Interest rates going up soon...
Discussion
RedTrident said:
So what'll happen when interest rates go up? I suppose the banks will leave the BoE +2.5% variable rates that I remember seeing a lot of last time I looked.
Deals can change daily some pulled some amended some reduced. If your fixed for x years you know the score whereas if your variable or SVR then there is uncertainty - however you can jump ship to a fixed at any point during a rate rise period of you think they will keep going up.
Some people are so close to being bust fixed is the only sensible option others can afford the risk of variable and can work out much better off or not. Others take an educated risk they know how much rates have to move by before fixed makes financial sense to them.
C'mon, rates going up soon, seriously. Most our debt is index linked and we're paying billions in interest at the current rates. Plus a lot of people with mortgages they can barely afford and an incoming labour government that will milk any sort of recovery to serve its client state. I think the fed won't stop or slow down the QE and the BOE will continue on the same course.
Welshbeef said:
But what about all the FTSE 100 companies with hundreds of millions in credit at the point a bank defaults suddenly that company is bust
Say it had the cash ready to pay the VAT or Corp tax or its suppliers or its staff on the next day but bank goes pop suddenly zero to pay out the tax man loses out the staff cannot pay for anything nor can they get credit they also have no job the suppliers take a 100% loss on services or goods provided which could cause them to go pop too etc etc.
Residential mortgages who are on the brink are a small % in real terms its the businesses which would go bust overnight due to cashflow. The house of cards would collapse very very quickly and we'd have potentially been in a barter scenario.
RBS goes down
Citi Bank goes down
Barclays goes down
Lloyds goes down
UBS
Credit Swiss
Each one would then start knocking the next over until only rural banks would remain and even then they would likely have a run on them so account holders could buy some food before they have to steal.
Etc if they collapsed and were broke it would be such a game changer civil unrest would be the least of your worries.
True but most corporates don't sit in cash like that. They actually run debt in the locations where cash is required and offset the cost of the debt against profits so as to be more tax efficient. The 'cash' is held on a spread basis both geographically and asset class wise. Say it had the cash ready to pay the VAT or Corp tax or its suppliers or its staff on the next day but bank goes pop suddenly zero to pay out the tax man loses out the staff cannot pay for anything nor can they get credit they also have no job the suppliers take a 100% loss on services or goods provided which could cause them to go pop too etc etc.
Residential mortgages who are on the brink are a small % in real terms its the businesses which would go bust overnight due to cashflow. The house of cards would collapse very very quickly and we'd have potentially been in a barter scenario.
RBS goes down
Citi Bank goes down
Barclays goes down
Lloyds goes down
UBS
Credit Swiss
Each one would then start knocking the next over until only rural banks would remain and even then they would likely have a run on them so account holders could buy some food before they have to steal.
Etc if they collapsed and were broke it would be such a game changer civil unrest would be the least of your worries.
It's the fact that an extremely large % of bank balance sheets in the UK are defined by residential property assets. If they had to mark the values down then the decimation of their balance sheets would have large enough to bust them. And this is still the case. Banks have favoured BTL debt as it is firstly easier politically to foreclose and also the debt funding is backed by more than one income source so is lower risk.
Welshbeef said:
RedTrident said:
So what'll happen when interest rates go up? I suppose the banks will leave the BoE +2.5% variable rates that I remember seeing a lot of last time I looked.
Deals can change daily some pulled some amended some reduced. If your fixed for x years you know the score whereas if your variable or SVR then there is uncertainty - however you can jump ship to a fixed at any point during a rate rise period of you think they will keep going up.
Some people are so close to being bust fixed is the only sensible option others can afford the risk of variable and can work out much better off or not. Others take an educated risk they know how much rates have to move by before fixed makes financial sense to them.
Trouble is the mortgage offers are only going to go up and that's before any BOE rate rises.
Deals about today won't be in one week or two months time.
If they are then the arrangement fees will go up instead.
egor110 said:
Crafty_ said:
youngsyr said:
I don't follow?
I'll try and make it as simple as I can...Lets say you owe 80k.
Mortgage at 1.29%
Overpay by 50%. You give up 1% on the amount you overpay (what you could have earned in investments/savings)
5 years later rates go up to (say) 3%
You've paid off £40k, so are paying 3% interest on the remaining 40k until its paid off.
If you hadn't of overpaid you'd now have only paid off something like £25k, leaving you paying 3% on £55k. So, in short you're going to pay more interest. You do have the extra 1% you earned on savings to offset this though.
I don't know at which point you are better off either way. Like I said, some clever person can probably work out a formula for it.
Let's say you owe £100k at 2% and have £50k in savings that can earn 4% (after tax).
Option 1: repay all £50k on day 1. Ater 1 year you owe (£100k-£50k) + (£100-£50k) x 2% = £51k.
Option 2: invest £50k and keep the savings in the bank. After 1 year you owe: £100k + (£100k x 2%) = £102k, but you have: £50k + (£50k x 4%) = £52k to repay, which you do, leaving your mortgage at £50k.
Under option 2, you reduce your debt by £1k over option 1!
The logical extension of this is that it actually makes sense to borrow as much money as you can in this situation and invest it - this is the principle on which banks operate!
