- Why you must get out and stay out of debt
- Buy on credit and you’ll pay for it twice
- The hidden cost of not saving and investing because you’re in debt
- The only good debt is dead debt
- Get out of debt to unleash your inner money maker
Our series on why you must get out of debt looked at how credit cards can double the price you pay, at the cost of foregone investments, and why mortgages are the only good debt.
But there’s another reason to get out of debt.
It’s hard to price, but it may be the most valuable benefit of all.
It’s the peace of mind and the freedom to make money that comes with being debt-free.
When you’ve no debts, you literally don’t owe anyone anything. Your money is yours to use as you will.
Sure, you may feel you owe:
- Your parents for raising you
- Your friends for the good times
- A beer to anyone who helped you in the bad times
- Whoever gave you that spare bed in my third debt article
But financially-speaking, you’re free.
Many people who get out of debt unfortunately use that freedom to go straight back into the mire. They fill the void left by paying off their debts with… more debt.
A better plan is to keep up the momentum to grow your net worth. Redirect your former debt repayments towards saving and investing. Use your new financial flexibility to increase your earnings.
You can start investing with a tiny budget – indeed it’s free with Freetrade.1
The important thing is to get your snowball rolling!
Make money for yourself, not some bank
I’ve heard many times from people how liberating getting out of debt is.
They discover what I relish every day – that my monthly income is going wherever I want it to go, not on paying for stuff bought and forgotten about years ago.
Debt-free, you can save up an emergency fund, invest to create a future income – or just treat yourself to a meal out or new pair of shoes, guilt-free.
And here’s the real bonus – when you’re financially secure, you’re also more likely to look for ways to make money.
Everyone knows the rich get richer. Having compound interest working for you instead of against you is a big reason why.
But I believe there’s also a mental pay-off for being debt-free.
Operating from a position of strength, you are more able to think of money as an opportunity and a tool, rather than as a burden. Your whole outlook on money and the language you use can change. And that’s the first step to getting richer.
My co-blogger The Accumulator had to get out from under his debts before he could begin amassing his passive hoard and planning for financial independence.
As someone who has never borrowed money and so started investing with a clean state, I find his journey inspiring.
But I’d choose my debt-free journey over it, any day.
What about my pal Bob / Aunt Bertha / Donald Trump?
Sure, we all know a few people who (seem to) handle their debts and still grow their income faster than their repayments.
I’m not saying debt is always a fatal disease. Rather, that it’s a hugely debilitating one, which can easily catch up and snuff out its victims.
How much wealthier would those income-rich, asset-poor debt jugglers be if instead of shuffling credit card payments, they put their brainpower into growing their investments or creating a passive income stream?
Mortgages: The exception to the rule
If you’ve got any non-mortgage debt – even if you think it’s balanced by assets – pay it off as soon as you can. In every way it’s worth it.
Using debt to buy a property is the only exception. A mortgage is cheap debt, and it enables you to live in your own home today rather than saving half your life to buy one, chasing rising house prices along the way.
Nowadays even I have a big interest-only mortgage, and I truly hate debt.
But do you want to know a secret?
I love my home and overall I’m happier for finally owning my own place.
But I believe I was a better investor when I didn’t have a mortgage hanging over me.
The bottom line on debt
For most Monevator readers, I’m preaching to the choir.
But too many average people have too much debt – and it’s in tough times like recessions that they discover why they shouldn’t.
It can be hard to get out of debt. You’ll have to go without.
But all that really matters in life is health, friends, family, love, and useful work or another purpose you enjoy.
Well, and beauty and truth, as the poet said.
(And personally I’d add Mexican food.)
Last I looked, getting into debt to buy an iPad when you can’t afford it just to have one before your friends wasn’t on a single philosopher’s list.
- Open an account via that link and we can both get a free share worth between £3 and £200. You’re growing your net worth already! [↩]
Operating from a position of strength, you are more able to think of money as an opportunity and a tool, rather than as a burden. Your whole outlook on money and the language you use can change – and that’s the first step to getting richer.
I agree 100 percent.
I’ve never before put forward a blog comment where that is all that I had to say, but I think it is called for here. The point you are making is of huge importance, in my assessment.
