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Mortgage risk: a checklist

Mortgage risk: a checklist post image

Franz Kafka’s classic The Metamorphosis sees the central character go to bed a man and wake up as a giant cockroach. Does your mortgage risk a similar transformation in 2022?

Could this engine of wealth creation become a millstone?

It sounds heretical. For more a decade it’s been almost daft not to run a cheap mortgage.

Barely there interest rates made for affordable repayments. Ever-higher house prices and stock markets meant owning additional assets was more rewarding than repaying your debt.

But now rates are rising. Stock markets have crashed, and house price growth is slowing.

Recession talk is in the air.

Sky-high inflation has driven a regime change. Low inflation and near-zero interest rates have given way to expectations of dearer money in the future.

The shift has already hit the highly-rated growth stocks inside your index fund.

But mortgage risk is a bigger existential threat to most of us than wobbly stock markets.

Why your mortgage matters so much

With about eight months to go until my own five-year fixed-rate mortgage ends, I’ve been thinking a lot about mortgage risk.

Having a big mortgage on your personal balance sheet dramatically shifts your financial posture.

And as a lifelong debt-hater, I’ve found having a mortgage challenging at times.

As I told friends who’ve been mortgaged since their mid-20s – and who couldn’t see what I was fussing about – getting a mortgage changes everything.

Because it’s really hard to go bankrupt if you’re not in debt. You can usually alter your circumstances to match your income. The Micawber Principle holds.

Sure we can all imagine scenarios where everything goes to zero and you end up under Waterloo Bridge. But absent debt, a lot must go wrong for that to happen.

With a mortgage though, things are different.

For starters it’s not hard to find yourself with a negative net worth. First-time buyers who put all their savings into buying a home with a 95% mortgage, for instance, are in the red if their house falls in value by just 5%. (Dragging them into ‘negative equity’.)

Bigger price falls might offset ISA and pension savings, putting even wealthier mortgage holders in the hole.

This certainly isn’t fatal in itself.

Crucially, a mortgage is not marked-to-market. As long as you make your monthly payments you’re okay – even if house price falls mean that you’re technically underwater until markets recover.

But what if you lose your job, or there’s some other financial disaster?

You could then struggle to keep up with your mortgage. Especially if mortgage costs are rising as rates climb.

In the worst case the bank repossesses and sells your home, you’re on your uppers – and you still owe the lender whatever is left of your mortgage debt.

Around 345,000 homes were repossessed in the 1990s housing crash.

That’s the nightmare scenario.

Assess your mortgage risk before it matters

I don’t want to overdo this. Interest rates are still low by historical standards, and employment high. And there’s no indication of a house price crash, except for property’s perennial expensiveness.

Personally I’m still mostly happy running my big interest-only mortgage.

I’ve plenty of assets, despite recent market falls. And I can handle a fair few rate rises.

I expect the majority of mortgaged Monevator readers feel the same.

You’ll typically have emergency funds, other investments, jobs, and you didn’t overstretch to buy.

However we’re all at different stages of our financial lives. Some readers will be edge cases.

Besides, the time to prepare is always before a disaster actually strikes.

Complacency kills!

A checklist to assess your mortgage risk

My interest-only mortgage is backed by my investment portfolio, rather than my salary.

And I didn’t get my mortgage like you got your mortgage. (It was personally arranged).

The whole shebang is very different. This means I must consider several moving parts – and different risks – when evaluating my mortgage-related moves.

You can probably do a simpler sanity check. But I think you’ll still find food for thought below.

Let’s get started.

Re-financing risk: what happens when your mortgage deal expires?

For most readers, this is a formality. Provided you’ve still got your job and nothing dramatic has changed, it should be straightforward to get a new mortgage deal when your current one ends.

Remember your initial mortgage was for 25 years or more. Any fixed-rate term of, say, five years was a special bonus period. Your contract runs for 25 years.

This is a good thing. It means that if you don’t get a new special deal, you should just go on to your lender’s standard variable rate (SVR). So you won’t suddenly need to repay your mortgage.

But what you probably want is a new bonus offer.

Let’s say you come to the end of your fixed-rate period. You should probably look to remortgage on a new fix, or some other kind of special rate. This will likely be cheaper than staying on the SVR.

Your best deal could be with your current bank, or with a different lender.

