Mortgage Rate Rises

[Guest2]

Despite the increase in interest rates, we don’t seem to have found the point yet where people will stop spending.

I never understand why there is / was a 'cost of living crisis' whenever we went out (which was qutie rarely) There were hundreds of people out in bars drinking and eating - spending almost £7 on a pint for hours on end. I just didnt see a cost of living crisis at all (in Leeds at least)
If anything, the opposite.

 

[Zatoichi.uK]

But it’s not. We compared the capital left on the loan after 3 years and it was pretty much the same. Presumably because you’re hitting the compound interest on a much bigger amount (the mortgage). Or to mention we couldn’t save that for 3 years and pay in one lump because we’d hit the overpayment limit. We’d have to break it up into say yearly payments. By which point you may as well save the admin and just pay off every month.

But the overpayment only affects the amount overpaid and not the total mortgage. By my calculations:

Overpaying your mortgage @1.24%
After overpaying £1,000 a month for 3 years and 0 months, you'll have a total of £36,693 in overpayments including £693 in interest

Saving £1000 over the same period at 5%.
After saving £1,000 a month for 3 years and 0 months, you'll have a total of £38,731 including £2,731 in interest

So after 3 years you would be £2038 better off by saving rather than overpaying.

Yes it's true that you may hit the 10% limit so is a factor. Its also generally true however that once you overpay, that money is effectively gone and inaccessible (not always). For me personally I'd rather than the funds were available at the end of the period and choose whether to overpay, invest or splurge depending on circumstances at the time.

Different strokes and all that.

 

[Nasher]

I read about that.... but cant they suggest to the government to increase the VAT? surely increasing interest rates is having a zero impact on inflation. Everybody i know are still having 2-3 holidays a year.

All that happens then is people buy less stuff and the economy starts to slow down

 

[FishThrower]

What makes you think that?

It can take months for the impact of rate changes to filter through into changes in spending habits, let alone into inflation figures.

This lag effect is further compounded by the fact that we have a large percentage of mortgaged homeowners still on fixed deals.

Good point... but surely it would have made more sense to increase the interest rate in larger segments rather than 0.25% and 0.5% increases every couple of months, rather than giving people time to think about what to do, causing them to panic buy on house extensions and home improvements etc . The amount of building work in our village has been crazy over the past six months.

 

[FishThrower]

All that happens then is people buy less stuff and the economy starts to slow down

isnt that what the BOE announced that they are trying to do? to stop people spending?

 

[413x]

isnt that what the BOE announced that they are trying to do? to stop people spending?

Yep. I mean they even openly dance around language of deliberately starting a recession.

 

[robj20]

I will start over paying I think for my Post Office/ Bank of Ireland one it's best to do a lump sum each year because you have to then submit a form to tell them to take it off the term and not just reduce the monthly payments.

I think that's the correct way of doing it, I'm unsure, it seems overly complicated.

If anyone is with Post office for their mortgage is that correct? Is it simple enough to do.
Why you can't just select at the time of paying I don't know.

 

[Richie]

Whole thing just absolutely stinks in my opinion, sadly the government paying everyones salaries during COVID to sit at home hasn't help either which is now biting us in the backside.

Was there another option than paying people an income whilst in a Government enforced lockdown?

What makes you think that?

It can take months for the impact of rate changes to filter through into changes in spending habits, let alone into inflation figures.

This lag effect is further compounded by the fact that we have a large percentage of mortgaged homeowners still on fixed deals.

I guess a VAT increase would overcome the lag given it would be pretty instant

 

[jaybee]

But the overpayment only affects the amount overpaid and not the total mortgage. By my calculations:

Overpaying your mortgage @1.24%
After overpaying £1,000 a month for 3 years and 0 months, you'll have a total of £36,693 in overpayments including £693 in interest

Saving £1000 over the same period at 5%.
After saving £1,000 a month for 3 years and 0 months, you'll have a total of £38,731 including £2,731 in interest

So after 3 years you would be £2038 better off by saving rather than overpaying.

