Borrowers Fail To Use Low Rates To Overpay

[cashinmattress]

Borrowers fail to use low rates to overpay

Homeowners are failing to use low interest rates to overpay their mortgage beyond regular repayment levels, a Bank of England report has shown.

Borrowers on existing tracker mortgages and most on standard variable rates have seen sizeable sums lopped off their monthly payments as the base rate was slashed down to 0.5%.

But there has been no significant change in the amount being paid off mortgages, according to the Bank of England's Trends in Lending report for June.

However, with regular repayments remaining fairly steady in the report, most borrowers appear to be keeping up with monthly payments and will be clearing debt quicker.

Council of Mortgage Lenders figures, also released today, show gross mortgage lending falling by 2% in May, with the number of people choosing to take advantage of low standard variable rates rather than a new mortgage deal contributing heavily to the dip.

Mortgages taken out for home purchases have risen steadily since the start of the year, but lenders expect net lending to turn negative this year, with more people paying back mortgage debt than taking it out.

Despite this forecast and the unprecedented opportunity for overpaying mortgages, most borrowers appear to be either using spare cash to help meet financial difficulties or salt away cash for rainy day.

But while this may benefit borrowers in the short-term and provide savings security for those fearing money troubles or redundancy, homeowners are missing out on the chance to shave years off their mortgage and save thousands in interest charges.

A homeowner with a £150,000 mortgage at 4% would clear their loan three years and four months early and save £13,517 in interest by overpaying just £2.50 a day extra, or £75 per month, according to analysis by mortgage broker London & Country.

Those on tracker rate mortgages have seen huge benefits as monthly payments fall in line with the base rate, which was cut in stages from 5% in October to a historic low of 0.5% in February. Standard variable rate borrowers have also seen hefty cuts.

Borrowers with tracker deals more than a year old have seen the biggest cuts in repayments, as some tracked below the base rate and lenders such as Cheltenham & Gloucester have homeowners paying 0% interest.

The fall in standard variable rates has seen a large proportion of homeowners coming to the end of deals opt to go onto their lenders' reversionary rate, as this is cheaper than taking on a new fixed or tracker deal.

Combined with lenders demanding deposits of at least 25% for the best deals, this has contributed to gross mortgage lending of £10.3bn in May being 58% lower than a year earlier, according to the Council of Mortgage Lenders.

The Bank of England report said: 'Falls in house prices are also likely to have contributed to low remortgaging activity as some households will no longer have sufficient equity to qualify for a new mortgage with another lender at a more competitive interest rate.'

Those taking the plunge into the property market are also finding themselves frustrated by lenders' failure to swiftly process mortgage applications and regularly valuing properties at below the agreed selling price.

The report said: 'Difficulties in valuing properties in present market conditions can lead to delays in the mortgage approval process. 'Some lenders have reported that this has contributed to breaks in housing transaction chains, so that approved mortgages are more than usually prone to cancellation before lending is advanced.'

The Bank of England said mortgage availability had improved and the overall average rate on new borrowing was steady at about 4%. However, these rates are only available to borrowers with larger deposits and the number of mortgages at 90% plus remains a tenth of those available a year ago, according to financial information specialist Moneyfacts.

Do we need any more proof that the British taxpayer is a complete idiot? They don't understand the concept of debt, and do not understand debt interest.

Yes, we are a nation of greedy, selfish dummies who can't even operate within a budget because of some twisted sense of second hand boomer self entitlement.

Idiot nation!

[CokeSnortingTory]

Why pay off your mortgage when you can get 2K off a new Hyundai?

[bobthe~]

Borrowers fail to use low rates to overpay

Do we need any more proof that the British taxpayer is a complete idiot? They don't understand the concept of debt, and do not understand debt interest.

Yes, we are a nation of greedy, selfish dummies who can't even operate within a budget because of some twisted sense of second hand boomer self entitlement.

Idiot nation!

I know what you are saying but paying down debt doesn't always make sense.

1. If you were on 0.25% over base rate and had 20k that you could get get 4% on a 1 year fixed bond, you would be able to pay off more on your mortgage after 1 year.

2. If you cut money off your mortgage instead of saving it and you get made unemployed, you will have no money to survive on, regardless of how much less your mortgage payments are.

