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Why You Should Pay Down Debt Even If Bank Rate Remains Frozen

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News that 61 economists polled by Reuters say the Bank of England should not raise interest rates today reminds me of the City dealing room definition of an economist: a man who knows 69 different ways of making love but doesn’t know any girls.

If, as seems likely, Bank of England base rate remains stuck at 0.5 per cent many savers – who outnumber borrowers by six to one – may despair of ever getting a decent return on their money. Very few bonds, deposits or individual savings accounts (ISAs) are paying enough to match inflation.

But savers who also have a mortgage – or any other form of outstanding credit – have a simple means of obtaining a healthy risk-free, tax-free return by discovering the joy of early debt repayment.

Debt is risky at the best of times but downright dangerous in a recession. Compound interest can be a cruel taskmaster even when a good salary goes into your current account every month. However, excessive debt might cost many people the roof over their head if imminent Government spending cuts cause unemployment to rise.

So it makes sense to consider paying down debt now rather than waiting to see whether or not we are heading into a double-dip recession. With interest rates near historic lows, most homebuyers are paying much less for their mortgage than they were a few years ago and so should have some cash to spare.

While there will always be a temptation for this to slip between your fingers in the form of extra consumer spending – and many economists say this is where the money should go to stimulate demand – anyone who remembers the housing slump of the early 1990s will prefer to safeguard their own family home, rather than set out to reflate the economy. Most of us would rather be solvent in a bankrupt country than bankrupt in a solvent one.

Better still, paying down debt ahead of schedule delivers a higher risk-free, tax-free return on your money than any savings or investment can offer. The reason is that early debt repayment avoids future interest costs and makes compounding work in your favour.

As the attached table demonstrates, the effects on substantial debts – such as mortgages – can be substantial. Take, for example, a £100,000 typical 25-year homeloan with a standard variable rate of 3.5pc.

If an extra £100 a month is paid, this debt will be cleared nearly six years ahead of schedule and more than £13,000 of interest costs will be avoided, freeing up this money to be spent on whatever you like. If the monthly overpayment is pushed up to £200 a month, then the home is mortgage-free nearly a decade sooner and more than £20,000 of interest costs are avoided.

Before anyone says those overpayments are unrealistic, it’s worth noting what Lloyds Banking Group – Britain’s biggest mortgage lender since it rescued Halifax – has to say. It reckons people with average earnings now spend less than a third of take-home pay on their mortgage compared to nearly half of their income three years ago.

Stephen Noakes, a director of Lloyds, said; “The average mortgage repayment has dropped by around £188 per month. And those on tracker mortgages have done even better – on average they are just over £400 a month better off.

“Customers have a choice to make to gain maximum advantage from the extra cash in their pocket. A number of them are not banking the reduction in their interest payments but are using that to pay down their mortgage. Not only can it help customers shave interest off their mortgage, it also means less of a payment shock should interest rates begin to move back up.”

Beware early repayment penalties on fixed rate and other discounted deals but most mortgages allow up to 10pc of the outstanding balance to be repaid each year without penalty and Lloyds recently doubled this limit to 20pc.

I think that says a lot about Lloyds financial position, they want the money back.

If you already have some savings built up to cover losing your job, then paying down your debt is going to give you huge returns which you won't get saving money in a bank.

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I think that says a lot about Lloyds financial position, they want the money back.

If you already have some savings built up to cover losing your job, then paying down your debt is going to give you huge returns which you won't get saving money in a bank.

Good, basic, common-sense economic advice applicable to most people with debt.

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It's a double bluff!

The banking Elites/City are conning people!

All you are doing by paying back faster, is filling the bankers coffers faster, before the final banking system collapse which they know is on the way!

They should not have exposed themselves to lending out @ 1/50

1 (pound in the bank) /50 (lent out on spurious lending)

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  • 428 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?

      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%

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