Sitting pretty with higher equity

Your status as a borrower has probably improved since your last mortgage deal.

UK house prices have been rising. This likely applies to your home, too.

You’ve probably also paid off some of the mortgage balance, alongside the interest.

Combined, this means you should have more equity in your home. (Equity is what’s left when you subtract your outstanding mortgage from the value of your property).

More equity usually means access to better rates.

Before, you might have been in the 90% loan-to-value (LTV) mortgage category. But perhaps your greater equity now puts you in the 80% bracket.

Banks will offer you a lower rate compared to somebody with less equity. Lending you money has become less risky. There is a bigger equity buffer against house price falls.

Remember this is mostly helpful for the bank because it protects its loan if it has to repossess your property and sell it. You obviously don’t want it to come to that!

When remortgaging you’ll also have a – hopefully clean – history of making mortgage payments. No longer are you a highly-stretched young schmuck without a track record. That will further increase your appeal to lenders, compared to when you were a first-time buyer.

So shop around.

Look out for early repayment charges: Most mortgage deals come with a penalty charge for early repayment of the mortgage for as long as the deal lasts. For instance I faced a 5% penalty in the first year of my five-year term, falling to 1% in the final year. However I can pay off 20% of my outstanding balance every year without penalty. Check your small print. Also: sometimes it may be worth paying a penalty charge to secure a new mortgage deal at a lower rate.

What if you lost your job?

If there’s been a big change in your circumstances you may struggle to get a new mortgage deal.

That’s because you could be asked to prove your income and other details such as credit card debt as part of your application for the new deal, just like when you first got your mortgage.

However at worst you should just revert to continuing on your lender’s standard variable rate. Your home ownership is not immediately at threat.

The downside is the SVR is probably costlier than with a deal. You’re also exposed to future mortgage rate rises (or cuts).

I’d suggest it’s nearly always better to lock in a fixed-rate mortgage when you can.

Even if you believe interest rates might not rise much more – or fall – the security of having a fixed schedule of mortgage payments is valuable.

Not sure where you’ll stand when your current deal ends? Give your bank a call so you can prepare.

Repayment risk: keeping up as mortgage rates rise

However you refinance your mortgage, you may well have to pay more each month because mortgage rates have been rising.

To state the obvious: higher mortgage rates mean higher monthly payments.

Can you cope? Do your sums to see if you should already be rethinking your budget.

I covered stress testing your mortgage against rates rise in my last post.

Please read that if you haven’t. Rising rates is the biggest mortgage risk for most people.

Interestingly, however, there’s been a development since my last article.

The Bank of England has told lenders they no longer have to stress test borrowers to check they could afford to pay with much higher mortgage rates. The central bank believes that restrictions on loan sizes as a multiple of income will be sufficient to keep things under control.

Maybe so, but it seems a curious decision just when rates are rising. If the Bank wasn’t politically independent you’d smell a rat.

With respect to today’s topic though, this shift might make it easier for some people to remortgage in a pinch.

Remember, the high inflation ushering in higher rates is also eroding the real value of your outstanding mortgage. That is definitely a good thing.

However you need to keep up with your mortgage payments to benefit.

Repossession in an economic downturn is to be avoided at all costs.

House price crash risk

This brings me onto the potential for house prices to fall.

Lower house prices is not a direct mortgage risk.

Unlike with a margin loan with a stock broker, for instance, your bank does not constantly reassess the value of your home and demand more cash if your equity falls below a critical threshold.

That’s one reason why a mortgage a relative safe kind of personal debt.

The other reason – for you and your lender – is a mortgage is secured against your property.

This asset-backing is why you can borrow to buy a home at 3.5%, but credit card debt costs 25%.

But it’s also why falling house prices are a tangential mortgage risk.

If lower property prices mean the equity in your home has fallen when you remortgage, you could have to agree a more expensive deal.

And if you’re in negative equity you could end up stuck on your lender’s SVR.

Buy high, sell low

And what if you need to sell your home when house prices are down?

At best you’ll lose out because you have less equity in your home to get as cash after the mortgage is paid off.

At worst, your house sale won’t cover the mortgage. You’ll be in arrears.

Unlike in some countries – and several states in the US – you can’t walk away from this debt in the UK. You’re still liable for the shortfall, even though you’re no longer a homeowner.

