Credit Crunch: Tighten Your Belts, This Could Be Rough

[The Masked Tulip]

I'm no doom-monger – and I'm certainly not about to become the millionth pundit to predict an imminent housing crash. But I do think that now is a sensible time to take a look at your exposure to the housing market, and to do what you can to reduce your mortgage – perhaps making overpayments each month – to prepare for the possibility of a collapse in UK house prices.

Far from being impossible, a crash over the next few months would work in a very similar way to the collapse of Bear Stearns – a solid business, which became a victim of market worry and bad sentiment.

Institutions stopped lending to Bear Stearns as they got scared about the true value of the assets on the bank's books. In the same way, a sudden and dramatic change in sentiment in the UK housing market could have exactly the same effect. Banks would stop lending to new homebuyers over concerns that their homes were not worth what they paid for them. Those in need of a remortgage would be forced to stay with existing lenders, perhaps on uncompetitive and expensive standard variable rates (SVRs), and it would become harder and harder to sell a property.

http://www.independent.co.uk/money/mortgag...ugh-799275.html

[Prof]

Isn`t this advice a tad too late ? -

"But I do think that now is a sensible time to take a look at your exposure to the housing market, and to do what you can to reduce your mortgage – perhaps making overpayments each month – to prepare for the possibility of a collapse in UK house prices."

By overpaying/offsetting for the past 4 or 5 years, I think I`ve done all I can to weather any problems in the housing market. Making overpayments now, when prices are starting to fall, is not going to help much, and I`m sure it won`t be pleasant watching your "wealth" diminish while your monthly expenditure increases.

Gate, horse etc.

[Optobear]

http://www.independent.co.uk/money/mortgag...ugh-799275.html

Agree with Indy article, not sure about the advice on overpaying though?

If you have the ability to overpay, why should you do that when property is crashing?

If you overpay you have sunk your money into the mortgage, if you kept it as cash, you might be able to use the cash more profitably?

Same issue if lots of inflation is coming, because then you want as large a mortgage as possible (so it can be eroded), and would want to invest the cash in something like RPI linked government bonds?

The plus points for overpaying would be

1) if you had a large LTV and wanted to reduce it below 90% or 75% or 50% to secure a better rate?

2) You fear that mortgage rates will rise and rise regardless of base rate?

3) You don't know where to put the cash because you are afraid of a run on banks?

I've been overpaying quite considerably, but am beginning to wonder if it is really a good idea in the current climate?

Any thoughts?

[Prof]

Let`s say you`ve been overpaying for the past few years. Maybe you`ve payed an extra £10K off your £100K mortgage. It`s time to re-mortgage, as your fixed 3 year deal is coming to an end. Won`t it be easier to find a good deal, as you owe less, and have proved you have the ability to easily manage your mortgage ? Also, your new mortgage will cost you less per month, so that might help if you are "feeling the pinch" from inflation, or a drop in income.

I suppose you could save the cash, instead of paying extra off the mortgage, but the tempation to spend the saving might be too great. Getting rid of the mortgage is not a bad idea, IMO.

[LowestoftBoy]

I overpay my Nationwide SVR mortgage. I understand that I can have my overpayments back again if I so wish. But overpaying my mortgage is just a way of saving money at a better rate of interest, isn't it?

[Selling up]

I'm certainly not about to become the millionth pundit to predict an imminent housing crash

Institutions stopped lending to Bear Stearns as they got scared about the true value of the assets on the bank's books. In the same way, a sudden and dramatic change in sentiment in the UK housing market could have exactly the same effect.

Isn't there an inherent contradiction between these sentences?

Or is the author making the distinction that while the housing market could crash, he does not predict it to?

That's all right then.

[stormymonday_2011]

If you overpay you have sunk your money into the mortgage, if you kept it as cash, you might be able to use the cash more profitably?

The main advantage of overpaying is I suppose that the money is 'safe' in so far it has been offset against your mortgage liabilities and that most mortgages enable you to use these over payments to take a payment holiday against the main mortgage at a later date. This should hold good even if your mortgage provider went bust and the mortgage was sold on. The main disadvantage is that the money is essentially illiquid so if you need to convert it into cash rather than just a mortgage credit you will find it more difficult and expensive to do, particularly when the credit crunch is making cash more valuable. Of course bank deposits are only really credits as well so could also be vulnerable in a financial meltdown. In this environment return of capital is much more important than return on capital so spreading the risk around is probably safest.

