Protecting against future mortgage rates
Discussion
Like many I imagine, I’ve been watching interest rates sail away this week with some concern. Fortunately I’m 6 or so months into a 5 year fix at a very low rate (thanks Sarnie, that worked out ok!)
I am wondering what those of us in this situation are doing, thinking about doing etc to prepare for what seems like an inevitable significant increase in rates when we next remortgage?
Is it as simple as chucking as much money into overpayments as possible? Or is this better kept as cash? Any other strategies anyone is thinking about?
£300k debt approx on current approx £450k property. South East. Done some modelling and this should be approx £250k debt by remortgage date. Might be able to get this down to £220k. 7% on 250k would be approx £1900 a month vs £1350 now. £220k at 7% is approx £1700.
Must admit I’m feeling a little different about my additional borrowing for the mid flight loft conversion right now!
I am wondering what those of us in this situation are doing, thinking about doing etc to prepare for what seems like an inevitable significant increase in rates when we next remortgage?
Is it as simple as chucking as much money into overpayments as possible? Or is this better kept as cash? Any other strategies anyone is thinking about?
£300k debt approx on current approx £450k property. South East. Done some modelling and this should be approx £250k debt by remortgage date. Might be able to get this down to £220k. 7% on 250k would be approx £1900 a month vs £1350 now. £220k at 7% is approx £1700.
Must admit I’m feeling a little different about my additional borrowing for the mid flight loft conversion right now!
Likely by time you need to think about all this again the dust will have settled and rates will be lower again, just maybe not as low as we’ve experienced more recently.
I’m an advocate of paying off the mortgage asap, even though the money people will tell you it’s not a good move in the grand scheme of things. What a massive feel of financial freedom it’ll be not having a monthly mortgage payment.
I’m an advocate of paying off the mortgage asap, even though the money people will tell you it’s not a good move in the grand scheme of things. What a massive feel of financial freedom it’ll be not having a monthly mortgage payment.
At the moment I’m not overpaying mine but putting what I could have overpaid into a savings account that is earning only slightly less than the mortgage rate (and will likely exceed it the way things are going). This way when the fix ends I can pay a chunk off and if some disaster happens meantime I can use some of it rather than having to borrow at a high rate. If my mortgage term was longer I’d probably be overpaying a bit now (compound effect) but the sums work out better with the savings route for my circumstances and keeps options a bit more open.
Pheo said:
Like many I imagine, I’ve been watching interest rates sail away this week with some concern. Fortunately I’m 6 or so months into a 5 year fix at a very low rate (thanks Sarnie, that worked out ok!)
I am wondering what those of us in this situation are doing, thinking about doing etc to prepare for what seems like an inevitable significant increase in rates when we next remortgage?
Is it as simple as chucking as much money into overpayments as possible? Or is this better kept as cash? Any other strategies anyone is thinking about?
£300k debt approx on current approx £450k property. South East. Done some modelling and this should be approx £250k debt by remortgage date. Might be able to get this down to £220k. 7% on 250k would be approx £1900 a month vs £1350 now. £220k at 7% is approx £1700.
Must admit I’m feeling a little different about my additional borrowing for the mid flight loft conversion right now!
If your mortgage is at a lower rate than you can get by investing the cash, there's no imperative to pay off extra early, might as well wait until remortgage time.I am wondering what those of us in this situation are doing, thinking about doing etc to prepare for what seems like an inevitable significant increase in rates when we next remortgage?
Is it as simple as chucking as much money into overpayments as possible? Or is this better kept as cash? Any other strategies anyone is thinking about?
£300k debt approx on current approx £450k property. South East. Done some modelling and this should be approx £250k debt by remortgage date. Might be able to get this down to £220k. 7% on 250k would be approx £1900 a month vs £1350 now. £220k at 7% is approx £1700.
Must admit I’m feeling a little different about my additional borrowing for the mid flight loft conversion right now!
The big question IMHO is how affordable will the mortgage be when the time comes?
What will your salary(ies) be?
Bearing in mind 4 years of wage inflation could increase your salary in ££ terms by anything from 15 to 50%?
