@Rand-
Wait, is your mortgage an adjustable-rate? Am I correct that fixed-rate mortgages in the UK are rare?
@Rand-
Wait, is your mortgage an adjustable-rate? Am I correct that fixed-rate mortgages in the UK are rare?
No, not rare at all.
They might be a little less common at present because of the base rate being kept at 0.5% since March 2009, and the BoE looking likely to keep it there pegged to the unemployment rate, so people are less concerned with tracker rates rising any time soon.
Mine are always fixed.
Originally Posted by Steely Glint
Given that the British Central Bank is throwing money at the government bond market I am pretty certain those actually are a losing proposition at the moment. Bonds issued by others are barely safer than stocks in enterprises.
Congratulations America
realized I never responded. Your rationale is fairly reasonable, esp re: equity risk. But my issues are twofold. Liquidity is a problem if your plans change. What if you decide NOT to move, but you might want that money for something else in the future? You can probably tap your home equity in a loan somehow, but I imagine that's far less easy (and probably more expensive) than having your money in a more liquid investment, especially since the returns on your illiquid investment are quite low. I assume tapping into equity in the future may be more expensive than just paying off your mortgage slower, but I could be wrong.Good point. I may be missing something obvious but I somewhat view paying into my mortgage as a low-return but zero-risk illiquid investment.
Risk: Yes the property market may go down as well as up, but that ship has already sailed. We already own the house so any movement in value we're already exposed to. Paying more into the mortgage will not increase any equity risk from price movements.
Liquidity: This is an issue yes. No matter what happens I have always since I started work kept an emergency buffer of instant-access cash that I intend never to touch or use and then replace if used in an emergency. That is my liquid reserve, you can't get more liquid than cash in a non-Cypriot bank.I have also always since I was a Part-Time teenager been in a habit of saving some money each normal pay day automatically so if an unexpected tight spot develops can cease saving temporarily and essentially get on-demand extra income. I'm not sure where else I'll need further major liquidity for except for ideally the house purchase at which stage releasing equity will be required anyway. I see no way of saving a big enough deposit without releasing equity.
If our income falls then we can stop over-paying and it will cushion the blow of the stop and even further get the minimum repayment recalculated due to the overpayments and it will be lower.
Worth nothing that interest is dead money. I get no tax relief from it. Which I'm OK with, never saw the point of rewarding or encouraging debt and discouraging the paying down of debt. The only way here to get tax relief is on the mortgage is oddly enough for buy-to-let mortgages as the interest on the second home can be deducted against the rent of it for tax purchases. Though realised there's a potentially big tax headache from owning 2 homes in that Capital Gains Tax must be paid on a second home (even one you used to live in) while there's no CGT on your own home. You have CGT on stocks and shares too but I wouldn't be investing more than the tax-free amount you can put into a tax-free ISA each year so share/fund investments are more tax efficient it seems.
Long-term I have savings in stocks that I have built over the years and do not want to touch under any circumstances. That is for retirement. I'd rather act as if these stocks don't exist so they can be left alone and never messed with.
My second concern, on risk, has less to do with your current home, but more to do with the entire idea of renting out a second home in the future. There you are most definitely exposed to extra equity risk, and it doesn't necessarily pay off.
That being said, I think you are taking a fairly reasonable approach to the situation, and you have a better handle of the specific numbers. Sounds like you can go either way!
His own-to-let idea is a fairly British one. If it's the right one for him, he himself can decide best. It seems he's considering it a bit on the early side.
Congratulations America
Maybe I'm just more conservative about money (heh), but my feeling is, once you are concerned with rates going up...it's already too late and the rates will start to rise. It seems like some level of stability concerns Rand a bit, in which case a fixed-rate mortgage would provide a great deal of certainty.
I would personally be terrified at having an adjustable-rate mortgage; it's basically speculating on interest rates, when in reality most people want their housing costs to be as predictable as possible.
Gambling on interest rates by a private individual is bound to end in tears. However, tracker-rates very often are the cheaper way to go if your horizon is not too far away. For 10 to 30 years, you definately want fixed, for less than 10, tracker becomes very attractive. My last mortgage was adjustable-rate and though it makes you more aware of swings and changes, I think I easily gained a couple of thousands over a fixed-rate one. It also gave me an early warning for the financial crisis. An overnight jump in the interbank lending rate, gave me the hint to sell shares just before the markets started to go down dramatically.
Congratulations America
The issue is that US fixed rate mortgages are anything but fixed. They're only fixed on the upper end - i.e. they can't increase your rate - but the borrower is free to refinance at will if rates significantly decrease. This one-way bet means banks have to do two things that are unusual for such markets - they dramatically increase transaction costs to discourage refinancing, and they demand a higher spread over variable rates. In that environment, it often makes sense to go with a variable-rate mortgage if one's investment horizon is short enough and interest rates look relatively stable for the near future. In RB's case, both seem to apply; that being said, I don't know if 'fixed' mortgages in the UK work the same as they do in the US.