Rob
Thanks Rob – much appreciated!
Having any debt is an added stress in my book. I feel so very very free without any debt.
It also give me confidence to try other things, since I know that my house is paid off!
Right now, I’m happy blogging after hour, but tomorrow who know what I’ll want to do!
When it comes to debt we all have the worst role model thrust in our faces day in and day out, the government. If you ever wonder why so many people have so much debt just look at the example that is being set by the most powerful people in America.
Debt is very stressful for most people and it has a huge impact on how they think of money. Unfortunately, most are more motivated by the things money can buy than they are at realizing how good they could feel by being debt free.
Ditto Evolution!!!
Investor – Too true. You nailed it. Even though I still have a mortgage (a very affordable one at that) to deal with not having any consumer debt has transformed my life and my attitude. I truly is liberating!
I agree 100% with Rob 🙂
Seriously, this is a very interesting point – everyone knows that being in debt can be stressful (to an extent that, in my mind, would almost always outweigh any utility gained from the extra consumption it enables in the present). Evolution of Wealth makes the important point that people don’t realise how good it feels to be debt-free, so they keep on consuming on credit because they feel that’s the best way to use their financial resources.
But the idea that people who are free from debt treat money differently is surprisingly deep. It stands to reason that people would see their money differently if they just see it leeching into a bank’s coffers than if they have a nice credit balance. Does the English aversion to talking about money have anything to do with our high rates of personal indebtedness?
Debt is really a stressful thing. This post is really good for everyone
I’ll give you a solid AMEN! As one who has recently found debt freedom after 17 years of servitude I can vouch for how wonderful it feels to be free. It’s indescribable, and if I could adequately pass on the feeling those struggling through would bust it even harder to be free. But alas I cannot and we must all find our way.
Good read. When you have debt you have less freedom. In general interest is money thrown away.
A horde is something that, much like many new viruses, comes out of the east. I think you mean hoard. (I wouldn’t normally be a spelling pedant, but with this having been up for 10 years, it’s probably about time it was corrected.)
@arty — Cheers, hoarding is one of my blind spots, and the ten-year vintage is no excuse as that was one of the paragraphs I added this morning* as party of my updating! 🙁
*The original post predates The Accumulator joining this website! Though not my friendship with him, which stretches back may years before that…
First time commenter, long time reader here. This is such a good post. Not to dismiss the seriousness of the current situation, might national stress levels have been reduced if the majority had no personal debt and an emergency fund to fall back on? It certainly helped my mental state and was worth years of thrift and driving around in older cars.
Also, it probably makes little financial sense, but we aim to pay our mortgage off early for the same mental benifits as above. That’s a whole other discussion no doubt.
Thanks again for the interesting and helpful content!
I would add one further exception to the “good debt”, 0% interest cards. If you have a good credit score, you can get cards interest free for nearly 2 years.
During the last financial crisis I found myself in a sticky situation – no home, no job, and experienced a lot of fear, uncertainty and stress. I decided going forward my no 1 priority would be security (so to never feel like that again). Myself & partner diligently paid off student loans, car loans, bought a house and paid it off, saved emergency funds, and the last couple of years have been tackling a pension deficit (all whilst earning less than the average wage – it hasn’t been easy!). We scrimped and saved every penny even once the economy had picked up …. whilst watching friends and family get back to normal and spend accordingly. The hardest thing was keeping going, after one thing was repaid we just wanted a break – to be normal – but we thought we’ve got this far we should stay the course.
I am now so proud of us and the feeling of relief during these times of Covid stress is immeasurable (especially as I work in a job where you are never safe, always worried about being made redundant) I can now say it was worth the struggle.
To those who might be in that situation now, you can get there, it is achievable, but not without sacrifice. Make it your priority, baby steps, tackle one thing at a time, give it your all. You get used to managing on less, you will realise how wasteful you have been. You can still spend, but make it count on the things that make you really happy, and the happier you will get.
I wonder what our lessons from this crisis will be, what will we do now to be proud of in ten years time?