Possibly even more if you expect to be in a more senior job.
Depending on inflation and promotion. you could easily be in the realm of income multiples which were considered reasonable last century..
I suspect if you model things out to your retirement, using a rage of reasonable combinations of interest and inflation rates, the gain from struggling to pay off as much as possible ASAP might be small.
I'd say , don't take your eye off your pensions or other savings.
As 'cases' go, I would say you don't have a problem, you should be thinking about your career, family, lifestyle etc.
If you're expecting or planning to take a massive cut in income and have kids, it doesn't look so easy.
Edible Roadkill said:
Likely by time you need to think about all this again the dust will have settled and rates will be lower again, just maybe not as low as we’ve experienced more recently.
I’m an advocate of paying off the mortgage asap, even though the money people will tell you it’s not a good move in the grand scheme of things. What a massive feel of financial freedom it’ll be not having a monthly mortgage payment.
Very much this 5 years is a long time we are in a similar position but I don’t intend to have much left in 5 years time. Hammer it while you can and rates are low. I’m an advocate of paying off the mortgage asap, even though the money people will tell you it’s not a good move in the grand scheme of things. What a massive feel of financial freedom it’ll be not having a monthly mortgage payment.
Yeah we moved a few months ago and fixed for 5 years at the time, glad we did! Personally I am not going to do much differently, rather than over pay I tend to plough a lot of money into the share save scheme at work as I tend to nearly double my money on it. I was going to do this anyway though. When the fixed rate ends we will pay a chunk of the mortgage off with whatever savings we have.
What I will do is be a bit more sensible with any potential large purchases, as in, probably not do them or defer them and see how things go over the next year or two.
What I will do is be a bit more sensible with any potential large purchases, as in, probably not do them or defer them and see how things go over the next year or two.
It's not per se the rate that may transpire to be the issue but the deposit when people come to rollover their fix deals.
A non issue of property prices hold but we are now in a market where we need to consider such events.
A falling value will come out of the home owner's deposit, or initial margin as we call it in our industry. So at the point of renewal additional margin/deposit may be required.
Ie someone who puts down a 10% deposit and the value then falls 10% may be asked to find a new 10% deposit for their mortgage deal. At worst, it should mean they're just captive to their current supplier but while the answer for years has been to pay down a mortgage, my view in this market is to save cash alongside it.
Simply save the cash separately and hold it until there is better market clarity.
A non issue of property prices hold but we are now in a market where we need to consider such events.
A falling value will come out of the home owner's deposit, or initial margin as we call it in our industry. So at the point of renewal additional margin/deposit may be required.
Ie someone who puts down a 10% deposit and the value then falls 10% may be asked to find a new 10% deposit for their mortgage deal. At worst, it should mean they're just captive to their current supplier but while the answer for years has been to pay down a mortgage, my view in this market is to save cash alongside it.
Simply save the cash separately and hold it until there is better market clarity.
I don't think it's just the rate or the deposit which may hinder peoples options when looking for a new mortgage in a year or three.
Lenders may have different criteria.
Possibly the guvmint may enforce rules.
Possibly lenders perception of risk and appetite for risk may change.
I've seen this in the past, a lender who was falling all over themselves to lend me huge sums of money were very cagey about lending me half as much a few years down the line.
Lenders may be able to get all the market share they want from people they consider low risk, with comfortable income multiples, no other finance commitments like cars etc, with more than 20 years to retirement and a solid career.
Lenders may have different criteria.
Possibly the guvmint may enforce rules.
Possibly lenders perception of risk and appetite for risk may change.
I've seen this in the past, a lender who was falling all over themselves to lend me huge sums of money were very cagey about lending me half as much a few years down the line.
Lenders may be able to get all the market share they want from people they consider low risk, with comfortable income multiples, no other finance commitments like cars etc, with more than 20 years to retirement and a solid career.
Unless you are putting money into a cash isa then surely you'll be paying tax on those gains which means that actually you're quite a long way from parity with your mortgage rate?