3. If you are in negative Equity then paying down your mortgage doesn't do you many favours if you get repossessed.

Having said that, if it was me I would probably be paying it back. It has to be repaid eventually, so why not now? Once taxes and IRs go up, it would be a nice cushion.

[Georgia O'Keeffe]

I know what you are saying but paying down debt doesn't always make sense.

1. If you were on 0.25% over base rate and had 20k that you could get get 4% on a 1 year fixed bond, you would be able to pay off more on your mortgage after 1 year.

2. If you cut money off your mortgage instead of saving it and you get made unemployed, you will have no money to survive on, regardless of how much less your mortgage payments are.

3. If you are in negative Equity then paying down your mortgage doesn't do you many favours if you get repossessed.

Having said that, if it was me I would probably be paying it back. It has to be repaid eventually, so why not now? Once taxes and IRs go up, it would be a nice cushion.

also theres a part of me that still holds hope out that the British public arent complete financial feckwits so maybe some are clearing credit card debts at 25% APR

[interestrateripoff]

Not benefited from the base rate, but trying to pay something off every month to try and give ourselves some cushion if things go wrong.

Is other debt being paid off?

Are these people just keeping there heads above water? Who many on these low base rates have seen someone in the household lose a job? The low base rate could be keeping many from defaulting.

There is another alarming prospect that the money people who have got from the base rate cut are now keeping the economy afloat by spending.

Alternative is the money being saved?

The assumption that people are stupid by not over paying could be a very misleading statement, I don't think you can draw that conclusion from the above article.

[ParticleMan]

What's happened to savings balances over the same timeframe?

(I call this the "it's suboptimal to accelerate debt repayment when incomes are crushed and employment outlooks dire" conundrum)

(incidentally, if borrowers had used the low rates to retire debt, the QE program would be a failure per term; low rates are intended to increase liquidity hence otherwise marginal activity, not reduce broad leverage hence monetary velocity)

Edited June 18, 2009 by ParticleMan

[scottbeard]

If you cut money off your mortgage instead of saving it and you get made unemployed, you will have no money to survive on, regardless of how much less your mortgage payments are.

I am currently overpaying on my mortgage, and the lender will let you "borrow back" any overpayments made this way if they are needed, and will also allow a three month "mortgage holiday" (basically eating into those overpayments).

So I think it makes sense for me to make overpayments, as I could get them back if I lost my job, but if I keep my job my mortgage is paid off earlier.

[Pytyr]

2. If you cut money off your mortgage instead of saving it and you get made unemployed, you will have no money to survive on, regardless of how much less your mortgage payments are.

If you save instead of paying off your mortgage and you get made unemployed, you will get no benfits until your savings have been reduced to (I think) £6k. No-one will look at your mortgage and (again, I think) they will even pay your interest after a certain length of time (caveat - it's been a long time since I had anything to do with the benefits system so I'm not up to date with the various monies on offer!)

SUXOR!

[ParticleMan]

I am currently overpaying on my mortgage, and the lender will let you "borrow back" any overpayments made this way if they are needed, and will also allow a three month "mortgage holiday" (basically eating into those overpayments).

Does the lender reserve the right to reassess your property's value?

[eightiesgirly]

Maybe they are using the money to pay down other debts at higher interest rates such as credit cards. I think the recent figures show credit card balances reducing.

[this_prisoner_is_opting_out]

I am currently overpaying on my mortgage, and the lender will let you "borrow back" any overpayments made this way if they are needed,

I wouldn't bet on the reality of that should you *need* that option. Wasn't it said here at the weekend that those "one" type accounts are being hammered?

[scottbeard]

Does the lender reserve the right to reassess your property's value?

My understanding is that you can always borrow back the overpayments, however "Terms & Conditions apply" so perhaps if you are in negative equity you can't do it. (Nationwide website is being v slow for me so i can't track them down)

[Flash Gordon]

Do we need any more proof that the British taxpayer is a complete idiot? They don't understand the concept of debt, and do not understand debt interest.

Yes, we are a nation of greedy, selfish dummies who can't even operate within a budget because of some twisted sense of second hand boomer self entitlement.

Idiot nation!

It makes more sense for people without redundancy insurance or a decent rainy day fund to use the extra money to increase their savings rather than overpaying the mortgage.

[BigBlue]

Maybe they are using the money to pay down other debts at higher interest rates such as credit cards. I think the recent figures show credit card balances reducing.