There are rules, though. If it happens you’ll definitely want to seek advice.

And banks really don’t want to go down this road. It is expensive, and bad for publicity. They will usually try to agree some new payment schedule.

We can’t be sure that would happen in a really deep downturn, though.

Keep up your payments and you’ll be okay. But this is a mortgage risk, hence I list it here.

(Further) stock market crash risk

Fewer Monevator readers will need to worry about lower share prices with respect to their mortgage.

Indeed for most people in the accumulation phase of life, a stock market crash – and the chance to buy shares cheaper – is a good thing.

But if, like me, you’re on an interest-only mortgage that’s meant to be paid off by investment returns – or maybe you’ve still got a market-linked endowment mortgage from the 1990s – a drawdown in your portfolio could matter:

  • In the short-term, there’s the risk your portfolio falls a lot and at the same time your bank checks on whether your repayment vehicle is on-track. You can chant ‘be greedy when others are fearful’ to bankers all you like – they will only lend you an umbrella when it’s sunny. Banks will be spooked by a portfolio decline. This will probably limit your options if you want to agree a new deal – perhaps to address a projected shortfall – such as extending the mortgage term.

  • In the long-term, there’s a danger that your future investment returns leave the portfolio unable to cover the mortgage. In my case this would require negative nominal returns over the next 20 years! Not impossible, but I judge it to be low risk. You’ll have to do your own sums.

As I said, borrowers with endowment mortgages from the ’80s and ’90s have already trod this ground.

At one point there was lots of talk of an endowment shortfall crisis in the UK, and of how this might also encompass struggling interest-only mortgagees.

We don’t hear much about it now. Products and strategies were created to help usher older mortgagees over the line, and I expect many just sold into a stronger market and downsized.

The bottom line is anyone reading Monevator with an interest-only mortgage should be on top of their finances. Don’t assume another decade of high returns like the last one will bail you out. Contribute more money to your investments, or consider doing something else like shifting to a repayment mortgage or even selling up while house prices are strong.

Personal risks: health, job, moment of madness

Finally a broad catch-all covering all kinds of developments in your personal life.

Clearly if I could forecast whether you’ll be hit by a bus or suffer a stroke, I wouldn’t be writing a financial website.

However some kinds of massive disruption are predictable – and yet you might not have associated them with your mortgage before.

For example I’ve known couples set to divorce who’ve put off (un)doing the deed for years. This could be a big mistake if you find yourself having to divvy up a house in the midst of a house price crash, or if the main breadwinner is made unable to meet the payments.

Or perhaps you’ve known health problems that will eventually see you leave work, but you’re soldiering on for now? From the perspective of your mortgage it may be better to bite the bullet and downsize to get mortgage risk off the table, to avoid being hit by a double-whammy in the future.

I also think it’s fair to say the risks of running a mortgage increase with age – although there comes a point where it’s more your bank’s problem than yours!

The inescapable truth is a healthy young 30-year old has more time to correct missteps than a 60-something near-retiree. Act accordingly.

Be prepared

Given the shifting financial landscape, I believe it’s a good time for everyone to think about mortgage risk – and any upcoming remortgaging plans – and to consider what could go wrong.

Channel your inner Chicken Little. Imagine the sky is falling.

Could you be squished like a chicken nugget?

Let us know in the comments below.

In a couple of weeks I’ll return to my own mortgage, and give an update as to where I’m at as a result of all this thinking. Subscribe to make sure you see it.

{ 22 comments… add one }
  • 1 miner2049er June 23, 2022, 5:55 pm

    The chunk of cash 50k I had in reserve to pay off the mortgage is now nestling away in an account taking advantage of an interest rate above current mortgage interest rate (atom fixed rate 2.6%). I’ll review in 3 years when current fix ends what to do next.

    I was planning to take the cheap mortgage way into FIRE time, that may well change now.

    Yep inflation may be reducing what I could spend that 50k on outside of the mortgage, but it’s there for my mortgage and as long as it’s ticking above the mort% rate then I’m winning/sleeping at night.

    The 50k came from cashing in some portfolio when shares hit high and the signs in the above article mentioned on this site things could change. I didn’t want to be greedy and have something to service that debt so I could sleep easy.