I've mostly been investing into stocks and shares via my wife and I ISA allowances, which obviously in the last two years hasn't really produced much of a gain, in 5 years time that they could be worth lots less, or potentially a fair bit more I suppose which I think is still a bet I'd rather take than knowing I'm losing against inflation. That said, I am going to hold more cash than prior but I'll be putting this into premium bonds to avoid paying tax on it, well unless I hit the limit I guess. I think this is all better than overpaying a 1.8% rate, then at that point I can decide what to do depending on how the mortgage market looks.
I've mostly been investing into stocks and shares via my wife and I ISA allowances, which obviously in the last two years hasn't really produced much of a gain, in 5 years time that they could be worth lots less, or potentially a fair bit more I suppose which I think is still a bet I'd rather take than knowing I'm losing against inflation. That said, I am going to hold more cash than prior but I'll be putting this into premium bonds to avoid paying tax on it, well unless I hit the limit I guess. I think this is all better than overpaying a 1.8% rate, then at that point I can decide what to do depending on how the mortgage market looks.
Some interesting thoughts here Thankyou! Hopefully others are finding it a worthwhile debate as well.
Was pondering between saving the cash, and making overpayments. Presumably the advantage now of making overpayments at a low rate is that most of it is going into capital? But o guess because the rate is so low, it’s not actually saving as much interest as you might think, so I suppose saving it on the side has some advantages. Mind you if you’ve put it against the mortgage you can’t then spend it later (both a plus and a minus!)
Certainly hoping to grow wages and make a more senior position but nothing is guaranteed in this life!
Was pondering between saving the cash, and making overpayments. Presumably the advantage now of making overpayments at a low rate is that most of it is going into capital? But o guess because the rate is so low, it’s not actually saving as much interest as you might think, so I suppose saving it on the side has some advantages. Mind you if you’ve put it against the mortgage you can’t then spend it later (both a plus and a minus!)
Certainly hoping to grow wages and make a more senior position but nothing is guaranteed in this life!
Pheo said:
Some interesting thoughts here Thankyou! Hopefully others are finding it a worthwhile debate as well.
Was pondering between saving the cash, and making overpayments. Presumably the advantage now of making overpayments at a low rate is that most of it is going into capital? But o guess because the rate is so low, it’s not actually saving as much interest as you might think, so I suppose saving it on the side has some advantages. Mind you if you’ve put it against the mortgage you can’t then spend it later (both a plus and a minus!)
Certainly hoping to grow wages and make a more senior position but nothing is guaranteed in this life!
To use a real world example, I've got 1.86% for 10 years on 195k. If I overpay 200 quid a month then after the ten years, my capital balance remaining is £114360. However, if I keep to min repayments and whack the 200 quid a month into a Cash ISA at 3.61% (highest available at the mo) then I'll have £28849 of which 4849 is interest in the ISA, and capital remaining on the mortgage of 137854. So effectively £109005 - over 5 grand better off.Was pondering between saving the cash, and making overpayments. Presumably the advantage now of making overpayments at a low rate is that most of it is going into capital? But o guess because the rate is so low, it’s not actually saving as much interest as you might think, so I suppose saving it on the side has some advantages. Mind you if you’ve put it against the mortgage you can’t then spend it later (both a plus and a minus!)
Certainly hoping to grow wages and make a more senior position but nothing is guaranteed in this life!
This sounds like the 5 year deal club (all smug).
Got 3 years left on my deal at 1.59% and just looking at options, I'm already overpaying by 500 pre all this doom and gloom as I hate the idea of getting to the end of a mortgage when I'm nearing retirement, I will want some liquidity to spunk
Other considerations is sadly inheritance, someones bound to leave some for us so that'll be relieving a load of the mortgage.
I'm not one to dabble in ISA's, although Gilts seem to be quite an attractive option now if you have hard cash to invest?
Got 3 years left on my deal at 1.59% and just looking at options, I'm already overpaying by 500 pre all this doom and gloom as I hate the idea of getting to the end of a mortgage when I'm nearing retirement, I will want some liquidity to spunk
Other considerations is sadly inheritance, someones bound to leave some for us so that'll be relieving a load of the mortgage.
I'm not one to dabble in ISA's, although Gilts seem to be quite an attractive option now if you have hard cash to invest?
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