Mortgage Interest Rates

[Psycho Sonny]

The outstanding balance is £155k so hardly anything off the mortgage and mainly just interest.

LTV is circa 81.6%

Try and pay off another 1.6% if you can before you remortgage.

That's 1.6% of £190k so roughly £3k using rough maths puts you into the next band with better rates then available to you.

 

[Psycho Sonny]

Disagree with your maths as per my above post. Feel free to prove me wrong but it's closer to 90% if no re-evaluation is done on house price.

I based it on the £190k he said his home was now worth.

So yeah it depends on what the lender values it at. It's not without the realms of possibility though that it's worth £17k more after 2 years.

 

[Psycho Sonny]

Just locked in for 5 years at 1.24%. Currently paying 2.84% so interest will be literally halved and then some in 2 months time. Decided to stick with same lender to avoid all the hassle of switching and that was the best deal they had after running the numbers all day long on the options available.

My outstanding term was 16 years (original mortgage 21 years as a FTB) decided at these rates best to extend to 32 years. I won't be able to borrow money for cheaper than this ever again in my lifetime so best to rinse it whilst I can.

 

[Psycho Sonny]

won’t that make the overall cost roughly the same?

Only if I don't make any money off the reduced payment amount.

Let's say on a 16 year term my monthly payment is circa £1400. On the 32 year term my monthly payment is circa £900.

If I take the £500 I now have extra in my bank account (because my term has doubled) and invest it else where I can easily make circa 5-7% on it year on year compounded it doesn't really matter if I pay an extra 16 years worth of interest at 1.24% because the £500 is making much more than paying the mortgage would and the compound effect means that in 32 years time it will equal £475k with a modest 5% year on year. That is versus the £192K I would have paid to pay it off 16 years earlier. And then had say £1400 per month to invest over 16 years equaling £417k at the same 5%. I'm £50k better off so long as I stick with the plan and that's if it's only a measly 5%. I plan on making close to at least double that.

Paying 1.24% interest is nothing. So rather than overpayments on the mortgage. Investments which return far more than 1.24% mean although I pay more interest on the home. I am able to offset that through investment at least 5 times over.

 

[Psycho Sonny]

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.

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.

 

[Psycho Sonny]

From some basic estimates, it's roughly 5.5% you'd have to earn year on year if you invested the extra £500 a month instead of shortening the mortgage term (using 1.5% yearly inflation). Well within the realms of possibility.

The biggest issue is that you're fixed for 5 years, not the whole term, so you've got to be pretty optimistic that after the initial 5 years that interest rates haven't gone up hugely and you end up having to fix in at a higher rate with a higher outstanding balance.

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.

 

[Psycho Sonny]

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 on a product that returns 5% a year ? Try and save your keyboard and answer that succinctly.

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?

 

[Psycho Sonny]

Past performance doesn’t equal future

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

 

[Psycho Sonny]

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.

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.

 

[Psycho Sonny]

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.

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.

 

[Psycho Sonny]

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.

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.

 

[Psycho Sonny]

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.

I could pay mine off tomorrow if I wanted to. I'd rather retire earlier and have several sources of passive income or keep working with several sources of passive income and live in the best area possible.

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.

I have circa 40% left to pay and I was a first time buyer 5 years ago. So I've managed to triple the equity within 5 years thanks to substantial overpayments from investments into commodities. Rather than reinvesting I decided to play it safe since my interest was and still is for the next few months 2.84%.

The mortgage is now so cheap and insignificant my family would be financially secure even with the loss of a major source of income. That's why I'm now more averse to risk and decided to go with this approach.

I'd say this though investing will save you far more money than overpaying a mortgage will at today's rates.

Stocks and BTC, especially BTC, can go down though. you have your £60k deposit....you find a house and then boom, deposit drops off a cliff. Not ideal.

Is there an easy, safe, risk free, fsa backed savings in existance that offers a good return? Outside of premium bonds.

Bonds are a terrible investment and not risk free either.

 

[Psycho Sonny]

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"

This is obviously a huge risk for those with little willpower.

You should therefore always have seperate savings or slush fund for such purposes.

 

[Psycho Sonny]

I guess it all depends on what your money will be doing if you don't use it for overpayments. Mine would just be sitting in my current account doing nothing. So it makes sense for me to overpay. Since buying our current house, I've managed to get the monthly payments down from £460 to £370. So an extra £90 a month in our pockets.

It's not doing nothing though in that situation it's providing some security in terms of should a bill bill arise from a car repair or roof leak or boiler exploding.

However that money is at the mercy of inflation and being devalued constantly.

 

[Psycho Sonny]

for a complete novice where would you start if looking for a low risk +5% fund?

thank you.

Vanguard

Lifestrategy 100% if you believe in UK economy

VWRL to invest into the world economy

S+P 500 to invest into US economy

There is also emerging markets if you believe they will do better than the above.

Japanese and Asian funds too.

I'd say this though. Warren Buffet recommends the S+P 500 make of that what you will but if he backs it then it's not a terrible choice.

 

[Psycho Sonny]

Personally, I'm not a risk taker. I'll stick to chipping away at my mortgage with overpayments with the ultimate aim of having our house paid for within the next ten years.

Vs investing and having your current home paid for by the end and the next upgrade free of charge thanks to profits from said investments.

I'm currently up over 8% for the month of March alone. I don't expect to do as well in April but let's see.

For example if I had overpaid my mortgage by 100k I would have saved £2840 over the course of a year in interest. If I had that same amount in my current portfolio I would have made over £8k last month.

That's 8k in a month Vs 2800 in a year.

Overpaying the mortgage just isn't that smart a move with rates so low. My current rate is 2.84% it will be moving to 1.24% where overpaying the mortgage makes even less sense.

So it would be £8k in a month Vs £1200 in a year. I just sold 2 of my investments and put the cash elsewhere now. But there are stocks which have made 99% since the beginning of the year I have small amounts in. Finding those types of stocks isn't easy though and extremely high risk for those high rewards.

It's actually low risk if you are looking to just beat current mortgage rates. Just plough it all into VWRL on vanguard.

 

[Psycho Sonny]

You’d need to factor in taxes and broker fees on that money also?

Not if it's in an ISA wrapper. Plus you get allowances which renew every year.

To use up an allowance all you need to do is sell your investment. Park that money for 30 days. Then on the following day re-buy it. You have to wait to the 30 days though otherwise it's not classes as selling it.

Or you can alternatively just sell it and invest into something else. Once the gain is realised is when the tax is due. So if you sell yearly and invest into something else and it's below the allowance for that year you pay nothing.

Technically you can do that within an ISA and you have an unlimited tax free allowance. So if you open a T212 ISA account and only put £20k cash into it per year then whatever you make is completely tax free.

That includes if you tripled your investment sold it and then invested in something else that doubled all within the same year. Just as a theoretical example.

So no if you are smart you can work the system to pay zero taxes.

I'd therefore personally say use your ISA for a T212 account and then use your tax free allowances up on your vanguard account which isn't in an ISA where profits are likely to be lower / less.

For example the best you can hope for with vanguard realistically is 10% a year. Whereas with T212 if you invest in the right companies at the right times you can realistically double or triple your money within a few months problem is I don't put all my eggs in one basket so I will have my investments spread out over 10-20 companies and one will hit 100% return over 3 months the others won't have hit anywhere near that bringing the average down considerably.

But if you did gamble it all on a lower number and one or two hit it big time it's a much better use of the ISA system.