be £573 in real terms today.

If people purely compared the predicted total cost when comparing an overpayment applied to reducing the term compared to reducing the monthly, it completely ignores that extremely important variable. 

We know that our spending power will be lower in future that's inflation but where does your growth come in?

My wage may be static and I need to pay more for everything else as they have inflated yet my wage hasn't. I still i still need to earn that £1000 + tax and pay the mortgage to that sum, even if it only has the buying power of £573 compared to today.

As I said before: 

Time value of money seems to work for investing but how many people are really doing that? Retaining low mortgage payments whilst buying junk, or other consumables that seem to be the "necessary" elements of the disposable society doesn't do anybody any favours.

Put some figures into that last statement as I don't currently see it.

It's a completely unrealistic example, most people would struggle with a real terms fall in income of near 50%.

Sorry for repeating, however the time value of money is a consideration in the decision making. It doesn't dictate the answer, it should help inform the decision. Most people wouldn't put spare money into a cash bond with no access that only paid out in 20 years' time (for example). It's not quite as simplistic as that, but it's analogous to the effect of shortening the term via overpayments toward the front end or middle of a mortgage term in most cases. I do appreciate there are other possible considerations. 

I'm quite happy with the fact real term income will fall but what you have't explained and I am trying to understand is how do you make the decision? What informs the decision? What process have you gone through to say I'm not paying the mortgage off because........

If I could get a cash bond that would mature before the mortgage needs to be settled and I could guarantee that I would get more cash back then I would save against the mortgage then yes I would do exactly that, in fact that's why people have pensions and LISAs and although short term to match end of current low interest period we have maxed out ISAs and why we are stoozing credit cards.

But you haven't explained Time Value and how it works for you. I will have an option when the current low interest fix finishes and rather than killing the bubble, saving £25k interest over the full mortgage term, what could I do differently? The follow on rate is currently 8.5% but if I can get a better rate and lower my payments while keeping my stash working to get more cash from this Time Value principle please explain.

How do you define the Time Value and decide?

housebuyer143

BikingBud said:

Altior said:

BikingBud said:

Altior said:

The significance is not predictable, but it's about as certain as anything that the mortgage principal will erode away in real terms in the long term, due to the value of fiat cash diminishing over time, as it has done over many years of monetary history. 

Therefore if your mortgage payment is £1000 today, and still £1000 in 20 years, the real terms cost of that payment will have has diminished considerably. For example, the BoE states a £1000 repayment in 2004 would only be £573 in real terms today.

If people purely compared the predicted total cost when comparing an overpayment applied to reducing the term compared to reducing the monthly, it completely ignores that extremely important variable. 

We know that our spending power will be lower in future that's inflation but where does your growth come in?

My wage may be static and I need to pay more for everything else as they have inflated yet my wage hasn't. I still i still need to earn that £1000 + tax and pay the mortgage to that sum, even if it only has the buying power of £573 compared to today.

As I said before: 

Time value of money seems to work for investing but how many people are really doing that? Retaining low mortgage payments whilst buying junk, or other consumables that seem to be the "necessary" elements of the disposable society doesn't do anybody any favours.

Put some figures into that last statement as I don't currently see it.

It's a completely unrealistic example, most people would struggle with a real terms fall in income of near 50%.

Sorry for repeating, however the time value of money is a consideration in the decision making. It doesn't dictate the answer, it should help inform the decision. Most people wouldn't put spare money into a cash bond with no access that only paid out in 20 years' time (for example). It's not quite as simplistic as that, but it's analogous to the effect of shortening the term via overpayments toward the front end or middle of a mortgage term in most cases. I do appreciate there are other possible considerations. 

I'm quite happy with the fact real term income will fall but what you have't explained and I am trying to understand is how do you make the decision? What informs the decision? What process have you gone through to say I'm not paying the mortgage off because........

If I could get a cash bond that would mature before the mortgage needs to be settled and I could guarantee that I would get more cash back then I would save against the mortgage then yes I would do exactly that, in fact that's why people have pensions and LISAs and although short term to match end of current low interest period we have maxed out ISAs and why we are stoozing credit cards.

But you haven't explained Time Value and how it works for you. I will have an option when the current low interest fix finishes and rather than killing the bubble, saving £25k interest over the full mortgage term, what could I do differently? The follow on rate is currently 8.5% but if I can get a better rate and lower my payments while keeping my stash working to get more cash from this Time Value principle please explain.

How do you define the Time Value and decide?

Everyone has different views and I can see this from your comment on the cash bond - that's okay but for me, I have looked at my personal circumstances and decided that money in the bank while I am younger is more advantages than pumping all my spare money into a house where it's difficult/impossible to access.

Lots of people are so focussed on being mortgage free at any cost, just because that's the expected thing. if you are making more money from your cash/investments than you do paying your mortgage then it doesn't make sense to do this. 
Yes, you will save on interest, but if you are making the same or more interest using the money for other things then it doesn't really matter? 

I doubt anybody is deciding not to pay off the mortgage solely because of the time value of money, but it is one piece which you can look at when making a decision. I paid my first house off at 28 and I actually think it was a mistake, especially because interest rates were so low at the time - I moved, got a bigger mortgage and have decided that's not my goal this time around. I choose to keep my money accessible to me, not stuck in my property. I'll probably go offset next remortgage time to counteract falling interest rates but at the moment, all my money is earning more interest than I pay on my mortgage, so I'm not really losing out.