^Freetrade as mentioned above have just launched another round of Crowdfunding today. Might be of interest to some on here so thought it was worth pointing out having just read another great monevator article.
https://www.crowdcube.com/companies/freetrade/pitches/bvP4rl
I need to get another job so I can remortgage by late 2021. Otherwise supposedly good mortgage debt could turn out to be bad debt. Covid has been a perfect storm of dangers of leverage! I should have got a longer term product with benefit of hindsight. But I guess for any duration, something bad could happen just before it ends and you’re potentially in trouble?
@The Rhino — I went for five years and would have gone for ten if I could have. But yes, it’s hard to plan for the likes of Covid-19. For the past — what? — 15 years perhaps, fixing for shorter periods has almost always been the cheaper move. I wanted insurance though against higher payments, which is why I went for five years (and would have gone for ten, as I say). At these levels of rates I was happy to take my chances on rates falling 0.5%!
I think my potential problem will be getting a fixed mortgage on the same terms again, even at whatever the prevailing rates are in three years or so. There’s a strong chance I could be bunged on to the standard variable rate if the banks have had another Cleaning of the Augean Stables moment. I’m therefore thinking I’m going to try to build sufficient low-risk assets in my portfolio to bring my outstanding mortgage down to 50% LTV to try to sweeten the deal at the time. Of course the way things are going with the economy, “V” is looking like a moving target, too!
See kids? Be careful with debt — even super-cheap fixed-rate mortgage debt!
@Andrew — I’ve used 0% credit cards many times and in the good old days (before 2007) had a moveable chunky sum rolling through various deals and stoozing in high interest accounts. However those days balance transfers were very cheap (even free for a long time, through the right card, as you probably know) and risk-free savings accounts were paying 6% or more. Now you’re more doing it for whatever ‘return’ you’re getting from inflation, and that’s assuming no transfer fee. I don’t think they’re hugely worth the candle any more. 🙂 With all that said (a) I used one to help furnish my new apartment a couple of years ago, rather than take cash out of ISAs and (b) I’d stress they’re only really ‘good’ in the right hands. I wouldn’t recommend them to most people I know. 🙂
@KateW @Jules — Thanks for reading and for the great comments both!
@lenahan — Indeed they are. As I’ve disclosed before, I’m already a shareholder. 🙂
What an odd post. I agree with getting rid of or avoiding debt but this comes across like a post from one of the many FIRE/personal finance internet spiv websites or youtube channels. I hope Monevator isn’t going rogue and selling out under Covid 19 pressure!
@cat793 — These are the sort of posts we should do *loads* more of to be honest. I used to do a lot more like this in the old, old days.
The stuff that has become the mainstay of the site appeals to about 1-2% of the population (literally, if that) and in the absence of a membership option (which I suspect only a fraction would pay up for) are pretty much impossible to monetize.
Don’t get me wrong, I’m very proud of the appeal to that 2%, I genuinely think it’s one of the best things I’ve ever been involved in.
But it touches a fraction of people, almost all of whom would have been fine without us (just perhaps less wealthy due to fees etc, and that knowledge is hardly rare nowadays) while most of the country has less than £500 in savings.
So a niche site that caters to smart people who pay nothing for it. It’s a terrible business model! 🙂
I’d estimate about 95-99% of the money we do make comes either directly or indirectly from people who never comment on the site.
That’s media for you nowadays! Sigh.
Cat793
I disagree. We often forget about how we got here. As a 52 yo I’m now debt free for the first time since the 80’s. This reminds me to tell me kids why it’s not worth the angst of getting involved in the first place. We all know that once we succumb for the first time We will be the there for life.
I became debt free 3 months ago. God that feels so good.
It’s this type of article that got me reading Monevator in the first place. It reminds me that having no consumer debt is better than a shiny new thing, that I can’t afford but must have to keep face. Admittedly I’m embarrassed about the level of consumer debt I’ve paid off and subsequently built up over the years. But articles like this, and others on the web remind me that aiming for financial independence is, for me, a better goal. Rather than continually trying to borrow another couple of hundred quid each month, so that I can lease/have the latest ‘lifestyle’ accessory or experience. I can now focus on something more meaningful and in the longer run better for my family and my mental health.
