£1.50 for every £1 borrowed...

[otherman]

DogRough said:

It's also much more to do with the fact that the interest on mortgages is heavily front loaded, than anything to with the actual interest rate. So for example in the first year a £500 payment would be broken down as say £490 interest, £10 capital. In the last year, it would be more £490 capital, £10 interest.

And the reason for the front loaded interest is to keep monthly repayments level. If you paid an equal amount of capital every month, at the beginning when you owe the full amount, there'd be a huge amount of interest, and at the end when your remaining mortgage is small, payments would be tiny. People don't want that, because early on is normally when they can least afford it.

150k at 2% costs off a total of 190k, with a monthly repayment of £636 = £7632 per year.

In year one, it's £4761 of capital + £2871 of interest
In year 25, its £7550 of capital + £82 of interest

That's why it's not terribly important to pay off the last bit early. The interest is nearly all paid already.

[djc206]

XMT said:

Competely agree. The rate I got was 2.15% for the 5 year fixed and the plan is to not have one after the 5 years. everyones situation is different

We remortgaged yesterday at 1.94% on a 5 year fix. Barclays massively overvalued our house, we thought we'd be looking at 85% LTV but thanks to their pie in the sky figures worked out at 75.2%. My girlfriend isn't in a position to overpay at the moment and insists on paying half of everything so hopefully from 2019 we can start throwing money at it. We have 23 years left now but hoping to cut it to 10 after the fix is up, interest rate dependent of course.

At current rates we should be looking at say a third of the value in interest max, my parents worked on paying double, thankfully their house was worth quadruple what's they paid for it so they, removing inflation, probably got £1.50 for every £ invested. That is not going to be the case for my generation.

[mjb1]

Dizeee said:

Some interesting food for thought here.

I have never overpaid my mortgage, I probably could have in the past, but certainly not now. We are very much in the "just think about what you pay each month" camp, I have never really considered anything more, and I must say I don't know of anyone else who has. With the jobs we both do, our wages will never rise (in fact they have been going down for the past 8 years) so there is no hope of ever being able to do anything other than paying a monthly payment.

The only way of us ever coming into more money than the flat wages we take home each month is if we were to inherit or win the lottery. We don't play the lottery and our inheritance will be a pittance as there is no money with what relatives we have left. I lost direct family many years ago and didn't inherit a penny as his new wife (fourth marriage) ran away with his accumulated wealth and property the day after the funeral.

We just have to bat on and try and re fix every few years, reducing the term if we can. I had some savings which are now dwindling as we are dipping into them to cover costs that we can no longer cover, mostly house maintenance. I can no longer save either so am being very careful with what I am spending my savings on.

We probably have a buffer if rates increase but it would mean just eating baked beans on toast and walking around insocks with holes in them. Yes we could do it, but not ideal.

So you would never consider overpaying your mortgage repayments, but you were happy to shorten the term by 2 years?? Makes no sense as they're both effectively the same thing - you overpay, it reduces your mortgage balance and shortens the term. The only difference is shortening the term forces you to pay more each more, at least a voluntary overpayment can suspended. But try going back to the lender and asking them to tack that extra 2 years back on the mortgage because you can't afford the monthly repayments, probably won't go down well!

[DonkeyApple]

I'm not a huge fan of shortening a mortgage term to under 20. Unless you genuinely know that you lack the discipline to make over payments or your borrow is so low that you'll be able to cover it regardless then the flexibility of a deal that maintains a conventional term and allows you to over pay is going to be much healthier.

People should take note that in the current climate of 1-2% property debt rates if someone needs equity fast the second lien industry currently quotes 9-14%. Something worth bearing in mind for people who are head of a household and have an obligation to be able to handle those little quirks of life that come out of the blue. There is a value to being financially flexible and it's worth considering that value in any decision that will leave you either short of cash reserves or tied into a more aggressive than the norm debt repayment program.

[TheInternet]

otherman said:

And the reason for the front loaded interest is to keep monthly repayments level.

Indeed, though it's not 'front loaded' IMO, but I can understand why some see it that way.