Yes it's true that you may hit the 10% limit so is a factor. Its also generally true however that once you overpay, that money is effectively gone and inaccessible (not always). For me personally I'd rather than the funds were available at the end of the period and choose whether to overpay, invest or splurge depending on circumstances at the time.

Different strokes and all that.

I think you are over simplifying? When you pay off that £38,731 at the end of the 3 years it won't have the same effect because of the compound interest calculating monthly on mortgages. So the sooner you get the payments paid off it starts to take effect more quickly.
I've just worked mine out using my spreadsheet I made ages ago. I'm 3 years into a 5 year fix at 1.89%. Current outstanding balance is obscene... well over 300k. 27 years left.
If I right now stop over paying £300 per month, and instead put it into a 5% saver for the final 24 months of this term, then pay that off at the end, I would be worse off by £681. EDIT: Worked it out properly and it's £57
The final outstanding balance in 2 years time is lower by paying £300 off each month even with rates at 5%.

 

[robj20]

Looks like as I'm in a promotional period I can't reduce the term.
All is overpaying still worth it if all it does is reduce the monthly payments? Does it still save on interest overall?

 

[Ayahuasca]

I never understand why there is / was a 'cost of living crisis' whenever we went out (which was qutie rarely) There were hundreds of people out in bars drinking and eating - spending almost £7 on a pint for hours on end. I just didnt see a cost of living crisis at all (in Leeds at least)
If anything, the opposite.

Many people find themselves willing to accrue debt, live from paycheck to paycheck, or just have sufficient funds to enjoy life. However, relying solely on anecdotal evidence is not an effective method to accurately gauge the state of society.

Similarly, people who spend time volunteering in food shelters or similar organisations may have a contrasting perspective. However, these perspectives are also personal experiences and do not necessarily provide a comprehensive view of societal conditions.

 

[Guest2]

I think you are over simplifying? When you pay off that £38,731 at the end of the 3 years it won't have the same effect because of the compound interest calculating monthly on mortgages. So the sooner you get the payments paid off it starts to take effect more quickly.
I've just worked mine out using my spreadsheet I made ages ago. I'm 3 years into a 5 year fix at 1.89%. Current outstanding balance is obscene... well over 300k. 27 years left.
If I right now stop over paying £300 per month, and instead put it into a 5% saver for the final 24 months of this term, then pay that off at the end, I would be worse off by £681.
The final outstanding balance in 2 years time is lower by paying £300 off each month even with rates at 5%.

This, im sure the compound interest negates savings. Why i've dumping any spare money into paying off now - so the interest isnt ~£380 a month like when it started at 192k, its ~£220 a month at 114k

 

[SPG]

Well the Tory`s have left Labour a right old mess. (How easy is that going to be forgotten) the bank of England have been useless as well tbh.

 

[Zatoichi.uK]

I think you are over simplifying? When you pay off that £38,731 at the end of the 3 years it won't have the same effect because of the compound interest calculating monthly on mortgages. So the sooner you get the payments paid off it starts to take effect more quickly.
I've just worked mine out using my spreadsheet I made ages ago. I'm 3 years into a 5 year fix at 1.89%. Current outstanding balance is obscene... well over 300k. 27 years left.
If I right now stop over paying £300 per month, and instead put it into a 5% saver for the final 24 months of this term, then pay that off at the end, I would be worse off by £681.
The final outstanding balance in 2 years time is lower by paying £300 off each month even with rates at 5%.

If you pop the figures into the below and use the 'compare to savings' option how does it come out?

Mortgage Overpayment Calculator: Pay off your debt early?...

Mortgage Overpayment Calculator shows how much you can save by paying off your mortgage early - if your mortgage allows overpayments.

www.moneysavingexpert.com

 

[413x]

I think you are over simplifying? When you pay off that £38,731 at the end of the 3 years it won't have the same effect because of the compound interest calculating monthly on mortgages. So the sooner you get the payments paid off it starts to take effect more quickly.
I've just worked mine out using my spreadsheet I made ages ago. I'm 3 years into a 5 year fix at 1.89%. Current outstanding balance is obscene... well over 300k. 27 years left.
If I right now stop over paying £300 per month, and instead put it into a 5% saver for the final 24 months of this term, then pay that off at the end, I would be worse off by £681.
The final outstanding balance in 2 years time is lower by paying £300 off each month even with rates at 5%.