Great post. Thanks again for a common sense approach to straightforward financial topics.
Be careful where getting free of debt might land you though – after 25 years being a mortgagee – even if trading up to a property of higher value – and paying it off with one of those much maligned endowment policies I’d kept going….then a year later totally shifting from the UK to NZ!
Sort of illustrates how feeling that free (and to be fair, a fair sum in my ISA too) and able to take that risk (and stress!) of moving and then deciding to stay in NZ.
Lots of factors – but the key initiator was the financial freedom/security to try and do something new.
Wishing all your readers the best from Alert Level 2 NZ. Kia kaha.
I clearly remember the day that we became indebted to no one. I was strange in some ways with a life time tracker mortgage it made no sense to do but as time passed I realised it was a life event. Those occasions which because they are so positive you just don’t forget them. The buzz from that has become a pleasant warmth that just makes you feel happy safe and content. Sure it’s a hit when the portfolio goes down 20% but honestly it’s quite nice adrenaline hit rather than the panic stress you feel when you are worried about your family security disappearing in a puff of smoke. The feeling of having a perfect portfolio is never for me going match the positivity of having no debt along with a little money to get buy (which during lockdown is even less than I thought). Investing has now become fun rather than a necessity so I can learn from my mistakes and adjust accordingly.
Although I confess it feels tone-deaf at the mo, because an awful lot of people may not have any good options as far as debt is concerned – I have seen over the last couple of months that there is a very serious qualifier to the debt=bad but mortgage debt=good mortgage exception
Live in your home is the operative phrase here, because it saves you paying rent, which is a cost you couldn’t otherwise get out of. The requirement that other people pay you rent doesn’t count when the chips are down. As two people I know have recently found out. One when the developer on their piece of land went bust, and the other who were trying to consolidate two mortgages (on a B&B and their own house).
Both are older than I am. Do NOT borrow to speculate/invest, and BTL and the B&B business are both investing with leverage. That may be OK for a young pup with half a working life ahead of them, but for people 10 years or post retirement age looking to featherbed their wastrel kids it’s a tragedy. The kids will be OK, but the parents will have to suck in their guts in retirement, and one lot will probably end up renters.
Also what the hell is this with serial short-term fixed mortgages? People tried to push me down that route but I always found the incidental costs (arrangement fees etc) added up. I am old enough that I have seen people both sides of me repossessed in the 1990s. You are a hostage to fortune if you get regularly qualified for a mortgage, because no job=no mortgage these days. Perhaps that was OK in the days of liar loans but seriously guys.
In my last 10 years when I had a mortgage I could have lost my job and sweated out for more than five years drawing down overpayments and paying the minimum. It very nearly came to pass, and your well-paid job gets more fragile as you get older for various reasons. “Only when the tide goes out do you discover who’s been swimming naked” as Warren Buffett used to say. Mortgage is still debt, though a mortgage on your own house at least defrays a debt you would otherwise incur.
@ermine — Cheers for your thoughts. I wouldn’t call a five-year fixed-term mortgage a short-term mortgage, although as I say I’d have preferred a ten-year fix. At the end of the five years, worst case I go on to the lender’s standard variable rate, as per the contract. So it shouldn’t be no mortgage in a bad scenario (where a bad scenario = no offer, for some reason, to re-fix again cheap), it’d just be no cheap mortgage. I don’t expect that to happen, I’m just saying it’s possible, hence thinking it three years in advance.
As ever I appreciate you holding the banner aloft for not thinking property is a sure thing.
However I’m about the only person I have *ever* met who ever saved up enough to buy a property outright who didn’t (a) work in the City or (b) start and sell their own business. And there aren’t many of those around, either.
It was an absolute nightmare, financially-speaking, and with the State against you to boot. (CGT on shares, none on own property, etc).
Okay, so I chose to do this through multiple London housing bubbles; in the rest of the world your mileage may differ! But if I’d just got a mortgage on the first flats I looked at in the mid-1990s (why I didn’t is a long story, related elsewhere on this site) then I’d have been conservatively about £500,000 better off.