[Fittster]

DogRough said:

Dizeee said:

ETA - bank says they now won't lend us the extra 10k based on our last 3 payslips.

Ho hum.

From everything you have said, that isn't a surprise, but is ultimately for the best. Rates can only go one way.

Are we really so different from Japan?

[DonkeyApple]

Fittster said:

Are we really so different from Japan?

That's a very relevant question. We are ten years in and they must be approaching nearly 25.

But there is one massive difference. Over their period of zero rates they've had a bear market with prices falling year on year since 1992. Only in about 2007/8 did they appear to bottom and climb very slightly. Conversely, throughout our period of zero rates we have had a housing bull market.

The chart half way down this article is very interesting. GB is up over 1000% while Japan has risen about a gnat's fart:

https://www.economist.com/blogs/graphicdetail/2017...

I don't think their population has grown much over the last 20 years either whereas I believe ours has. Probably as a result of very different policies on immigration rather than indigenous birth rates?

I also wonder if there is a significant cultural difference between the youth populations also? You get the impression that in Japan they are more subservient whereas here they are much more likely to rise up and overthrow their parents generation?

[Fittster]

I'm not an economist, the fact that I take away from Japan is that trends can go on much longer than people expect.

Maybe we will see interest rates significantly but there are cases out there were ultra low interest rates have gone for decades. You don't hear anyone talk about bond viglantes driving up rates anymore.

[DonkeyApple]

Fittster said:

I'm not an economist, the fact that I take away from Japan is that trends can go on much longer than people expect.

Maybe we will see interest rates significantly but there are cases out there were ultra low interest rates have gone for decades. You don't hear anyone talk about bond viglantes driving up rates anymore.

Very true. I've categorically been surprised about the length of time we've been down here. I would never have believed it.

Got a meeting on Wednesday with some people wanting to get a fund away shorting the bond market and as I have very little experience on this side I've been trying to educate myself and it does seem like many funds are beginning to look for this exposure to hedge out exposure.

[NickCQ]

DonkeyApple said:

Very true. I've categorically been surprised about the length of time we've been down here. I would never have believed it.

Got a meeting on Wednesday with some people wanting to get a fund away shorting the bond market and as I have very little experience on this side I've been trying to educate myself and it does seem like many funds are beginning to look for this exposure to hedge out exposure.

I wonder if the borrow cost on negative yielding sovereigns is low enough to mean that you would have a positive carry on the short trade. That would be an interesting trade - go short rates and get paid to do it!

[Dizeee]

okgo said:

Nearly everyone can upskill/earn more.

While your situation probably isn't unusual, there are certainly ways to make it easier I should think. It does make your spending on expensive bikes seem mental though!

You have always said that, and often you have said "just get a new job". I have always thought that based on these remarks, you must be hugely naive. If it were that easy, everyone would just "go out and earn more money", which doesn't happen. My situation is like all those that I work with, we are stuck in a public sector pay and conditions rut, with absolutely nothing to offer in the way of skills or experience. I could re train from scratch of course, however, that would mean around 5 years ish of trying to work my way up in a new career with no guarantee's. With two dependants and a huge mortgage, that isn't an option, plus I am cautious and uncomfortable with leaving the safety net I have been accustomed to over the past 16 working years, so for now at least, I will stick it out.

As for the bikes, they have always been affordable, as I am very careful with what I spend. You know nothing about my financial situation or what cash I had available at the time of purchase, plus you don't know whether I have a lump of cash sat in the bank which I have built up over the years. Has it occurred to you that I may have been putting away money each month since I started work?

Things seem very simple in you work of "just doing" things but the majority of people have complex lives, especially when they have young kids and difficult jobs.

[Dizeee]

mjb1 said:

So you would never consider overpaying your mortgage repayments, but you were happy to shorten the term by 2 years?? Makes no sense as they're both effectively the same thing - you overpay, it reduces your mortgage balance and shortens the term. The only difference is shortening the term forces you to pay more each more, at least a voluntary overpayment can suspended. But try going back to the lender and asking them to tack that extra 2 years back on the mortgage because you can't afford the monthly repayments, probably won't go down well!