If they're anything like my girlfriends friends, they aren't paying anything.

This is a couple who, 2 years ago, bought a small place for £130k, with 125% mortgage (the extra 25% was to pay off previous debts, I believe) from NR. She is a new-ish teacher and has had a couple of decent pay rises due to re-grading over the past 2 years. Husband has a better paid job now than when they took out mortgage, so they could realistically be reducing that debt while the going is good - girlfriend says that they have an extra £1000 / month coming in at the moment.

GF reported to me that she suggested to her friend that maybe they could pay extra on the mortgage whilst they have the opportunity. Friend said ' what's the point, if I do that then that £1000 isn't benefiting me at all, it's just gone straight away. Might as well spend it while we have it, as long as we can keep up the mortgage payments then we'll be fine.' I think the latest plan is an expensive holiday with her mum.

They seem to have forgotten having to sell their previous house and move in with her mum as they couldn't pay the mortgage.

[cashinmattress]

If they're anything like my girlfriends friends, they aren't paying anything.

This is a couple who, 2 years ago, bought a small place for £130k, with 125% mortgage (the extra 25% was to pay off previous debts, I believe) from NR. She is a new-ish teacher and has had a couple of decent pay rises due to re-grading over the past 2 years. Husband has a better paid job now than when they took out mortgage, so they could realistically be reducing that debt while the going is good - girlfriend says that they have an extra £1000 / month coming in at the moment.

GF reported to me that she suggested to her friend that maybe they could pay extra on the mortgage whilst they have the opportunity. Friend said ' what's the point, if I do that then that £1000 isn't benefiting me at all, it's just gone straight away. Might as well spend it while we have it, as long as we can keep up the mortgage payments then we'll be fine.' I think the latest plan is an expensive holiday with her mum.

They seem to have forgotten having to sell their previous house and move in with her mum as they couldn't pay the mortgage.

Damn straight. More than 3/4 of the folks I know on low trackers are spending the differential on cheap tat.

Fvcking idiots.

[R K]

Makes sense. Borrow when it's cheap, repay when it's expensive.

You'd have to be pretty stupid to repay virtually 'free' money in the middle of the worst recession in 100 years.

[Flash Gordon]

Radical cuts in interest rates by the Bank of England have yielded an average 25 per cent improvement in the disposable income of households with a mortgage. Research from Ernst & Young suggests that the average household now has more than £200 a month more left over after fixed monthly bills than it enjoyed last year. The researchers say that the improvement has been "driven overwhelmingly" by lower mortgage repayments.

Since last autumn, the Bank of England has cut Bank Rate from 5 per cent to 0.5 per cent, the lowest in its 315-year history. The savings for those with tracker mortgages have sometimes been spectacular, and other borrowers have also benefited. A decline in other costs such as petrol, electricity and gas has also helped those still in work.

Jason Gordon, retail director at Ernst & Young, commented: "Even though we're still in recession, many UK householders who have not been hit by unemployment have experienced a dramatic upturn in their monthly budgets over the last year."

However, he added, "many consumers are using their increased monthly spending power to repair savings balances and pay off credit cards and other debts. These gains are certainly not being spent freely on the high street."

Good news that people are being sensible and increasing their savings balance.

http://www.independent.co.uk/news/business...nt-1709003.html

[Godley]

I know what you are saying but paying down debt doesn't always make sense.

1. If you were on 0.25% over base rate and had 20k that you could get get 4% on a 1 year fixed bond, you would be able to pay off more on your mortgage after 1 year.

2. If you cut money off your mortgage instead of saving it and you get made unemployed, you will have no money to survive on, regardless of how much less your mortgage payments are.

3. If you are in negative Equity then paying down your mortgage doesn't do you many favours if you get repossessed.

Having said that, if it was me I would probably be paying it back. It has to be repaid eventually, so why not now? Once taxes and IRs go up, it would be a nice cushion.

I agree, but I suspect that the average British mortgage holder hasn't considered any of the above when deciding what to do with the extra cash. More like it will be being spunked up the wall on tat and holidays to costa del chav.

[tpbeta]

You'd have to be pretty stupid to repay virtually 'free' money in the middle of the worst recession in 100 years.

Unless you think house prices are going to crash, in which case selling and repaying your mortgage in order to rent would be logical.

