Debate House Prices


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Is my deposit going to be eroded away by inflation

I almost bought a house last month, buck (luckily?) got credit crunched and the bank withdrew their mortgage offer leaving me high and dry. Now I've got a whopping deposit sitting in my bank account.

I'd like to buy once the prices have stabilised, and once the banks are doing good deals on mortgages again, but in the meantime whats the best thing to do with my cash? I've got it in a Kaupthing Edge account at the moment, but inflation @4% + tax means its not growing particularly fast, if at all.
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  • WTF?_2
    WTF?_2 Posts: 4,592 Forumite
    macatak wrote: »
    I almost bought a house last month, buck (luckily?) got credit crunched and the bank withdrew their mortgage offer leaving me high and dry. Now I've got a whopping deposit sitting in my bank account.

    I'd like to buy once the prices have stabilised, and once the banks are doing good deals on mortgages again, but in the meantime whats the best thing to do with my cash? I've got it in a Kaupthing Edge account at the moment, but inflation @4% + tax means its not growing particularly fast, if at all.

    If you have a lot of savings then inflation is definitely a worry as with the accelerating rate of price increases we are seeing the value of money eaten away.

    However, if these savings are earmarked for something that is experiencing deflation - in this case, houses - then that's not too bad. You'll have to make a judgement call as to when the best time to jump into the market is.
    --
    Every pound less borrowed (to buy a house) is more than two pounds less to repay and more than three pounds less to earn, over the course of a typical mortgage.
  • hostman
    hostman Posts: 377 Forumite
    Not a great deal you can do, unless you opt for riskier investments or fart around drip feeding into various accounts offering 10-12%. But by the time you transfer the money between these accounts, you'd have lost significant interest anyway so the gains will be quite marginal.

    But I would recommend splitting the amount between different banks who are different FSA members if the amount is over the FSA compensation limit.
  • PasturesNew
    PasturesNew Posts: 70,698 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Photogenic
    If you are saving for a house it doesn't matter because the prices are coming down by more than you're saving.

    The problem comes if you are saving for other things that are going up in price.

    eg. if you save £1/month for 12 months for something costing £12, by the end of the year that might have gone up by 25% and be costing £16. So you will be further behind.

    With high inflation it can work out cheaper to buy some goods on credit if the amount they are inflating is greater than the cost of the credit.

    e.g. if you are saving £10/month to buy something costing £100, but instead you borrow the £100 at 20% interest and pay back £12/month, then you get the goods today at £100, you pay back £120 by the end of the year, but if the goods increased by 25% then in a year they'd have cost £125. Saving a £5.

    So it depends what you are saving for, what the rate of inflation is for that item, if that item is increasing/decreasing in price and how much credit would cost you for it.

    While houses were going up by 10% per year, it made sense for people to decide to buy today at 5% interest on the mortgage because they were paying less in interest each year than the house was increasing by. That's now stopped as houses are now costing 10% less per year.
  • Austin_Allegro
    Austin_Allegro Posts: 1,462 Forumite
    1,000 Posts Combo Breaker
    I have heard doom-mongering about Icelandic banks - they have a liquidity shortage I think hence the high interest rates - though you are FSA protected and also get some kind of Icelandic protection scheme also, I'd divide the money up to be on the safe side.
    'Never keep up with Joneses. Drag them down to your level. It's cheaper.' Quentin Crisp
  • tradetime
    tradetime Posts: 3,200 Forumite
    Depending on when you are thinking of entering the housing market you could look at some of the savings products that have inflation protection built in such as NS&I savings certs or the Leeds BS Inflation bond.
    Hope for the best.....Plan for the worst!

    "Never in the history of the world has there been a situation so bad that the government can't make it worse." Unknown
  • baby_boomer
    baby_boomer Posts: 3,883 Forumite
    Part of the Furniture 1,000 Posts Combo Breaker
    High inflation may keep interest rates / mortgage rates high at the same time as slowing down the wider economy and hitting employment.

    Inflation may therefore help reduce the price you have to pay for your house in the future.

    You gotta keep your eye on the wider picture :).
  • lostinrates
    lostinrates Posts: 55,283 Forumite
    I've been Money Tipped!
    I have heard doom-mongering about Icelandic banks - they have a liquidity shortage I think hence the high interest rates - though you are FSA protected and also get some kind of Icelandic protection scheme also, I'd divide the money up to be on the safe side.

    Yup, though we are keeping our FSA protected amount there ATM.

    We keep everything instant access 'just in case' we see the house we need to buy, and although there is of course, a bg difference in the rates doig this, keeing on the ball as to what pays most interest for instant access savings is the only way to make these savings acculmulate.
    I
  • brit1234
    brit1234 Posts: 5,385 Forumite
    A lot of the highest interest banks strangly happen to be the most unstable ones. On top of that the protected £35,000 in each bank hasn't got the money to payout if any of the top 25 British banks collapse.

    So in reality you should look at the most stable banks and spread your money there. There will be banking casualties this year with Bradford and Bingley the next (as we predicted last year).:exclamati
    :exclamatiScams - Shared Equity, Shared Ownership, Newbuy, Firstbuy and Help to Buy.

    Save our Savers
  • tradetime
    tradetime Posts: 3,200 Forumite
    So in reality you should look at the most stable banks and spread your money there. There will be banking casualties this year with Bradford and Bingley the next (as we predicted last year).
    Not being funny, but who would you say are "The most stable" I know you are probably going to name the same banks that I would if I were asked that question, but quite frankly I'm not so sure and have a neww theory now.
    Hope for the best.....Plan for the worst!

    "Never in the history of the world has there been a situation so bad that the government can't make it worse." Unknown
  • PasturesNew
    PasturesNew Posts: 70,698 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Photogenic
    As money is "created from nothing", I think it's appalling that cash savings can simply vapourise. It'd be easy to reprint that money.

    It'd be so much simpler if you could simply keep hard cash in one account without fear. I hate having to open/run many many bank accounts to try to be safe and still not really ever be sure.
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