So are yo saying we could leave the term at 28 years (not shortening), make an overpayment of £100 each month and then be better off for it? I didn't know this would be a better option - it just feels better to think that we are removing a couple of years from our mortgage in the long term. It is only now at the age of 35 that I feel like we should be starting to pay it off and looking to the future rather than just borrowing off it continually, which we have done over the years usually to buying/moving house or extending one.

[GR_TVR]

Dizeee said:

So are yo saying we could leave the term at 28 years (not shortening), make an overpayment of £100 each month and then be better off for it? I didn't know this would be a better option - it just feels better to think that we are removing a couple of years from our mortgage in the long term. It is only now at the age of 35 that I feel like we should be starting to pay it off and looking to the future rather than just borrowing off it continually, which we have done over the years usually to buying/moving house or extending one.

So let's say by shortening your mortgage by 2 years your payments go up £100 a month.
If you don't shorten your mortgage and overpay by £100 it has exactly the same effect - you will knock 2 years off the term of your mortgage simply by overpaying.

The difference is, by overpaying it is a voluntary payment - if you find that for a period of time you need that £100 a month, you can simply stop paying it. Obviously the mortgage payment term would stop reducing at this point.
If you shorten the term then you have no option but to pay the £100 - even if you can't afford to.

Try googling "mortgage overpayment calculator" to try and get a feel for this.

[stongle]

DonkeyApple said:

Very true. I've categorically been surprised about the length of time we've been down here. I would never have believed it.

Got a meeting on Wednesday with some people wanting to get a fund away shorting the bond market and as I have very little experience on this side I've been trying to educate myself and it does seem like many funds are beginning to look for this exposure to hedge out exposure.

If your looking to enhance returns on any hedge positions - take a look at the latest from BoE -

http://www.bankofengland.co.uk/pra/Documents/publi...

If the fund is hedging in Bonds (gilts in particular) - there will be significant premium in lending them out from 2019 - particularly given separation of retail and investment arms increasing demands on high grade assets

You've said before banks mispriced risk in the run up to 07/08; but now we are seeing the crystallisation of Basel lII over the next few years. With regulations adding cost drag to bank resources we have to see a cost back to the consumer. This likely reduces the impact AND latitude the Central Bank has to increase rates as the Banks are going to up product cost accordingly - pre 07 bank spread on a 5yr fix was about 10bps - now its 70-80bps (balance sheet hurdle rate would be 40bps+).

Its interesting that post financial crisis reform runs contrary to the needs of monetary policy.

If the housing market wasn't so depressed I think we'd be seeing the impact of bank spreads in the market more than an additional rate hike - that could add unwanted damage to the consumer led economy. I think the situation is less hawkish than recent MPC meetings suggest.

[Dizeee]

GR_TVR said:

So let's say by shortening your mortgage by 2 years your payments go up £100 a month.
If you don't shorten your mortgage and overpay by £100 it has exactly the same effect - you will knock 2 years off the term of your mortgage simply by overpaying.

The difference is, by overpaying it is a voluntary payment - if you find that for a period of time you need that £100 a month, you can simply stop paying it. Obviously the mortgage payment term would stop reducing at this point.
If you shorten the term then you have no option but to pay the £100 - even if you can't afford to.

Try googling "mortgage overpayment calculator" to try and get a feel for this.

To be honest I would prefer having to pay it rather than volunteering it. It would work better for us, we could afford it, and if we didn't have to pay it we would probably be lazy and spend the money on something else.

[GR_TVR]

Dizeee said:

To be honest I would prefer having to pay it rather than volunteering it. It would work better for us, we could afford it, and if we didn't have to pay it we would probably be lazy and spend the money on something else.

That's fair enough - you know better than I what your discipline levels are like!
Just so you know - it would be a case of calling them up and changing it back from overpaying, it's not something you'd have to do manually each month etc. Might make it easier to stop yourself changing it back!
It's just an additional safety net, at the end of the day. But does require that discipline!