Saving up half your life to buy your own home is incredibly hard and expensive, unless you’re in a market where prices are falling over the decades, and we haven’t seen that in the West for, what, 70 years? (Sure, never say never, but I know how I’d bet…)
Hence mortgage debt is good debt. It enables you to fulfill what for most people is a life aspiration. It enables you to do it when you’re young so you can enjoy it and benefit from it. It’s cheap and it’s not callable or marked-to-market. It’ll probably be very profitable.
Is it risk free? Of course not. But the benefits outweigh those risks, IMHO. 🙂
@Pinkney — Sounds like bliss. One reason I decided to mortgage-up (apart from the obvious, as related above!) is that I wanted to feel how it is to invest with different pressures / constraints / liabilities.
I doesn’t feel the best, to be honest. I can see myself paying down at least some of my mortgage sooner than I thought, after all.
Maybe I’ll think of your tranquility when I do! 😉
@ermine:
“Do NOT borrow to speculate/invest”
Have I misunderstood you or have you just about come round to accepting that clearing your mortgage is not such a bad idea?
Comment #27 should be addressed to @TI too
Why the sudden fear around short-term fixed rates mortgages? Looking at HSBC 60% LTV mortgages (as a reference benchmark)
2y fixed = swap + 65bps, 5y fixed = swap + 100bps, 10y fixed = swap + 205 bps
So the forward credit spreads are already quite steep (2y3y at 185bp and 5y5y at 300bp). It’s not clear to me why 2y fix + rolling into an SVR for 3y is going to be worse than a current 5y fix. In fact, the 10-year fix looks pretty expensive at that credit spread.
For higher quality debt, demand to lend is going to be absolutely fine here. The big banks are not in trouble and, if we follow, what is happening in Europe, I’d expect to see much more demand to lend from lifers with rates this low and their LDI issues.
The problem is those with high LTV mortgages (say 70%+, senior stretched) and those reliant on the shadow banking sector. But those sorts of borrowers always are vulnerable to rollover risk in a cashflow recession. It’s no different from normal.
I agree about mortgage debt.
I took my ‘forever’ mortgage out with Yorkshire BS in 2005 as a lifetime tracker at 0.75% above base, with no collar.
More by luck than judgement it was the best financial transaction I ever did, and it has cost literally pennies in interest over the last 15 years. At no time have I ever been convinced that it was in my interest to over-pay, or pay it off early. The current interest rate is 0.85%.
Indeed, as I get 40% tax relief on my pension contributions I’ve maxed out on those rather than over-pay, although I could pay the remaining mortgage off tomorrow if I needed/wanted to do so.
I’m all for being debt free, but sometimes it can pay to be flexible in your thinking.
Yep, this is potentially me, ish. (You may recall I had to go down an unusual avenue to get my mortgage, due to my strange financial profile/requirements). I don’t think it’s certain to be a problem, it’s just a risk I didn’t see as very large before.
The ‘difference’ is we’re not normally in the biggest economic drawdown for 300 years! 😉
Hopefully we’ll bounce back as still seems widely predicted, perhaps not a V but at least U rather than a bathtub, and so for myself by 2023 the risk will have dissipated.
I have more than the mortgage in ISAs, anyway. I just don’t want to draw them down unless I have to, obviously, because you lose the wrapper (which was half the reason I got a mortgage in the first place! 🙂 )
When I had a mortgage, I never went for a fixed rate. I always reasoned there was a price to pay for the certainty. I didn’t need certainty (I reasoned) as I never mortgaged to the max. What I wanted was the flexibility to overpay without restriction.
I thought it made sense. I find the near universal use of fixed rate mortgages a bit odd. Is it just to do with the weird low interest rate environment? (My last mortgage was taken out around 2007)
I love being fully and completely debt free. No leverage for me thanks.
In the days when we did have a mortgage – we initially hedged our bets and went part-and-part. Both parts were capital & interest; one part was standard product (i.e. fully flexible, allowing unrestricted overpayments, etc) and the other part was a fixed interest rate (of relatively short duration, with no flexibility). All worked out well and we got rid of it all more than 15 years ago. No regrets at all – and totally agree with @Vanguardfan’s sentiments.
@TI “So a niche site that caters to smart people who pay nothing for it. It’s a terrible business model!”