  • 2 Andrew June 24, 2022, 1:26 am

    There seems to be a lot of similarities to the sequence of return risk you get prior to retirement. The likelihood of anyone who bought 5 years ago on a 25 year mortgage being underwater anytime soon seems remote given that prices would have to drop 30-40%.

    On the other hand, suckers like me, buying today, are basically just going to have to pray that the inflation crisis passes and rates stay under control or otherwise earnings keep up.

  • 3 Erico1875 June 24, 2022, 7:02 am

    Don’t expect the bank to help/work with you when things go wrong.
    About 10 years ago I developed a back problem that put me out of action for 6 months.
    I would have been better owing money to the Kray Twins.
    Santander harassed me almost daily for the payments. They refused payment holidays, switching to interest only or any other solution other than make the regular payment
    Fortunately, I recovered in 6 months, repaid the arrears and there after managed to switch to a cheaper deal.

  • 4 Charleston June 24, 2022, 9:25 am

    Are interest only mortgages still sold? What are the current rates for say, 60% and 80% LTV?

  • 5 The Investor June 24, 2022, 9:54 am

    @Charleston — Interest-only mortgages are still available — I have one — but you have to jump through far more hopes in my experience. And they’re not just from specialist lenders. To randomly pick a High Street bank, Natwest says it will issue interest-only mortgages but:

    * You’ll need to earn £75,000 a year, or have a combined joint income of £100,000
    * You can borrow up to 75% of the value of the property (i.e. a maximum 75% loan-to-value (LTV) mortgage)
    * Your mortgage must be at least £25,000
    * Your repayment plan needs to be approved by us

    They are the right product for some people, but most will probably do better and sleep easier with a simply repayment mortgage — especially now rates are higher.

  • 6 Rosario June 24, 2022, 10:18 am

    @TI Interesting timing for me. I’m also coming to the end of my current fixed deal (March 2023) and was actually thinking of running the numbers on whether its worth paying the 1% early exit fee of my current deal (2.05%) and locking in one of the c3% fixed deal currently available.

  • 7 Fred June 24, 2022, 10:36 am

    My Stocks & Shares ISA has increased to £200K and I owe £120k on fixed rate mortgage that ends in 1.5 years.

    May be foolish – not sure yet, but I sold £120k worth of equities a month ago with a view to paying off mortgage, including 5k penalty, so it’s sitting in the ISA as cash at present.

    Still have wifes ISA and I have a SIPP and also have healthy equity in the property with no other debt. I’m 55. So decided to pay it off to remove debt and release any ties with bank, and with the thinking it was a good idea to sell in May, before markets possibly drop more, although I know we don’t really know what will happen?!

    Having second thoughts now – should I go for it, and pay it off or wait until the end of the fixed period? Wife would prefer to be mortgage free.

    I wonder what fellow Monevators think?

  • 8 JDW June 24, 2022, 10:37 am

    @rosario yup another one here planning on running the numbers of moving prior to the end of the current deal, albeit this is some way off still in October 2024.

    The ten-year fixes around 2.5/3% with the ability to port are looking very tempting, even with a penalty for moving early but need to spend some time at some point soon to crunch the numbers – think from memory the penalty was five figures (!), so may be better off sticking for now.

    The certainty of fixed rates is a must for me, coupled with the awareness (prior to this article but highlights many good points, thanks again @TI) to get our shit together before the deadline as also on a 1.89% interest only, (with Santander @charleston) with a decent chunk of the LTV down (and have been making overpayments in the region of 5% pa). Switching to repayment is an option, if only for piece of mind in the long run, but would obviously impact saving and investment rates elsewhere. One snag/another complication is since getting the mortgage I’m now on FTC role, another is wishing to move in the mid-term to a slighly larger family home. Tempted to get professional advice.

  • 9 ermine June 24, 2022, 11:19 am

    @Andrew #2
    > anyone who bought 5 years ago on a 25 year mortgage being underwater anytime soon seems remote given that prices would have to drop 30-40%.

    In a previous life, I was that mug. It can happen. I know, because it happened to me.

    If I totted up every single financial mistake I have ever made in life, from drinking too much beer and partying in my 20s to buying into the dotcom boom, churning like a nutter and then selling out into the long bust, and every single stock I have sold for a loss since then, they fall into the noise compared to buying a house in 1989 and selling it for just over half a few years later. At least I had 20% equity when I bought it. All thrown down the toilet. the neighbours on either side of me were reposessed, I recall reading the To Whom It May Concern notice nailed on the door and wondering when it would be me.