[Optobear]

Let`s say you`ve been overpaying for the past few years. Maybe you`ve payed an extra £10K off your £100K mortgage. It`s time to re-mortgage, as your fixed 3 year deal is coming to an end. Won`t it be easier to find a good deal, as you owe less, and have proved you have the ability to easily manage your mortgage ? Also, your new mortgage will cost you less per month, so that might help if you are "feeling the pinch" from inflation, or a drop in income.

I suppose you could save the cash, instead of paying extra off the mortgage, but the tempation to spend the saving might be too great. Getting rid of the mortgage is not a bad idea, IMO.

Prof,

I see those arguments, but let's say you're already well below 50% LTV - the rates don't improve much more after that.

You can pay off the mortgage, or you can put the cash on deposit, or you can invest the cash in a mixture of investments, some in cash, some in RPI linked, some in shares, etc.

If you opted for the simplest, that would be a cash mini-isa. You don't pay tax on the income, so the difference is in the rates. Perhaps 1% spread on a £100k mortgage (6.5% on mortgage, 5.5% on ISA savings), and you have £3k to overpay (conveniently set to be the amount you can put in the ISA).

If you overpay you are better off by the difference between the mortgage rate and the ISA, so interest difference of 1% of £3k, which is £30 over the year. So financially, overpaying by £3k, and putting the money into the ISA are pretty well equivalent.

However, in the ISA you can control what you do with the cash, if you pay it off, then it is used. So for example, if you lost your job, you'd have the £3k to help make monthly mortgage payments while you find a new job, if you lump sum pay-off the mortgage, and then lose your job, you've not improved your situation.

Then there is inflation to consider. Most people on here figure that the real rate of inflation is the RPI rate, and probably higher still. Whether that will follow through into wage inflation is a big question, but say it does? Then you're better off investing your cash, and letting inflation erode the debt. The question is how you invest to beat the inflation?

In the example above, I kept the figures in the tax-free band. If you can save / overpay more, then the calculation might be different.

It seems to me, and I'm not a financial advisor, so go seek proper advice, that

1) you are better off making sure you use up your cash ISA allowance, before overpaying your mortgage.

2) Once you've used up the cash-ISA limit, you have to take a decision based on risk, do you want to put your savings into a riskier (but potentially inflation beating investment), or do you want the safety of paying off the mortgage?

It seems that inflation is the complication. If real inflation were below mortgage rates, then you're better off paying the mortgage off. If real inflation is higher than mortgage rates, then you're better off investing the cash.

The other fly in the ointment is if banks start collapsing? Then paying off the mortgage is probably better because the interest rates will rise longer term.

Comments?

[grey shark]

Isn't there an inherent contradiction between these sentences?

Or is the author making the distinction that while the housing market could crash, he does not predict it to?

That's all right then.

Many of these so called experts are just fence sitters , 12 months ago most couldn't see what was coming , now everything is going t1ts up there fence sitting and use words like "could" and " if " a lot , when the crash is in everyones face they will be outright bearish and start spouting "how it was all so obvious it wouldn't last" and "it really wasn't differant this time after all " , most of these experts are only experts in stating the bleeding obvious imo

[Optobear]

I overpay my Nationwide SVR mortgage. I understand that I can have my overpayments back again if I so wish. But overpaying my mortgage is just a way of saving money at a better rate of interest, isn't it?

I always wonder about those promises, say you lost your job, would they let you take it out again? I doubt it. What would you do if they refused? Sue them?

Ditto with offset mortgages, good when things go well, but is the cash actually available if you REALLY need it, like losing your job?.

,

[Prof]

I`ve had an offset mortgage for a few years, and I`ve also been overpaying a bit. I suppose I`m over-cautious, but reducing your mortgage as quickly as possible, while you are able to, is a good way to protect yourself against any unemployment or problems that may arise at a later date. The old saying is that a bank will offer you an umbrella while the sun shines, but will want it back when it starts to rain. I resisted the umbrella, and made some hay. The weather now looks a bit stormy, but I won`t need that umbrella, hopefully !