It’s good that you at least feel good about this site. You should. The quality of much of the writing is worth paying for even if the reality is that when faced with a paywall most people don’t want to pay.
But then if you did monetize the site it becomes a commercial product and with it more pressure to deliver the goods. It may not be worth it.
A good book on the other hand, now that could generate some revenue.
@ZX48k
> Why the sudden fear around short-term fixed rates mortgages?
Because each and every time you need a new one, you either (nowadays) take a big hike in interest rate to go on the SVR or you get requalified for a mortgage. When I had one, though this was over 12 years ago, I believe I was requalified when the fix came to an end. I still had the same job, but I wasn’t going to take a chance on that question again, though as it was I paid it off before leaving work, which was perhaps a different category of error.
Needing to be requalified for a mortgage looks bad if you don’t have a job. I have had the experience of a good job going bad – arguably there may be many finding this out in 2020/21. I didn’t need a job. I had an ISA that was well over the amount of capital I was looking to borrow to bridge two houses when moving from Suffolk to Somerset. I had enough to live on. But I am an average guy, I don’t know bank bosses to rig up to factor in my unusual situation. Mortgage brokers looked at me as if I was living under the railway arches. Nobody can live in the modern world without an income or perhaps a pension! I did it for 8 years, FFS. Computer sez no. Now one can also query whether carrying two houses would have been a good idea if something like the current crisis had arrived, but it didn’t matter:
No Job? Computer says No.
Living off capital shows no income. Presumably I could now raise a mortgage as I have pension income, but I lived for eight years off capital. It counts for aught for a mortgage.
If you lose your job in a crisis and your fix comes up, even if you have capital to run down, you are SOL. You run the risk of being a forced seller of something.
@AlCam
> Have I misunderstood you or have you just about come round to accepting that clearing your mortgage is not such a bad idea?
Yes and no. Using an offset mortgage to carry you across a deferred DB gap to be able to discharge it with a PCLS and therefore smooth your income is a very different beast from using it to max your S&S ISA. In that specific case the PCLS is better defined than the value of an investment.
But yeah. I failed that test in 2010. I do not have TI’s balls of steel, but I also lack his human capital. I would still have had a smoother ride had I not paid that mortgage off so early. Early retirees, and particularly those pre-the SIPP 55 cutoff need to be very very careful paying off their mortgages and/or becoming forced requalifiers on a short fix.
That is different from using the mortgage to buy a business of a BTL, or a S&S ISA. I am better off now but my younger self was poorer. Given what’s happening this year there is a slightly elevated tail risk of that having been a misallocation of capital…
@ermine:
Re the SIPP pre-55r’s – they probably do not have the certainty of a DB PCLS to count on.
In any case, we have discussed the use of a line of credit to fund, say, a temporary shortfall in liquidity versus a conventional mortgage previously, see https://simplelivingsomerset.wordpress.com/2019/09/12/__trashed-2/
IMO you were just far too hard on yourself re paying off your mortgage – so I am glad to see that you are softening a bit on that! For me, the behavioural change brought about by early payment of our mortgage was the real win.
If approx 30% (28%?) of the bond index is mortgage backed securities, anyone who has a mortgage could in theory hold the bond index minus Mbs and swap out that element with mortgage overpayments, since paying down your own mortgage would be safer and more tax efficient than MBS, although mbs is more liquid and may well be at higher rates
A topic worthy of regular reminder, I think – thanks.
As someone who once had a mountain of credit card debt and who for years, juggled endlessly with 0% cards to pay it off, I can’t describe the sense of relief and freedom I felt once it was all finally cleared.
Throughout my 20s and most of my 30s, I thought having such debt was normal and I was quite content to live that way. It was when I realised that it wasn’t normal to have a decent job but be in so much debt, that I started to become stressed about it. Those were quite dark days, with no helpful blogs or communities to provide guidance or support and of course, I was too ashamed to tell family and friends, so it felt like a very lonely battle.
But I got there in the end and since then, pay off my credit cards every month and only have my mortgage debt.
If I were state one regret in life, that would be to let those credit cards spiral out of control!