    I’m not saying it’s going to happen. But it can. Like the lying toerags that sold me the mortgage saying 6.5% interest rates were unlikely to go up. I asked what the cost would be if they reached 14% (it was an IO endowment mortgage (!) so the computation was easy. As it was I got to find that out the hard way in a couple of years when they reached 15%-ish.

    UK residential property is a one-way money tree. Until it isn’t, and then it’s a rapacious monster. The historical average for interest rates in the UK is about 6%. I’d say a checklist wants to factor in being able to pay that at some point in the next 10 years.

    The house market cycles are long, longer than business cycles. The people who remember the last time this went titsup are old now, coming up to retirement age. It isn’t part of the historical record of the internet because the high-water mark of the misery was the rise in interest rates to keep the £ in the ERM which failed in 1992 after Black Wednesday when the £ was ejected from the ERM in September 1992. The WWW only really got going from 1994/1995. Three million British households were in negative equity according to newspaper reports at the time. There is something uniquely miserable about paying shedloads of money into negative equity, month on month on month. Losing 7k in the dotcom bust was nothing in comparison, either in real terms, or in the value of the instruction in how not to be a muppet – I got something for that money. All I got from paying down that negative equity was a deep hatred for residential property, to the extent that I still don’t regard the value of my paid off house as part of my networth, because of the visceral memory of it all going to squit and a so-called asset becoming a massive liability.

  • 10 GMN June 24, 2022, 11:23 am

    The idea that BofE base rate will just keep on rising (as reflected in the blog post and the comments) is just short-term thinking, in my opinion.
    We’ll be in a recession before 2022 is over, and wouldn’t surprise me to see BofE start lowering rates again 1H23..
    This is what the market is starting to reflect, at least in the US – just look at what happened to the bond market this week! 20y Treasurys starting to price in a recession and expectation that FFR won’t reach the level J.Powell is claiming for 2023.. Fed will continue to tighten in the short-term, but will have to pivot at some point in the coming months, hence why long-dated bond yields are starting to roll-over. Expect similar on this side of the Atlantic too.
    Therefore I’m not so sure that locking-in a 5y or 10y fixed mortage rate at this point in time is such a financially-sound idea, as some here seem to think, especially if you need to dish out large early payment penalties..

  • 11 ermine June 24, 2022, 11:36 am

    > Three million British households were in negative equity

    Correction. It was one million (Times, 24 April 1992) – I think the three million were the number of people exposed to the pain. Or the psychological trauma distorted my recollection 😉

  • 12 The Investor June 24, 2022, 11:56 am

    @GMN — Cheers for thoughts. 🙂 I agree that rising rates aren’t absolutely nailed-on. However with inflation forecast to rise towards 11% in the UK it’s hardly outlandish. I’ve noted the same rollover in market yields this week in both the UK and the US, but one blip doesn’t really upset the trend. Set against that, bond prices have come down a very long way in a very short time; I’d far rather be a buyer of government bonds today than at any point in the past 5-10 years, despite those inflation expectations.

    I also think UK is in a particularly tricky spot. UK government debt servicing costs hit a record in May. We have Brexit set to throw sand in any recovery for years, as well as likely leaving us more exposed to persistently higher inflation (friction trade costs, lower unskilled immigration, higher skilled immigration — the latter of which is great IMHO but it is what it is). I’d definitely see the US and UK as on different paths.

    All-in it’s a very murky backdrop.

    But regardless, you’ll note I said in the article the average person IMHO should NOT be speculating on interest rate direction as a reason to fix a mortgage.

    The reason for most of us to fix a mortgage IMHO is to have security and visibility over our payments.

    If one is very wealthy than perhaps one doesn’t need to worry about that, but with the squeeze going on and so many contrary signals (particular higher inflation potential versus lower growth signs that might slow inflation etc) and with fixed-term mortgage rates still available around the BOE’s long-term inflation target, I think there’s hardly been a better time to fix rates.

  • 13 The Investor June 24, 2022, 12:00 pm

    @ermine — Cheers for the cautionary tale, always welcome. However I disagree with this, as always:

    I still don’t regard the value of my paid off house as part of my networth, because of the visceral memory of it all going to squit and a so-called asset becoming a massive liability.

