Tuesday, March 3, 2009

Maths never a VI strong point

Interest rate cuts: How much can you save

An article showing how lucky martgage payers can save up to £9,000 on a £200,000 mortgage due to the low interest rate. Wow wee. Since houses have fallen 20% from peak already, a £300,000 house will have lost you around £60,000 to date. Given that most people say another 15% is on the way (I say another 20-25%) then now is a good a time as any to get out before you lose another iro £35,000. So with a total loss of around £85,000 (allowing for "saved" interest), what kind of advice are banks giving when they tell their customers to "take advantage of the lower rates" that isn't in their own interest?

Posted by growler @ 02:05 PM (1507 views)
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16 thoughts on “Maths never a VI strong point

  • mark wadsworth says:

    This ‘low mortgage interest rate’ scam is all well and good, but it’s a policy of no return. As soon as the government, oops sorry, totally independent and impartial Bank of England, allows rates to creep up, even by one per cent, that’ll be the budgets of millions of households shot to sh1t and they will scream blue murder.

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  • surely the key thing from this article is that the beneficiaries of these low rates are (rather sensibly) using the windfall to pay down debt, rather than go and splurge it as the govt would like.

    The mentality truly has changed.

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  • Some of my friends have decided that the market has bottomed and have dashed in with deposits. I’ve suggested they wait a while – at least till Obama’s next bail out.

    They don’t think interest rates can go down by any more. What is driving them is the threats of the printing presses. They argue food is going up fast and houses will follow. However, I’d caution that pay has yet to rise!

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  • @3

    With unemployment set to rocket in Eurozone, the European bailout of Eastern Europe becoming a necessity, a new round of funding required for the IMF and thus consequential drying up of international liquity – there won’t be many banks keen to get involved in UK houseprices unless the LTV and multipliers are VERY conservative. This all overlooks the fact that any UK property/interests held by foreign institutions is already taking a hit due to the exchange rate. Can’t see Sterling rising anytime soon – and zero interst rates won’t help. Also, with average salaries to house price ratios still waaay over long run averages, there’s a long bottom to this market yet to come. Where to put the money? good question; not answerable yet. But cash is easy to move, a house in a collapsing market?

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  • @growler

    Excellent points – it’s a property trap (amongst wider problems) and the key is not to get caught

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  • Interest rates are alarmingly low for mortgages, because you may be able to fix a deal at these levels for a year or two, there is only one way interest rates can go from here and that’s up. In most previous recessions, rates are lowered for a year or so, but as in the 1990’s they will rise and your monthly payment will double or even treble, and that may be the final nail for the housing market. History does repeat itself as most economists will tell you.

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  • shipbuilder says:

    Alan – exactly. With all this talk of inflation, people seem to miss the fact that inflation-led nominal price increases cannot happen without wage inflation and then only when wage inflation takes 3x the average wage to meet the falling average price. This is what I don’t understand about the panic inflation-hedging that is talked about so often on here. Unless, of course, that people are just being greedy and want to use their STR proceeds to surf the next bubble.

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  • shipbuilder said “Unless…people are just being greedy…” –
    People? Greedy? Naaaaaah!
    I think you may have unleashed the truth… watch out they will come and get you if you’re not careful, etc, etc…
    🙂

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  • Here I come 51ck

    shipbuilder

    It’s not about greed but doing ones best to do something.

    With the fall in interest rates every 100k in savings earns about £3500 less per annum than it did. On top of that none of the banks are particularly safe (even if under £50k is guaranteed).

    Therefore it’s a case of trying to spread risk and get a little back to replace the lost interest.

    Oh and before you say it, asking prices of good houses in good areas are still at 2007 levels or above from what I can tell. Yes there is the odd house reduced but investigate a little further and you usually find out there’s a pilon in the back garden or some such other reason no-one wants to buy it.

    Cars may and laptops may have fallen in value, but I’ve got a perfectly good car and laptop (which have also fallen in value). So I’m not seeing much benefit.

    No doubt the ‘business’ of working for the local council this year will involve deciding how much money they need then sending out the appropriate bill. (Some business).

