Sign of the times..?

ailuro2

I think you're chasing your tail on that one, SMF:p

At the end of the day in an ideal world everyone would have a mortgage that is affordable and not living beyond their means so it wouldn't be a disaster to cope with a 1 or 2% increase in interest rates.

Interest rates were at 13 and 14% when I was a first time buyer many years ago, and I remember paying awful amounts of interest on my Endowment mortgage - however it instilled in me a lifelong reminder that interest rates can go up as well as down, and to borrow within my means or be faced with the consequences.

setmefree2

Hi ailuro2

I'm just involved in a debate on the house prices board about the effect of falling house prices. My argument being that in a market in which values are falling but in which rates are rising no-one is actually better off until values have actually fallen quite away. So I'm just trying to check my logic, being an amateur...

Of course cash is always king, so if you have cash you are better off. Also, if you are a FTB you can get on the ladder in a falling market ( a good thing IMHO).

Sadly, I am also old enough to have had negative equity and been in the market for double digit intest rates, just don't really understand all the jubilation in a market with rising interest rates.

SMF2

fedupnow

ok setmefree2 et al
I apologise if this is hijacking the thread - if it needs to go elsewhere can somebody move it accordingly? - ta.

You seem like a knowledgeable (sic) crew. Help me out a little here.
We went abroad for a while and managed to find ourselves back on the bottom rung and so had one of those deals where we only buy 70% and the house assoc has the remaining 30%. (only option at the time)

We were overpaying for a while but have stopped doing so now in order to put extra cash into doing it up ready to sell. We only have about 8k left.

Now, I think, we would be better off saving like crazy and earning interest until we get the 30% of todays value in order to buy out the house assoc. that way we can earn interest as we go.

My oh seems to think that we would be better off increasing our mortgage and paying them off that way - but I argue that we will then be charged interest. But he wants to be free of them. 30% today is about 45k.

what would you guys do?

Our income ain't great by the way and I have a job which I fear will not last too many years longer. have a small pot of savings but not any that I would want to spend right now - i like a small safety net.

thanks

setmefree2

Good question.

If the property market moves down will you have to pay less than £45k ?....however, if it moves up you will have to pay more than £45k?

That makes it a tough call. Doesn't it?

Things I would be thinking about:-

1)If there was no movement in the property market to consider the following would be true. If you have £100 and you invest it 6% at the end of the year you will have £106 in your saving acount. The following year you will receive interest on £106, etc.
If you borrow £100 and the lender charges you 6% at the end of the year you will have to pay him £106.

So the cost to you is a £100 in the first scenario and at the end you have £106. In the second scenario you have paid £106. You are worse off in the second scenario. In many ways the Housing Association is giving you a free loan.

2)You should have a good pot of rainy day money. The savings board is good for ISA products. You should be able to get a good interest rate on an ISA. You and your husband can save £7200k in ISA in tax year 2008/2009. You can also look at regular savers in the region of 10% as even after taking into account income tax these can be good deals.
3)However, there is a good mortgage repayment calculator on the BBC web site so you can see what the loan looks at different interest rates on repayments of £45k over 25 years.


It's a tough call I'm afraid. Crystal ball anyone?

SMF2

PS please be aware that I am no expert. I hope someone will be along to tell you if I've said something wrong.

fedupnow

At a point where your savings rate (still taking into account tax) can't beat a mortgage rate that's when you are better off getting a mortgage.

Ahhhh. That makes sense....even to my oh I'm sure.

We put as much as we can into ISAs (6.5% I think) but in order to refurbish the house we have reduced our savings to the basic 3k. At 3k, I do see his point that it will take a while. BUT, we could manage more next year providing both our jobs hold out. We really want to go rural and fear time is running out for us (mid forties) - I really don't want another mortgage (6.2% (i think) - I know it's high but it is because we wanted the flexible), I want to buy cash but I can live scruffy and small if necessary, so will buy accordingly.

The other option is save like lunatics and then give the 30% back when we sell.

I just soo want it all and I just sooo want to do this move right....no regrets.

Your sig is fantastic!!!! I wish mine was so impressive. Is it more from living frugally or working very hard? Good luck - you look like you'll be done in the first year.

setmefree2

fed up now - I've just changed my post....I have pmed you.

fedupnow

Yep, I am hoping the timing will ALL be on our side. That is I am hoping property prices will go lower so the 30% will drop and we have a lesser amount to pay.
However, the prices are what they are. We have to live somewhere. They are up or down for us to buy as well as sell. Everything is relative. Getting a 'good' price for this one only means we will have to fork out a horrid price for the next. The advantage is that 45k (current guestamate) is interest free but bobbing up and down on the market kwim? I reckon we could get it together in oooooo about 2 or 3 year if both jobs hold out.

Perhaps we could agree to save for 2 year and see what the situation is then.

I'm using you as a sounding board - sorry.

Those cystal balls would be worth a bomb eh?!.

Thanks

ailuro2

It depends on the price of your next house, and how much rent you're paying on the 30% the housing assoc. owns. Assuming the next house is going to cost 50% more than your current home. To keep things (quite) simple. If your current house is worth £100K and the house you want to move to is £150K then you need to find half as much again to fund the new house. So £50K is what you'd need to find to move today,plus 30K for paying off the HA. Total 80K Moving a year from now when house prices may have reduced to £80K and £120K then you'd have to find £40K plus 24K for the HA Total 64K plus you've paid another year's rent. The current mortgage market appears to be a bit shaky, it's not a bad idea to have a decent deposit and low LTV rate to keep the risks down. Keep saving hard- either way you'll be better off!

setmefree2

Happy to be proven wrong but if £100,000k costs the following over 25 years:-

7%, £212,034(£18,744 more than at 6%)
6%, £193,290 (£17,913 more than at 5%)
5%, £175,377

then

£100, 000 @ 5% costs £175, 377 (£1.75377 * £100,000)
£90,732 @ 6% costs £175,377 (£1.9329 * £90,732)
£82,713 @ 7% costs £175,377 (£1.75377 * £82,713)

Therefore,
Prices have to drop 9%, then 8% to be equal to the cost of £100k at 5%.
Thus, when interest rates move 1% the market has to drop 9% for things to be the same and 17% for a 2% rise.



So if interest rates go up 1% then the market has to drop 8% (roughly) for the cost of a £100k house to be the same (over the life of a mortgage)

And if rates go up 2% then the market has to drop 17% for the cost of the house over the life time of a mortgae to be the same. to be the same.

So the market moving down by 8% in house prices is really the same as mortgage rates going up by 1%.
Happy to be proven wrong

SMF2

fedupnow

No rent on the remaining 30%. When we pay the mortgage it will be free. I am unsure actually whether there is a clause saying if we pay off the mortgage we then are obligated to buy the rest. After all the scheme is designed to aid people onto (or in our case back on to) the property ladder. But it is an investment for the housing assoc. I think their original investment was around 11k.

I'm hoping our next house will be smaller and tattier (we can do cosmetics as and when - not a problem) for about the same. I've spotted some real crackers that I would love - but the timings all wrong. Hopefully there will be similar going in a few years when we are ready.

setmefree. wow. Seeing it all written down like that makes me realise how much of a difference that 1% makes. I have never done that. Not sure the market will drop that much.

Thanks