Oh c’mon now!
This is one of my infrequent “real life money” posts. Today, in the Telegraph online we have this claim…
“Home repossessions are expected to soar after the Bank of England took the shock decision yesterday to raise interest rates by a quarter of a point to 5.25 per cent.”
Oh, C’mon now! A 0.25% increase in the Bank of England base rate, slightly earlier than expected (and it was expected to happen in February) and suddenly we are hearing that repossessions will “soar”.
If people are tipped over the edge by a 0.25% increase in their mortgage interest rate, they really should get a better grasp of money. I mean, a lot of people who took out mortgages in the last two years will be on highly discounted rates, so they are paying less for their loan than most people. Anyone who’s discounted rate has expired (usually after 2 or 3 years) will have got used to their monthly payments and should be able to cope with the 0.25% change.
On a £100,000 mortgage (roughly $200,000), an increase from 7% to 7.25% (standard rates, which are to be avoided anyway by shopping around for a better deal) the monthly increase is £16 (roughly $30).
Who’s financial position is that increase going to ruin?
Lots, if we believe the Telegraph and there are to be “soaring” repossessions!
If you really want to see how “soaring repossessions” happen, check out this PDF from the Bank of England and see the graph on page two. You’ll see interest rates rocketing, causing huge pain and housing market slumps. In 1990, rates were as high as 15% having climbed from under 8% in 1987. In the last five years they’ve change from around a low of 3.75% to a high of 5.25%.
I didn’t own a house in 1990, but my parents did, and I remember it well.
Perhaps that’s one reason why I’m keen to pay off my mortgage so quickly… and I mean quickly… by September. 
January 14th, 2007 at 8:19 pm
Back around 1980 US mortgage interest rates hit the low 20s. My Dad had just put up for sale a house that he had remodeled. Boom. 21 or 22% rates. As you might expect there weren’t too many offers.
Paying off all debts, including the mortgage, sounds like good advice to me, not necessarily because a 5% debt is so painful, but because of where that interest rate might go if we have a variable rate on our own loans.
Otherwise extra cash might be better sent into a business that will return a much greater rate than 5%.
Greg
January 15th, 2007 at 2:58 pm
Hi Greg,
I totally agree with you. I often ask myself if paying off the mortgage is going to get me the best returns. The way I see it, paying off the mortgage is a strong motivational goal, whereas setting a goal of “growing my business by in excess of 5% per annum” really doesn’t motivate me much. I guess it’s down to each individual, and what motivates them.
My mortgage rate will be going up by 0.25% very soon… with further increases expected… so that’s additional motivation.
Neil.
July 27th, 2007 at 5:27 pm
Keep UP good work
June 9th, 2008 at 9:57 pm
Neil, damn, wish I’d never found this site, an ex phd student worth half a million. I’m in the same boat, finished my phd, never used it and now I want to be rich!
Anyway, I think that your advice is sound. If you get a mortgage, pay it off as soon as you can, that way, you don’t have to pay the banks the interest on the loan. Alternatively, if you are good at investing, you can get an interest only mortgage to purchase your property and use the difference between that an a standard mortgage to build up a pot of cash and you could have more at the end of the term than the initial mortgage amount. At the end of the day, it’s your attitude to risk, I think that ex PhD students tend to be risk takers!
June 10th, 2008 at 6:21 am
Ph.D. holders have to be risk takers because they spent so long in higher education they have less years than everyone else to build up their pot of cash.
Neil.