    So that is why we try. Rant over.

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  • shipbuilder says:

    str 2007 – I didn’t mean looking for a reasonable rate of return on your savings, I meant the mad rush to get into whatever assets are expected to rocket when inflation supposedly kicks in, from people who would not normally invest. This is inherently risky and therefore a greater return is expected, surely – is this not exactly what happened with houses? Mightn’t we imagine a forum formed at the bottom of the last housing crash with fevered posts about what could happen to prices in the next few years, now is the time to buy to preserve your wealth etc. etc etc.?

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  • @10

    Its terribly trendy terminology, but the fundamentals have changed. The amount of credit that had been extended to people as a proportion of their income is – In my opinion – never going to go back to where it was. This means that the levels of consumption per capita on goods in this area (hifis, houses, boats, bikes, etc) cannot be supported. Any return to an environment where people are heavily in debt is as good as over for the forseeable. The only reason people will “scramble” to convert cash to assets is if massive inflation is going to hit. I can’t honestly see the apocalyptic scenario as realistic. Inflation must be either cost-push or demand-pull. Sure, QE would eventually cause issues, but I think the sophistication and global environment we’re in means that any country inflating out of control relative to others will see capital flight to another country. I cannot see – much as the Express and Torygraph (and other pro-US media) claim – that the Euro project will collapse and fail. I can see a humbling period for UK Sterling and a bloddy nose for the Euro. Calamity? I don’t think so. Therefore, I see a very long Japan-like period of dead growth as economies learn a long, hard, deleveraging time.

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  • mark wadsworth says:

    @ Shipbuilder “people are just being greedy and want to use their STR proceeds to surf the next bubble”

    Yes I am greedy, I do have STR proceeds. On the assumption that The Tories have no intention of following the sound advice of centuries of economic theory and practice (i.e. introducing Land Value Tax to replace as many taxes as possible), and will cheerfully start inflating the next credit/house price bubble in about five years’ time, why shouldn’t I try and make money? If I could change the rules, I would, but I can’t, so I’m playing the hand that THEY have dealt me.

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  • [email protected] & [email protected], many workers in the private sector are having to absorb hefty wage cuts just to stay in gainful employment. LDV 10% paycut and 3 day week, other manufacturers similar e.g. JCB, Honda UK etc, contract rates are also static or falling in the engineering sector and the construction sector is dead on it’s feet. So irrespective of how low interest rates are many of these workers are already much worse off and facing a worse case scenario of long term unemployment and as has been stated before when interest rates rise there is only one way they will go and that is up or the UK is bust. This is a no-win scenario and everyone and I mean everyone will be poorer irrespective of how they think they have hedged their position and at the back of my mind I am also thinking that the next big victim will be a large pension company.

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  • Who cares if property values continue to fall anyway! Are the people living in those houses actually losing money? No, not at all. Not unless they need to sell that is. Sell and leave the housing market completely and not buy another property that has also fallen in value!

    The good news is that homeowners are seeing a real benefit to falling interest rates and for many, it is removing the risk of repossession unless of course they lose their jobs and cannot find new employment.

    As more and more money feeds through to the masses, they will eventually repay those credit cards and then it’s off down the shops to buy stuff. This will halt a shattered economy, job losses will stop and the economy will bounce back into high inflation mode. Then property prices will shoot up and what of those people that have lost 30% of the value of their homes? Well they haven’t noticed a thing.

    The value of their homes are just a number that means nothing until they sell. Keep on telling yourself and others not to buy. You might convince yourself and even a few others, but the world really isn’t about to end. The sun will come up in the morning, you just see if it doesn’t. 🙂

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  • shipbuilder says:

    enuii – i agree, I was making the point that people are hedging against inflation to protect their savings for a house – but houses cannot inflate without wage inflation first, which certainly isn’t happening.

    mark, str – Of course people can do whatever they want with their savings, but let’s not all complain about the ‘sheeple’ buying into a bubble when we are all trying to do the same thing. House prices are going down by anything between 15 and 35% a year – is that not enough?

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  • Wow – sounds like you had a good evening out str 🙂

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