@W. Don’t mention the ‘ B’ word!
I too disagree that a mortgage is good debt. Least bad maybe?
After we bought our house we used an off-set mortgage to effectively pay down the modest £176k mortgage in fours years. And boy does that feel good! Now, we’re covered except for paying interest on about £5k and have a four year emergency fund to boot.
Could I have been “clever” and gone interest only and invested the difference? Definitely (in retrospect). Would I have been better off? Almost certainly (in retrospect). Do I regret it? Not a bit!
You have said the only good debt is mortgage debt. What do you think about student debt? It’s at least arguable that it’s a debt taken out to buy an asset of lasting value, and the payment terms are not unreasonable, although the interest rate is (why peg to Inflation rather than base rate?)
@Pinkney, I’m still not paying off the life time tracker mortgage, even though I have enough in ISAs to do so. It’s such cheap money!
@IanT I got my tracker at base plus 0.27% (and was annoyed because I had been considering it for some time and applied the week the rate went up from base plus 0.17%). It’s amazing how cheap those deals were!
@Nebilon
TI’s opined on student debt a while back …
https://monevator.com/reasons-not-to-go-to-university/
@ermine – I think ZX’s point is more that the cost of 2 year fixed then 3 year SVR is very similar to 5 year fixed. So if you can’t get a new mortgage at the end of 2 years you are no worse off than if you had been on the 5 year fix. So the impact of losing a job or house prices crashing doesn’t really impact the final position after 5 years. So if you can get multiple 2 year fix you can do better than one 5 year. Note I have not crunched the numbers to check if this is true, but it makes sense that banks make sure you pay a penalty for them taking on the longer time risk.
Of course two other factors that effect this, if SVR spikes up due to say interest rates (doesn’t look likely) and the pain of doing all that paperwork every two years.
@richard, that is the same logic that I used to avoid fixes. I assumed that the bank would ensure they weren’t going to lose out. I suppose a bit like passive investing, I assumed I had no forward knowledge of interest rate movements.
I’d be interested to know if that logic holds today, is it cheaper to avoid a fix?
(Generally speaking in those days, you could either get fixes or discounts from the SVR. I usually want for a short term discount but probably spent most of my time on SVR. I would use all windfall lump sums to pay down the mortgage. I didn’t invest much either. I was unenlightened, but unlike ermine I am totally happy with the way it worked out!)
@Nebilon
I did a bit a googling the other day to find the cheapest historic “lifetime tracker mortgage” – It was base Rate + .16/.17%
My Lifetime tracker mortgages are base + .9% & base + .24% (on a BTL!).
I was hoping at one point that Bank would ask to “buy me out” – wishful thinking.
Interestingly, while the banks are very inflexible for Fire-ees to move house, my bank let me extend my IO base rate tracker by 7 years FOC when I moved 6 years ago – the best Option I’ve ever been given.
I wonder if there are any purchases/deals available today what have the potential to be similarly great value…hindsight bias perhaps
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@richard @Vanguardfan — You would ordinarily expect tracker or discount mortgages to be cheaper over the mortgage term for the reasons @ZXSpectrum48K and you guys state.
The reason to use a fixed-rate mortgage isn’t typically to speculate on future rates diverging from market expectations, it’s to have *certainty* about your payments.
Hard to remember now, but there was a time when rates used to go up! 😉 With a fixed-rate mortgage you don’t have to worry about that for the term of fix.
So it’s basically insurance. You might think of the (these days small) additional cost you’re paying as the cost of that insurance.
It might seem paranoid to worry about interest rate rises now, but we have to look through the recency bias of the Covid-19 pandemic to when the likes of @Rhino and me were taking out our fixes.
Also rates aren’t likely to revert to their old ‘normal’ any decade soon (one reason I finally bought a flat) but even small rises can make a difference.
E.g. On a £250K interest-only mortgage, a mortgage rate rising from just 2% to 3% equates to monthly payments rising from £416 to £625. (A repayment mortgage would go from £1,068 per month to £1,196 per month).
I can easily imagine having either sufficiently high and/or secure income or sufficient net worth that I wouldn’t worry about paying the ‘insurance premium’ of a fixed-rate mortgage, but I think for a lot of people they do make sense.