I think your spreadsheet is wrong.

There is no fancy maths needed. You can do a like for like calculation.

 

[Scam]

Money saving expert has a overpayment vs savings calculator, will tell you right there,

That's exactly what I'm quoting.

Yeah I have a spreadsheet where last time I checked, the difference between chucking mine all into a savings account vs over paying, was minimal at best. We have a massive mortgage though and only got on the ladder in 2020 on a 1.89% rate. I will work it out again to be sure today I think.

Thank you. Let me know, I do worry we've worked it out wrong but have done it multiple times separately, so I think not.

So after 3 years you would be £2038 better off by saving rather than overpaying.

Honestly, I'm not sure £2k is worth my time or effort over 3 years (or is the difference even £1400 in your example?), to administrate another account, to maybe encounter potential issues for locking money away etc. (not sure if you can get 5% on easy access? Havent looked). Afterall, we are still working on the house and might need funds.

But what do you mean by the amount of interest on the mortgage overpayment? The £600-odd. What is that? As stated above, by paying off earlier you're hitting the compound interest, and also reducing your term more quickly.

For us, we're fortunate that overpaying say £1k/month doesn't mean we won't be able to save a little bit as well.

 

[GordyR]

Good point... but surely it would have made more sense to increase the interest rate in larger segments rather than 0.25% and 0.5% increases every couple of months, rather than giving people time to think about what to do, causing them to panic buy on house extensions and home improvements etc . The amount of building work in our village has been crazy over the past six months.

There's plenty of differing opinions regarding what would have, in retrospect, been the best speed of rate rises; and personally I would have probably been a supporter of going a little further, sooner.

But there are a huge host of massive impacts on interconnected markets that are associated with rate rises, and from a Central Bank's perspective, it's about balancing these.

Raising them in massive jumps, very quickly, would have sudden huge impacts on GBP and bond markets, and would risk slamming our economy straight into a deeper than necessary recession, one which could have worse consequences than inflation itself.

By doing it more slowly, and in smaller increments, in theory you give the economy some time to adjust, and you allow the lag to catch up so that you get some visibility of the impact (or lack of) the raises are having; ultimately with the aim of becoming less likely to overshoot and cause a worse than necessary recession along with the inevitable fallout that follows.

 

[jaybee]

If you pop the figures into the below and use the 'compare to savings' option how does it come out?

Mortgage Overpayment Calculator: Pay off your debt early?...

Mortgage Overpayment Calculator shows how much you can save by paying off your mortgage early - if your mortgage allows overpayments.

www.moneysavingexpert.com

It says I would be better off saving, but that's over the entire 27 years left not the fixed period.

I think your spreadsheet is wrong.

There is no fancy maths needed. You can do a like for like calculation.

I'm concerned I'm working this out wrong now. Is it possible you've underestimated the power of compound interest though for people with high outstanding balances?

 

[Semple]

It kind of is that simple though.

If you overpay £1000 per month on a mortgage at 1.24% for 3 years (until 2026) you would better off putting that £1000 per month into a savings account at 5% (rough fixed term rates currently) for 3 years.

Most people aren't in that position anymore though, they're coming out of a low rate mortgage when savings over the last 4-5 years have only been like 1-2%.

Looking at my own numbers, we're overpaying our mortgage by 500 a month which over the last 6 months has an average monthly interest saving of £41.78, which works out roughly £500 a year. If I diverted that to a regular saver for example at 4.8% at end of year 1 that would only net me about £155.

For year 2 (as the interest reduces) I'd probably be at around £950 in savings. Whereas the regular saver would now be at £605.

It's only year 3 where savings start to overtake, but for me my fixed term will have ended by then.

 

[413x]

It says I would be better off saving, but that's over the entire 27 years left not the fixed period.


I'm concerned I'm working this out wrong now. Is it possible you've underestimated the power of compound interest though for people with high outstanding balances?

It compounds on both in the same way.