Most common in the UK I know of are "x% APR fixed for y years" and then variable after the initial fixed period of y expires. Anything from 2-5 years (of the 25) with then a follow-on tracker rate seems most common and then not unusual for people to refinance after that fixed period and get a new mortgage that is once again fixed for a few years. Fixed for the life of the mortgage? That's very, very rare as far as I know. The fixed rate is normally higher than the tracker rate and an alternative is a full tracker which tracks base rate from day one with no fixed period.
When we got our mortgage I put a lot of research into getting the best. And so I DID gamble heavily on interest rates, I was absolutely convinced they would stay low for a while. For some reason the follow-on tracker rate is lower than the immediate tracker rate, possibly as the bank expects people to pay to refinance rather than actually use the follow-on so I decided the best value was to get an initially fixed mortgage with the very minimum of the 2 years fixed. We're now on the follow-on tracker period and I'm quite OK with that, our rate fell by quite a bit when the fixed rate expired. If I'd gone for fixed for 5 years not only would we not be benefiting from the lowered rate now but for the initial 2 years too the rates would have been higher. Rates would have to raise quite high quite fast for it to have been the wrong call now.
The way it works here is that fixed is pretty fixed on both ends, during that period. During the fixed period (eg my now expired 2 years, or 5 or whatever) there is normally an "early repayment penalty" if you overpay your mortgage or refinance etc. The policy at Barclays is that you're allowed to make over-payments of upto 10% of the original capital per year which is quite a lot during the fixed period so its really just trying to stop refinancing and not paying just a bit extra. Once you're into the follow-on tracker period then there no such restrictions and you're encouraged to refinance.
Last edited by RandBlade; 10-23-2013 at 09:46 PM.
Well I have read that, because of our government subsidy for housing, our mortgage market is unique. It's true that the US "standard" 30 year fixed mortgage is something of an anomaly. Though it makes a decent amount of sense for a long-term purchase.
Rand, a different way to approach this is to assign a dollar value to your Time. In other words, calculate how much Time you'll spend on crunching numbers, financing/re-financing, maintaining two residences, traveling back and forth, being a landlord, etc....and decide what's "worth" doing yourself (based on your hourly wage) or paying someone else.
Since you're going to be a new father come March, my guess is you'd assign a pretty high dollar value to any Time that's spent away from your wife and child. If you can't afford to hire a property manager, that means you'll be doing all that work yourself....and that can cost a lot of Time away from home/family you may not want to spend. At least not during the first couple of years in your new family life, that's going to be crammed with momentous occasions in rapid succession.
30 year fixed!
How much higher than the base rate is that typically?
How long has that been the 'standard'?
Over here it's varied quite a bit over the years. I hear many horror stories of difficulties with mortgages in the late 70s and early 80s, when rates were around the 14% mark, peaking at 17% in '79. I hate to think how much my mortgage costs would be with those kinds of rates.
UK standard mortgage length is a 25 year term, though longer is possible with most lenders. Fixed rates are typically 2,3 or 5 year terms, though 10 years is provided by some lenders. At the end of the fixed term, most buyers will then take up a new fixed term, shop around for better fixed rates at other lenders, or move to trackers.
I suppose every mortgage market is 'unique', the Dutch system though knows the exact same government subsidies on housing for as long as I care to remember. The 30 year mortgage is so much a standard that even legislation is taking it into consideration; rates are usually fixed for 1, 5 or 10 years.
The main differences I see between the US and The Netherlands is that overhere not fulfilling your obligations on a home-loan leads to personal bankrupcy if the sale of the property is at a price that doesn't cover the debt. We have no such thing as handing over the deed and walk away. Which probably explains that even though there are enough people under water with their mortgages, the risk of them defaulting on their mortgage is significantly lower than anywhere else.
Congratulations America
We're currently at the zero rate bound, so prices are a little distorted, but currently: A 30-year fixed rate is about 4.25%, 15-year is 3.36%. A standard ARM (adjustable every year) is running about 2.8%. Remember that rates have been compressed because of the lower rate bound; normally the spread is larger. (Also, this is just one example of a loan value and geographical location... there can easily be a shift of more than 50 basis points as you shift those).30 year fixed!
How much higher than the base rate is that typically?
30-year fixed mortgages have been around since at least 1971 (that's when Freddie Mac data starts), probably longer. Rates used to be pretty high - they started in the 7-8% range - but they've in general moderated in recent decades. You certainly can get 'fixed' mortgages like in the UK - but in the US they're called adjustable rate since it's only fixed for a small portion of the loan.How long has that been the 'standard'?