Sorry, that was a bad analogy, I couldn`t help myself.

[dryrot]

However, in the ISA you can control what you do with the cash, if you pay it off, then it is used. So for example, if you lost your job, you'd have the £3k to help make monthly mortgage payments while you find a new job, if you lump sum pay-off the mortgage, and then lose your job, you've not improved your situation.

Comments?

well, if you pay off the mortgage there's less to pay if you are laid off.

tax is a huge issue -- if you are a higher rate taxpayer then any interest outside an isa will have to be at least 40% more than the RoI on your mortgage for it to make sense...

[Optobear]

well, if you pay off the mortgage there's less to pay if you are laid off.

tax is a huge issue -- if you are a higher rate taxpayer then any interest outside an isa will have to be at least 40% more than the RoI on your mortgage for it to make sense...

Tend to agree over the tax thing.

As to paying off early... true that if you're laid off you have less to pay, but in my example it is £97k, vs £100k, and if the £3k cash is in the ISA you can always choose to pay down the mortgage on the day you get your P45, puts you in the same place as overpaying,

however, I bet you wouldn't do that, if you lose your job, then you'd leave the mortage at £100k and keep your hands on the cash.

[Prof]

I always wonder about those promises, say you lost your job, would they let you take it out again? I doubt it. What would you do if they refused? Sue them?

Ditto with offset mortgages, good when things go well, but is the cash actually available if you REALLY need it, like losing your job?.

,

Yes, the money in your "savings account" (and this can be a Cash ISA, so you can still take your yearly ISA allowance, even though you might not earn any interest on it due to offsetting) is available to spend whenever you need it. IMO, offset mortgages are great if you can save money, and/or your income is variable. If you have a whopping mortgage or just don`t have much spare cash, a cheaper - fixed rate mortgage is a better bet.

[Optobear]

I`ve had an offset mortgage for a few years, and I`ve also been overpaying a bit. I suppose I`m over-cautious, but reducing your mortgage as quickly as possible, while you are able to, is a good way to protect yourself against any unemployment or problems that may arise at a later date. The old saying is that a bank will offer you an umbrella while the sun shines, but will want it back when it starts to rain. I resisted the umbrella, and made some hay. The weather now looks a bit stormy, but I won`t need that umbrella, hopefully !

Sorry, that was a bad analogy, I couldn`t help myself.

Prof,

I've been overpaying too, but a couple of years ago, and for the reasons you give. However, I almost moved house, and at the time, my strategy had been to buy (at what I knew to be a high price), take on a huge 5 year fixed rate @ 4.79% mortage with C&G, and hope for inflation to erode the debt.

In fact, that purchase fell through due to structural building reasons, but looking back now, and even with the credit crunch, I wonder whether that might still have been a good plan? The 4.79% fixed rate until 2011 would have matched the RPI inflation very well, so effectively would have been a free loan.

Optobear

[Prof]

Prof,

I've been overpaying too, but a couple of years ago, and for the reasons you give. However, I almost moved house, and at the time, my strategy had been to buy (at what I knew to be a high price), take on a huge 5 year fixed rate @ 4.79% mortage with C&G, and hope for inflation to erode the debt.

In fact, that purchase fell through due to structural building reasons, but looking back now, and even with the credit crunch, I wonder whether that might still have been a good plan? The 4.79% fixed rate until 2011 would have matched the RPI inflation very well, so effectively would have been a free loan.

Optobear

Agreed, that may well have worked in your favour. I`m not saying that an offset mortgage is some sort of miraculous financial product. What I will say that it seems a very sensible option. I can also say that the extra reduction in my mortgage balance is very welcome. Looking back, it may have been better for me to buy a more expensive house 5 years ago, struggle with a large mortgage, then sell 12 months ago. I didn`t do that, so I`m not as wealthy as I could have been, but what I do know is that I don`t regret taking an offset mortgage.