Yes I well remember the days of interest rate rises! I never had much of a mortgage in the current low interest rate environment, we had mortgages from early 1990s for about 20 years. I can understand if you have stretched to maximum borrowing on a 2% rate you have a lot more risk from small rises in interest rates. I recall rates of more like 8%, and I think the most we ever borrowed was no more than maybe three times our income (those were the days eh! Actually still possible in our area for a professional couple, but don’t bank on rising property values – they haven’t risen in real terms since the GFC). So we always had a comfortable safety margin.
@TI – indeed that is the reason I took a fix. I have ‘lost’ these past few years though for sure.
The biggest issue with rolling onto the svr is the svr are nearly always what I would call a rip off. Most look to be around 3.5%. To get onto a competitive tracker you need to apply and then you are back to needing a job etc. And these usually have end dates as well so you are sucked back into the cycle every few years, needing to maintain your income to keep the payments low…. So then you may as well take the longest fix you can (at todays rates)
Our mortgage came up for renewal last year and we went for a 5 year fix – at the time due to Brexit uncertainty. The 10 years were considered but were like an additional 1% which seemed a bit steep. I’m happy to pay for the certainty of those 5 years. 🙂
It would seem if you’re worried about potentially re-mortgaging in the near future you need to get your LTV under 70% ASAP though, as I think Finumus noted in an article not too long ago.
ZXSpectrum48k wrote:
“Looking at HSBC 60% LTV mortgages (as a reference benchmark)
2y fixed = swap + 65bps, 5y fixed = swap + 100bps, 10y fixed = swap + 205 bps
So the forward credit spreads are already quite steep (2y3y at 185bp and 5y5y at 300bp). It’s not clear to me why 2y fix + rolling into an SVR for 3y is going to be worse than a current 5y fix. In fact, the 10-year fix looks pretty expensive at that credit spread.”
I’d love it if someone could unpick that a bit so that I could compare mortgages in this manner myself in future. Where do the 2y fixed = swap + 65bps parts come from? Looking at the HSBC rates use as example, I see them at 2y=1.49%, 3y=1.54y, 5y=1.59% and 10y=3.14% (10y is only available in “fee-saver” guise so I’ve quoted rates for same product flavours of other durations too). The deltas between the HSBC percentage rates don’t map simply to the “swap + n” rates given by ZX as far as I can see.
Is it then a case of computing the forward rates via something like this method?
https://www.investopedia.com/ask/answers/043015/how-do-i-convert-spot-rate-forward-rate.asp
(Btw, is there a syntax cheatsheet for formatting comments? I’d have put that quotation in a blockquote or italicised it if I knew how…)
In my mid-20s I had a ghastly experience that changed my attitude to debt and spending for the rest of my life.
3 years after graduation, I found myself working in Malaysia with, for me, a big overdraft.
I was called into my local branch of Standard Chartered Bank and, without warning, told that my account was frozen until the overdraft was cleared. I left the bank shell-shocked, counting the loose change in my pocket and wondering how I would manage to buy fuel to get to work.
It was a nightmare but taught me never ever to get in that situation again.
TP2.
One thing I can’t understand about this whole debate is why doesn’t everyone just look at the mortgage payment as the monthly living expense that it is. If you didn’t own a home, you would be paying rent, which means paying off your landlord’s mortgage instead (and then some). No one seems to suggesting paying rent months or years ahead of time, depriving yourself of money to spend or invest now. That would be silly. A mortgage is basically like paying rent to the bank anyway.
Likewise, no one is suggesting paying other living expenses ahead of time. For instance, I don’t know anyone who stockpiles non perishable food on the basis that it will be cheaper than buying it as and when needed over the next 30 years.
I have a big problem with your argument. For most people, it takes 25-30 years to pay off a mortgage, most of their working life. The benefits of investing in a tax sheltered account take years. The average rate of return from investing is higher than the rate on the mortgage debt. In theory, what you say is all good. In reality, retirees cannot eat, pay utility bills etc on the equity on their house, but they can from a diversified portfolio which has had years to even out the stock markets ups and downs and compound.