My mortgage provider automatically raised my capital repayment when rates dropped. Suspect that's happening a lot - especially where people are on older base rate trackers. Banks want to get you off the books as fast as possible.

[No Teacher - No Guru]

A lot of folks I know with interest only mortgages have used the money saved in interest payments to go on great holidays rather than reduce their debts.

I am boringly overpaying my repayment mortgage.

[LondonToManchester]

As someone with multiple mortgages and large savings, I'm not overpaying. My reason for not doing so is that I don't know what the future holds. If I do lose my job I want a cushion! Plus I can always overpay at a later date.

[anonguest]

If they're anything like my girlfriends friends, they aren't paying anything.

This is a couple who, 2 years ago, bought a small place for £130k, with 125% mortgage (the extra 25% was to pay off previous debts, I believe) from NR. She is a new-ish teacher and has had a couple of decent pay rises due to re-grading over the past 2 years. Husband has a better paid job now than when they took out mortgage, so they could realistically be reducing that debt while the going is good - girlfriend says that they have an extra £1000 / month coming in at the moment.

GF reported to me that she suggested to her friend that maybe they could pay extra on the mortgage whilst they have the opportunity. Friend said ' what's the point, if I do that then that £1000 isn't benefiting me at all, it's just gone straight away. Might as well spend it while we have it, as long as we can keep up the mortgage payments then we'll be fine.' I think the latest plan is an expensive holiday with her mum.

They seem to have forgotten having to sell their previous house and move in with her mum as they couldn't pay the mortgage.

Seems to nicely summarise the younger "Want now, Live for today" generational attitudes. The concept of, even modest, personal sacrifice today to (usually) enjoy more tomorrow has almost been lost.

In the xtreme case here, yes they are foolish not recognising that, in the long term historical scheme of things, that rates are abnormally low - and should be taken advantage of to pay down the debt a little earlier than normal.

That said, at the end of the day, each person must make judgemnts based on their own personal circumstances as to how much early repayment effort one makes, e.g someone diagnosed with some ailment, after buying a house, that may likely result in dramatically reduced life expectancy is reasonably justified in enjoying more of the fruits of their labours today over paying off a mortgage they may not live long enough to enjoy the benefits of.

[General Melchett]

Indeed. If, as suggested in the article, and elsewhere on here, they are either paying off high interest debts (loans, credit cards), or are salting it away in some dodgy high interest Nigerian bank, that makes perfect sense. Although the salters-away should check the small print on their mortgage terms, as it may limit what they can overpay in a year, which may matter if interest rates start to get priced appropriately for risk/inflation in a year or two.

If they are splurging it on a new Fiat 500 or a holiday in Magaluf then they will reap what they sow.*

*Except those bastards who make others reap what they have sown by going bankrupt.

[pathfinder]

When did the interest only mortgage become mainstream. A few people i know started off with IO 4 years ago, the game plan based upon wage inflation and property gains in 25 years time. The last thing these people are thinking of is overpaying. They are not very happy atm.

See now im thinking why are the average total savings not going to the moon. Say someone has been on IO for 4 years there should be around 30k worth of savings no? This should effect the stats even on a small scale.

And then there is the Governments system where savings get used up if your out of work. Brilliant but what happens to the IO mortgage holder. 5-8 years of life on hold? Either IO should be removed or the government should ignore savings in regard to benefits and pensions.

Perhaps houses are full of cash hidden away atm ^^.

[No Teacher - No Guru]

When did the interest only mortgage become mainstream. A few people i know started off with IO 4 years ago, the game plan based upon wage inflation and property gains in 25 years time. The last thing these people are thinking of is overpaying. They are not very happy atm.

See now im thinking why are the average total savings not going to the moon. Say someone has been on IO for 4 years there should be around 30k worth of savings no? This should effect the stats even on a small scale.

And then there is the Governments system where savings get used up if your out of work. Brilliant but what happens to the IO mortgage holder. 5-8 years of life on hold? Either IO should be removed or the government should ignore savings in regard to benefits and pensions.

Perhaps houses are full of cash hidden away atm ^^.

Most I/O mortgage holders I know aren't saving and only took out an I/O mortgage as they couldn't afford a biggish house on a repayment mortgage.

I think some were planning on switching to repayment after ten years or so, or using bonuses to reduce the principal.

Others have not really thought it through and are still caning their credit cards, getting additional loans, etc.