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Mortgage Interest Rates

Discussion in 'Home and Garden' started by Psycho Sonny, 11 Mar 2020.

  1. Jokester

    Don

    Joined: 7 Aug 2003

    Posts: 42,451

    Location: Aberdeenshire

    Not sure of your point here, it doesn't matter if it's a £1 or £100k, if the cost to borrow that is less than your returns from just investing that cash instead, it's better to invest it and just not pay off your mortgage. There is a risk here clearly, but it's not like endowment type mortgages, where people were taking out the mortgage and starting with zero investments and hoping to be able to invest enough over the term to then have made enough cash back when the final repayment was due and coming up substantially short.
     
  2. Psycho Sonny

    Suspended

    Joined: 21 Jun 2006

    Posts: 38,365

    I don't think Simon or DLockers get how loans work.

    The interest rate is 1.24%

    It doesn't matter if I'm paying the bank back £10 or £10,000,000.

    What matters is I'm being charged 1.24%.


    Now I used £500 as an example. Let's say it's £5k a month as another example.

    I could pay the bank £5k per month and I save 1.24% on interest on each 5k repayment made per year.

    Alternatively let's say I take that £5k per month and make 12% on it in a single year. I will be making 10%+ more than I will by paying the mortgage would have.

    As for where can I make 5%. Even the worst investment right now is paying 5.4%. Zopa fyi @Simon which is peer to peer lending. I won't be investing in that I can assure you. It will be going elsewhere. If you want to know in the past 3 weeks alone I've made over 4%. But if all you want to make is 5% plough your money into Zopa.

    Obviously investments can go up or down blah, blah, blah. This isn't my first rodeo. I started in 2018 and let's just say the money I've made in the past 3 years is why I've decided to take this approach.

    I do have money in Zopa fyi but my other investments are making far better returns. I've diversified to reduce risk.
     
    Last edited: 4 Apr 2021
  3. Psycho Sonny

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    Joined: 21 Jun 2006

    Posts: 38,365

    Why?

    All I'd have to make is greater than 1.24%.

    I'm being charged 1.24%. if I made 2% I'm still up. If I make 1.3% I'm still up.

    A mortgage is no different to a loan. All I need to do is beat the rate of interest which is a measly 1.24%.

    Let's say my investments only make 1.24% year on year. I simply break even.

    Even Warren buffet Berkshire Hathaway has made 12% on average over the past 20 years. So if I invest in his company and it follows even half the performance it's had over the past 2 decades I'm laughing.
     
  4. Simon

    Capodecina

    Joined: 21 Oct 2002

    Posts: 24,380

    Location: Berks / Moscow

    That right. Your personal Situation means I don’t understand how loans work.

    Again you seem to go off and argue something that no one is questioning with far too much text but to say you are guaranteed 5-7% like anyone can do it is just wrong.

    How have you made 4% in 3 weeks? You just said you can make 5.4% on ‘the worst investment’ but you won’t be using it ? Try and save your keyboard and answer that succinctly.
     
  5. Simon

    Capodecina

    Joined: 21 Oct 2002

    Posts: 24,380

    Location: Berks / Moscow

    Past performance doesn’t equal future
     
  6. Psycho Sonny

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    Joined: 21 Jun 2006

    Posts: 38,365

    I'm not talking about Zopa. I'm talking about another investment I made in the stock market.

    I bought shares. They are now worth 4.6% more than they were 3 weeks ago.

    They do however go up and down daily. If I sold it tomorrow I'd be up 4.6% on my investment.

    Is that succinct enough?
     
  7. Psycho Sonny

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    Joined: 21 Jun 2006

    Posts: 38,365

    You don't say do you. Brb selling all my stocks.
     
  8. Simon

    Capodecina

    Joined: 21 Oct 2002

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    Location: Berks / Moscow

    Yes I miss read. Some people don’t want to gamble on the stock market. But I would agree overpaying mortgages like it’s some life goal is something I don’t understand either.
     
  9. Simon

    Capodecina

    Joined: 21 Oct 2002

    Posts: 24,380

    Location: Berks / Moscow

    It’s funny cause I’m doing the exact same thing as you. But maybe I don’t assume, and post, everyone is stupid like you do ?
     