    Presumably by that token you also don’t count your equities and bonds and gold and crypto as part of your net worth? They can all go down in value, too.

    The house didn’t become a liability as an asset (except for the need for repairs etc). The MORTGAGE became a liability. Same as if you bought shares on margin.

    I understand this is all very emotional for you, but conflating the different parts (the assets, the financing, the sequence of returns you happened to (not) enjoy) isn’t that useful I’d suggest.

    Warning that property prices are not a one way street or that interest rates can rise — from your lived experience — is very valid of course! 🙂

  • 14 Thomas Elliott June 24, 2022, 12:17 pm

    I’m in the minority of Monevator readers who don’t own a home, but we’re planning to buy our first home soon. So, shout out to anyone else for whom a correction in house prices would actually be welcome!

    I’ve done my best to maintain a level head amidst the recent turbulence (soaring house prices over the pandemic, followed by the recent interest rate hikes). My view was that I shouldn’t get sucked into the race to lock in a low interest rate and risk paying over the odds in a frenzied market. Counter-intuitively, I think that the next few months might be a good time to start looking, as others get nervous and a bit of heat comes out of the demand side.

    Also, this might be a post-hoc rationalisation, but it might be a good thing if my maximum borrowing ability is dented now, the alternative being that I would have over-leveraged only to be stung in 5 years.

    Does it sound like I’ve got my head screwed on? Does anyone else have any sage wisdom for someone who remains on the outside of the property market?

  • 15 Hak June 24, 2022, 12:48 pm

    @fred not sure what premium you attach to a happier wife and a “sounder sleep” but the implication of your actions and message suggests you should pay the mortgage off.

  • 16 Seeking Fire June 24, 2022, 12:51 pm

    @GMN. FWIW (precisely nothing), I largely agree with you. It’s also therefore quite probable that having a mortgage (the larger the better) will be a financially smart move long term given negative real interest rates. A strong tool to combatting financial repression is owing money. Govt’s are largely on your side as they are also printing money nominally.

    The problem is if that is wrong, which it could well be and no one has any idea on the future (let’s all be honest), interest rates might continue to rise into a recession if £ tanks and UK Govt struggles to refinance in extremis, the mortgage holder loses their job as it’s a big recession, house prices fall and the tail risk is they lose their house and find themselves explaining to their partner and children why they are at the mercy of assisted housing or the gutter. Not my central scenario at all. But that’s a pretty spectacular downside tail risk and is generally enough for many people to get that mortgage paid off asap.

    The ability to sleep at night as have oft been discussed ad-infinitum is considerable.

    I’m all for people running a bit of leverage. Factors to consider – what are your other liabilities (e.g. dependents etc), how secure is your employment or business (really), are you young or old and how many other assets do you have that you could throw at the mortgage if the tail risk starts to become a reality……

  • 17 The Investor June 24, 2022, 1:23 pm

    @Seeking Fire — I believe @GMN is talking about the pros and cons of fixing a rate, rather than running versus paying off a mortgage 🙂 But with that said your points are equally valid to fixing a rate versus waiting, IMHO, and amplify what I said above.

    The downside of fixing now for might be that rates fall back by — what — 1% or so (if we take the peak lows as a blip). The upside is that there are plenty of scenarios where by fixing now you avoid rates of 5%, 6% or even 7%.

    For most people the asymmetry should be clear of risking paying a mortgage at say 7% (or worse, in some doomsday forecasts) versus the modest gain of going back where we were six months ago, rate-wise, I feel.

  • 18 ZXSpectrum48k June 24, 2022, 1:49 pm

    @GMN. I tend toward the view that inflation will roll over as consumer confidence collapses and supply-chain bottlenecks unwind. The rally in global fixed income this week seems to be a function of people waking up to that risk.

    Nonetheless, longer term inflation expectations are rising so a wage price spiral is now not out of the question. That would embed inflation back into the economy. It’s a difficult call here as we are at a pivot point where we can go either way.

    For a first time buyer, buying a house is not risky in itself. You are just covering an underweight position and going flat property risk. If house prices fall, this is good since you want to buy bigger later. The risk is in the levered debt position. You want levered debt since it’s being eroded by inflation much faster than the yield you pay. It’s a great positive carry position. The problem is that if you can’t make the payments, you default. I see the answer being to lock in the funding line for as long as possible.