Edited by youngsyr on Thursday 19th June 09:48
garyhun said:
Savings earning 4% after tax?
For illustrative purposes only! I could have used mortgage at 0.84% (base rate tracker) and savings at 2.3% after tax (ISA), the conclusion is the same (the workings are just messier): it's always better to invest rather than repay when your net savings rate is higher than your mortgage rate.
jdw1234 said:
garyhun said:
Savings earning 4% after tax?
Yes, to get that sort of return would imply a level of risk on the capital that I would not be willing to take unless my primary residence was paid for.
I'm not saying you have to earn 4% to make it work - at any point where your net savings rate is higher than your mortgage rate, you are better off not repaying.
youngsyr said:
There's no clever formula - if you invest instead of paying down, then you have more money to repay when the rates go up:
Let's say you owe £100k at 2% and have £50k in savings that can earn 4% (after tax).
Option 1: repay all £50k on day 1. Ater 1 year you owe (£100k-£50k) + (£100-£50k) x 2% = £51k.
Option 2: invest £50k and keep the savings in the bank. After 1 year you owe: £100k + (£100k x 2%) = £102k, but you have: £50k + (£50k x 4%) = £52k to repay, which you do, leaving your mortgage at £50k.
Under option 2, you reduce your debt by £1k over option 1!
The logical extension of this is that it actually makes sense to borrow as much money as you can in this situation and invest it - this is the principle on which banks operate!
Assuming no capital risk to get that 4%Let's say you owe £100k at 2% and have £50k in savings that can earn 4% (after tax).
Option 1: repay all £50k on day 1. Ater 1 year you owe (£100k-£50k) + (£100-£50k) x 2% = £51k.
Option 2: invest £50k and keep the savings in the bank. After 1 year you owe: £100k + (£100k x 2%) = £102k, but you have: £50k + (£50k x 4%) = £52k to repay, which you do, leaving your mortgage at £50k.
Under option 2, you reduce your debt by £1k over option 1!
The logical extension of this is that it actually makes sense to borrow as much money as you can in this situation and invest it - this is the principle on which banks operate!
Edited by youngsyr on Thursday 19th June 09:48
youngsyr said:
jdw1234 said:
garyhun said:
Savings earning 4% after tax?
Yes, to get that sort of return would imply a level of risk on the capital that I would not be willing to take unless my primary residence was paid for.I'm not saying you have to earn 4% to make it work - at any point where your net savings rate is higher than your mortgage rate, you are better off not repaying.
You are right and it is an obvious point. However, in reality you are quite likely to be risking capital to acheive a rate greater than the mortgage.
jdw1234 said:
youngsyr said:
jdw1234 said:
garyhun said:
Savings earning 4% after tax?
Yes, to get that sort of return would imply a level of risk on the capital that I would not be willing to take unless my primary residence was paid for.I'm not saying you have to earn 4% to make it work - at any point where your net savings rate is higher than your mortgage rate, you are better off not repaying.
You are right and it is an obvious point. However, in reality you are quite likely to be risking capital to acheive a rate greater than the mortgage.
However the past 6 years or so have not been normal; many people (including me, more by luck than judgement) have ridiculously low mortgage rates that are significantly below the better savings rates available and the principle remains.
youngsyr said:
Now we really are nit-picking: savings (including interest) in a UK bank are backed by a government guarantee up to £85k.
To me that makes capital risk negligible.
Show me a deposit rate greater than a mortgage rate & then tell me why millions of borrowed pounds aren't deposited there.To me that makes capital risk negligible.
Rovinghawk said:
youngsyr said:
Now we really are nit-picking: savings (including interest) in a UK bank are backed by a government guarantee up to £85k.
To me that makes capital risk negligible.
Show me a deposit rate greater than a mortgage rate & then tell me why millions of borrowed pounds aren't deposited there.To me that makes capital risk negligible.
My mortage is BoE base rate plus 0.38%.
My santander 123 account pays 3% (gross) on savings up to £20k.
There are plenty of people in a similar situation.
youngsyr said:
Normally, I'd agree.
However the past 6 years or so have not been normal; many people (including me, more by luck than judgement) have ridiculously low mortgage rates that are significantly below the better savings rates available.
I agree with you BUT there what some people fail to understand is that there is a whole psychology around risk and dept and that means for MANY/SOME people, the idea of being mortgage free is, in itself, more important than a pure financial return consideration.However the past 6 years or so have not been normal; many people (including me, more by luck than judgement) have ridiculously low mortgage rates that are significantly below the better savings rates available.
garyhun said:
youngsyr said:
Normally, I'd agree.
However the past 6 years or so have not been normal; many people (including me, more by luck than judgement) have ridiculously low mortgage rates that are significantly below the better savings rates available.
I agree with you BUT there what some people fail to understand is that there is a whole psychology around risk and dept and that means for MANY/SOME people, the idea of being mortgage free is, in itself, more important than a pure financial return consideration.However the past 6 years or so have not been normal; many people (including me, more by luck than judgement) have ridiculously low mortgage rates that are significantly below the better savings rates available.
For me, if I had a £100k mortgage at 2% and £100k in the bank at 4%, I'd feel better than mortgage free!
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