  10. Psycho Sonny

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    Joined: 21 Jun 2006

    Posts: 38,365

    Well you can play is safe and invest on Zopa then for a paltry 5.4%.

    It's making me around that amount currently from past investment into it.

    Personally I don't rate it but 5.4% is better than any bank account

    Edit just checked my Zopa account and it's reporting 5.46% as it's current performance. Even that is much better than paying the mortgage off quickly.
     
    Last edited: 4 Apr 2021
  11. DanTheMan

    Mobster

    Joined: 11 Oct 2005

    Posts: 4,578

    Location: Manchester, UK

    I made a rough estimate of £245k outstanding if the mortgage was ~£1400 over 16 years.

    Using a mortgage amortisation table, after 5 years paying £1400 a month at 1.24% on a 16 year term, there will be ~£173k remaining on the mortgage balance. Doing the same on a 32 year term, paying ~£780 per month, the remaining balance will be ~£213k after 5 years.

    So you've got to make roughly £40k using the ~£620 you're not paying on mortgage payments to break even.

    Using a compound interest calculator, investing that £620 per month, you'd need roughly a 2.5% return to earn £41k over 5 years, assuming inflation at 1% and only ever using the £620, not increasing it with inflation. So lower than my original estimate but not 1.24%

    (Originally I was using your figures of ~£1400 for a 16 year term and £900 for a 32 year term. Having checked a mortgage calculator, 32 years is much less so more to invest monthly, bringing the returns needed to break even much lower.)

    Obviously 2.5% is relatively easy to get currently and inflation is way below 1% so it's not a big deal, it's just highlighting that its not always a cut and dry choice.

    Even at 5% returns, it's a 'profit' of £60 a month over the 5 years. A nice amount I agree, but many people would be happy to pay that for the peace of mind of not having to worry about managing a portfolio of investments or changes in the economy that would negatively impact them.
     
  12. Psycho Sonny

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    I don't see why inflation matters at all.

    I owe the bank money it doesn't matter if inflation goes up by 10% per year I still only owe them the same amount of money plus the interest. All I need to do is beat the interest.

    All inflation does is devalue money and increase the price of things. It doesn't effect what I pay to the bank or how much I need to make to beat the interest rate at the bank.

    Yes if I had say £200k in the bank and it was gaining less than inflation I'm losing money in reality but the goal is to simply beat the interest so it's financially better than having a shorter term mortgage. If I also beat inflation that's a bonus. This money would have been essentially lost to me otherwise as the bank would have taken it earlier I've just delayed paying it to them at a cost of 1.24% per year.

    The alternative is I pay the bank and I pay 1.24% less interest on the amounts paid to them. So all I need to do is beat 1.24% on a yearly basis for it to have been a better deal.

    As for the hassle of an investment portfolio I already have one now I'm managing. All this is going to do in a few months time when I switch to the new mortgage is lower my monthly payment to the bank and I'll manually increase the standing order (direct debit) to the investments by the same amount or more as I like round numbers.

    The alternative is I don't invest it and just stick with the short term and it reduced the amount I owe extra by 1.24% per payment made to them. All I need to do is make 1.24% within a year of the investment to break even and then make another 1.24% the following year and repeat for the 5 year term.

    Inflation doesn't matter at all. It's the same money I'd be paying them that's going to be invested now.
     
  13. Judgeneo

    Capodecina

    Joined: 15 May 2010

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    Location: Out of Coventry

    Sonny is right with his numbers.

    The only thing that he isn't taking into account is that overpaying the mortgage is more of a hedge against future interest rate rises that it is a way of getting returns on your payments.

    You should both overpay your mortgage if able to do so, and invest your money.

    Longer term, the rule of thumb financially is that you shouldn't have more than 20% of your investment s in any one asset class, and no more than 5% in any one asset. Investments in this case includes pensions, your home, ISA and crypto.
     
  14. Psycho Sonny

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    I've locked in the deal for 5 years and that was one of the main consideration for going with a 5 year deal. The 10 year deal was awful iirc it was 2%.

    Let's say in 5 years time interest rates go up to 10% that is no big deal. I simply sell the investments and plough the cash from them into the mortgage.