    So I’d argue that the value of being able to fix for 10-years at 2.75% is huge. Especially at 50bp over a 2-year fix. Yes, you could have a significant opportunity cost vs a tracker or 2-year fix if rates fall back to zero. Against that though, the actual rate is very affordable. In real terms, in inflation goes back toward the more normal 3%, it’s still free borrowing. Right now, it’s a negative 6-7% real rate, and if CPI does stay persistent at say 5% or so for a number of years, there is little real chance of mortgage rates coming lower. In fact, the yield curve could re-steepen and credit spreads widen, pushing long-term fixes much higher.

  • 19 ermine June 24, 2022, 1:55 pm

    @TI I totally agree with you, intellectually, I wasn’t making a PF argument, although things where the consumption value is the usufruct are inherently hard to value. Buying a house is dear in the UK for many reasons, and one of them is that renting is so horrible and fragile, which makes the usufruct worth a lot more in the UK than say in Western Continental Europe. British landlords are simply more evil and less regulated than their counterparts, which raises the price of housing by making people more desperate to avoid their tender mercies.

    > presumably by that token you also don’t count your equities and bonds and gold and crypto as part of your net worth?

    Hmm, I certainly don’t regard the crypto as part of my networth, though it’s a rounding error anyway. Just a smaller rounding error than it was, but that’s fair enough, I consider that a punt, not an investment 😉

    It’s margin on risk assets that is dangerous to networth calculations, because the uncertainty is high. The worst thing that could happen is all that other stuff falls to zero. With a house the debt runs after you like a lost dog. I seriously envied the Americans who could simply send jingle mail and walk away and start again. A house can destroy the rest of your networth. For most of my thirties my networth was seriously negative. I had a decent job, I had some savings, I didn’t have a gambling habit, but I did have a house worth less that I bought it for, which wiped everything else out.

    The one thing that I very clearly learned from wanting to retire early is don’t owe money. I read Seeking Fire for instance, above, and entirely agree with his premise that desperate governments carrying too much debt are entirely on debtor’s sides, because they are the biggest debtor of all. Paying off debts are a mug’s game. I still want none of it. Yes, the pennies are shiny and attractive. It’s the steamroller that would worry me if I borrowed for risk assets, powered by Rummy’s unknown unknowns.

  • 20 Learner June 24, 2022, 2:53 pm

    @Andrew @Thomas fill your boots I say; regardless if sale prices fall in the short term, in the bigger picture the market value will inevitably recover and increase. Look at any chart, including through the GFC. Even in decline, the loan is good in real terms as ZX said above I believe.

    For complicated logistical reasons I’m unable to buy a home for at least another 8-10 years, which would see me entering a 15 year ~£400k loan on a modest flat in my early 50s. Count yourselves lucky!

  • 21 The Rhino June 24, 2022, 4:59 pm

    The mortgage market is weird in as much as people have such vastly different experiences in the products they can and can’t get which doesn’t seem to be solely related to their personal circumstances. I think there’s a lot of information inefficiency out there. I think a good broker is a valuable thing.

    I very nearly got caught by the no job at remortgage time trap. In the end squeaked through but only just.

    For the life of me I couldn’t get a 10 year product though so had to make do with 5. Prior was a 2yr variable that worked out brilliantly with COVID. Ended up less than 1%. As of last autumn on a 5yr fix at 1.3%. Just have to hope that my next cliff edge in just over 4 years is favourable. Either in terms of another attractive remortgage or being able to pay off without incurring a loss.

  • 22 Van Dieu June 25, 2022, 4:16 pm

    I don’t understand this. Financially savvy folk agrees that holding cheap debt and letting inflation erode it is a smart thing to do. But then when we actually get a bit of inflation rear its head everyone goes into headless chicken mode and starts questioning the stratetgy!

    I’ve got 18 months to go before remortgage and I’m not worried about it at all — this is what we *want* to happen — this is the entire strategy in a nutshell!

    Inflation and deeply negative interest rates will push the burden of the repayment onto the issuers of debt. Yes, nominal interest rates will rise a little, but let’s be honest, the rates we saw in 2020-21 were an aberation that should never have been allowed.

    Run it for 20 years and by the end of it your mortgage will be shrunk down to the size of a credit card bill over time.

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