[Bloo Loo]

yes, losing your job and having any mortgage at all, and those oh so affordable monthly subs suddenly look like a HUGE cliff from which to fall.

Pay down debt- you know it makes sense in a recession.

[gravity always wins]

Isn't there an inherent contradiction between these sentences?

Or is the author making the distinction that while the housing market could crash, he does not predict it to?

That's all right then.

The best way to be able to take some credit in the future for foresight but no responsibility for doom mongering now.

[expatowner]

Credit Crunch: Tighten Your Belts, This Could Be Rough

Do you say that to all your friends?

[numpty]

"Earlier on today, apparently, a woman rang the BBC and said she heard there was a housing crash on the way... well, if you're watching, don't worry, there isn't!".

[Optobear]

Agreed, that may well have worked in your favour. I`m not saying that an offset mortgage is some sort of miraculous financial product. What I will say that it seems a very sensible option. I can also say that the extra reduction in my mortgage balance is very welcome. Looking back, it may have been better for me to buy a more expensive house 5 years ago, struggle with a large mortgage, then sell 12 months ago. I didn`t do that, so I`m not as wealthy as I could have been, but what I do know is that I don`t regret taking an offset mortgage.

The issue I'm grappling with is whether it is really a good idea to carry on overpaying (as I have been for about 2 years). If you'd not offset, and put the money in an account, the increase from carried interest would be largely the same as the mortgage reduction. (assuming you had a tax efficient way of saving the offset cash).

[Prof]

The issue I'm grappling with is whether it is really a good idea to carry on overpaying (as I have been for about 2 years). If you'd not offset, and put the money in an account, the increase from carried interest would be largely the same as the mortgage reduction. (assuming you had a tax efficient way of saving the offset cash).

Well, saving the money in a decent account might return you about the same as paying extra off your mortgage. It depends on the savings rate vs the mortgage interest rate. Keeping the money in a savings account will provide an extra bit of cash, should the need arise. Perhaps the best bet is to pay a bit extra off your mortgage, and save the other bit. Best of both worlds ?

At the moment, the interest return on savings is probably about the same...... Hang on. A 6% savings account will actually return just below 5% for a basic rate tax payer. If your mortgage rate is less than 5%, it pays to save, but if your mortgage rate is >5%, pay off the mortgage. I think that makes sense. Anyway, it is nice to watch as your mortgage balance reduces a bit more quickly than it might have done.

[dreamOn120k]

Woa! This is the second weekend article to advise paying down debt in the middle of a credit crunch. I think not!

In a credit crunch the number one rule is don’t run out of ready cash, Northern Rock and Bear Sterns bare testament to that fact.

I have paid down my mortgage for 5 years with monthly payments 20% in excess of the standard monthly repayment schedule. Now I am in the fortunate position that I was able to extract £30k from a flexible mortgage this week to provide a financial cushion.

Myopic comparisons of mortgage rates and saving rates are academic compared to seeing your house sold for a distressed knock down price at auction.

[Bloo Loo]

Woa! This is the second weekend article to advise paying down debt in the middle of a credit crunch. I think not!

In a credit crunch the number one rule is don't run out of ready cash, Northern Rock and Bear Sterns bare testament to that fact.

I have paid down my mortgage for 5 years with monthly payments 20% in excess of the standard monthly repayment schedule. Now I am in the fortunate position that I was able to extract £30k from a flexible mortgage this week to provide a financial cushion.

Myopic comparisons of mortgage rates and saving rates are academic compared to seeing your house sold for a distressed knock down price at auction.

Any debt you have if you lose your job is an enormous ball and chain for a normal employee.

Benefits take no account whatsoever of debts.

if you feel you are in danger of unemployment, taking on more debt could be the road to disaster. it was a favourite cureall in the last recession. It was and is a mistake.

[dances with sheeple]

Cash ISA limit is £3600 from April? I wouldn`t overpay anything just now, I would even default on credit cards to put cash aside, let them chase you for it, the banking industry deserves to be put under pressure. If a bank runs into difficulty will they return overpayments to you. There is about to be a mighty bang, and when the dust settles is the time to take stock not now. I would pay whats owed every month not a penny more.