    I can pay as much as I want to with no ERC once my low interest deal is over.

    If they don't I'll make sure I lock in another good deal but I'll need to see what the deals obviously are in 5 years time.

    Again it is something I have considered and I don't think it will be that bad plus I have LTV below 60% anyway so I have the best rates available my lender offers.

    I agree though those with high LTV would be taking a much bigger risk than I am. I don't see much risk in what I'm doing. The only thing I can see that would make it fail is a crash similar or worse to 2008 but I think we have seen the worse that could happen last year in march. The vaccine will sort this blip out unless the virus mutates beyond a vaccines capabilities. If that does happen then I'll have much more important things to worry about than money tbh.
     
  15. DanTheMan

    Mobster

    Joined: 11 Oct 2005

    Posts: 4,578

    Location: Manchester, UK

    Yeah my calculations were off as I didn't use the exact difference between a 16 year term and 32 year term and I didn't factor in inflation working both ways.

    As you say, it's a bigger potential risk if you have a lot more outstanding and a worse LTV. If I owed £300k+ I'd probably be more inclined to bring down the mortgage balance sooner.

    I think I was looking at it with a lack of financial discipline too. I could see many people not always investing the full amount difference and spending it instead.

    There's definitely a big difference between the logical choice and the realistic choice for many of us though. Surely most people have more than 20% invested monthly in their home and certainly their home makes up more than 5% of their investment portfolio long term.

    If you have a £300k home, chances are your monthly mortgage payments make up way more than 20% of your investable income? If you're mortgage free, surely the value of your property makes up way more than 5% of total investments?

    Unless I've completely misunderstood.
     
  16. john_smith

    Gangster

    Joined: 19 Oct 2010

    Posts: 325

    Interesting thread regarding the investments.

    I take a different view and want the house bought and paid for ASAP with minimal to no risk so I can retire sooner and enjoy the finer things in life.
     
  17. 413x

    Capodecina

    Joined: 13 Jan 2010

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    Location: Llaneirwg

    I'd have been a lot better off if I didn't buy my house when I did.
    If I had put all that deposit on stock market/btc I'd have a 60k deposit rather than 40k. But this was an unprecedented time. And that's being cautious!

    But it isn't always better to pay off mortgage.

    For example my stocks have 2x in last 12 months.
    My btc has 3-4x
    I piled everything into stocks and crypto. Unfortunately starting from 2k after the house purchase has limited my gains.

    If I had put that into paying off mortgage I'd be well down. In these ultra low rate times its better to pay back no extra. If you were really brave you'd be on a repayment only and have even more to invest.

    Paying off extra off the mortgage is crazy right now.

    To put numbers on this.
    I owe 217k on a 262k house. At no point have I overpaid on the 30 year term.
    It doesn't really matter your ltv. It's sti better in every case (at the moment) to invest rather than pay it off.

    If I overpaid everything to date rather than invest I expect I could have gotten that down to 210k
    If I took all my investments out now and paid it off I'd be down to 197.
    13k is the difference in one year.
     
    Last edited: 6 Apr 2021
  18. IvanDobskey

    Sgarrista

    Joined: 2 Feb 2010

    Posts: 9,183

    Location: East Midlands

    I'm very much of the opinion you should pay off as much of your mortgage as early as possible. It saves a lot of money in the long term and the sooner its paid off the better. I'm keeping up with the max overpayments on ours. 66k left to pay and want that paid for within ten years.
     
  19. Martynt74

    Capodecina

    Joined: 20 Feb 2004

    Posts: 17,654

    Location: Higher Walton

    That only applies if you otherwise would spend the "overpayments" on general stuff. If you pile it into savings at >2% or whatever your mortgage rate is then you're worse off. Obviously the issue is it takes willpower and can't just say "Ooooh i have £20k in savings. Lets go to the Maldives for a month"
     
  20. 413x

    Capodecina

    Joined: 13 Jan 2010

    Posts: 23,482

    Location: Llaneirwg

    It only saves money if you don't invest.
    If you invest at a rate above your mortgage rate you should invest rather than pay off.

    At the moment that's about 2 percent. You're near enough guaranteed to get above 2 percent somewhere .