Over here it's varied quite a bit over the years. I hear many horror stories of difficulties with mortgages in the late 70s and early 80s, when rates were around the 14% mark, peaking at 17% in '79. I hate to think how much my mortgage costs would be with those kinds of rates.
UK standard mortgage length is a 25 year term, though longer is possible with most lenders. Fixed rates are typically 2,3 or 5 year terms, though 10 years is provided by some lenders. At the end of the fixed term, most buyers will then take up a new fixed term, shop around for better fixed rates at other lenders, or move to trackers.
What Wiggin said. After some refinancing post-2008, I'm at around 3.75% for a 30 year fixed. Home loans here have basically no penalties for early refinance or prepayment.30 year fixed!
How much higher than the base rate is that typically?
How long has that been the 'standard'?
Over here it's varied quite a bit over the years. I hear many horror stories of difficulties with mortgages in the late 70s and early 80s, when rates were around the 14% mark, peaking at 17% in '79. I hate to think how much my mortgage costs would be with those kinds of rates.
UK standard mortgage length is a 25 year term, though longer is possible with most lenders. Fixed rates are typically 2,3 or 5 year terms, though 10 years is provided by some lenders. At the end of the fixed term, most buyers will then take up a new fixed term, shop around for better fixed rates at other lenders, or move to trackers.
It sorta sounds like it's hard to ever get out from the debt if you're always taking up new fixed terms, is that kinda how it goes?
Actually, was I reading correctly about the Dutch government considering a scheme to mimick the Fannie and Freddie home loan subsidies we have in the US? That's a good point about the differences in bankruptcy law. Though I think it's sorta hard to turn bankruptcy into a productive "cleansing" process if something huge like a home is basically impossible to discharge under bankruptcy.
Historical Reminder: mortgage interest rates in the 80's exceeded 10%, often hovering around 18-20%. It was a hard time to be a home-owner with a new mortgage, and partly why Volcker policies (during the Reagan administration) turned things around.
There are some tentative talks yes, but it's not very likely those talks will lead to concrete results.
Once you are bankrupt and your assets are liquidated you an apply for a rehabilitation program, which basically puts your financial affairs in the hands of a curator who essentially gives you pocket money from your own income, but who also has the right to impose debt resolutions on your creditors. After 3 to 5 years you can be cleared of any remaining debt. This system is relatively new, and a huge improvement on the old bankrupcy legislation which merely was punitive and had no elements that enabled people a new start. The old system was definately medievel.
Congratulations America
That's interesting. I was reading about it a bit more here: http://ec.europa.eu/civiljustice/ban...tcy_net_en.htm
I assume the curator is appointed/employed by the state? Or is it some kind of fee from the debtor?
3 to 5 years to wrap up bankruptcy proceedings? And that's better than the status quo? And people wonder why Europe has such low levels of entrepreneurship.
I don't think you should just be able to determine that your liabilities > assets and preset a 1-day reset button. I think for many things entrepreneurial here it's standard to take 7 years for bankruptcy to be completely cleared.
1 day? Certainly not. But rapid resolution of personal bankruptcies (and debt discharge that is largely unconditional) is central to encouraging risk-taking and entrepreneurship. It also encourages lenders to do a lot of due diligence and risk analysis, which increases overall credit quality.
I may be mistaken, but I believe you two are discussing different things.
Bankruptcies in America will sit on your credit for 7-10 years from the date of filing. They will hang over your head, but they don't absolutely destroy your credit worthiness.
That doesn't mean it takes anywhere near that long to go through the stages of bankruptcy, from the papers being filed to the debts being discharged.
"In a field where an overlooked bug could cost millions, you want people who will speak their minds, even if they’re sometimes obnoxious about it."
Those bankrupcy rules were developed by the same people who created the first limited liability company EVER in the history of this planet, then went to turn it in the biggest enterprise under the sun for a long time (with a turnover that outshone the budget of several big powers). So I have no idea why you would say something stupid like that. It's not like you guys invented capitalism or enterprise.
Last edited by Hazir; 10-28-2013 at 04:48 PM.
Congratulations America
I don't know about the UK, but overhere the actual debt exists untill the final resolution; if you'd happen to come into funds you didn't have beforehand you could still be made to pay up full.
Congratulations America
They are court appointed.
Congratulations America
And you don't think entrepreneurship or economic theory has advanced at all in the intervening centuries? It certainly didn't used to be the province of individuals of average means, and proceeded at a glacial pace compared to today.
Let's ask Donald Trump, the Billionaire that Bankruptcy built.
The point is that the one obviously has got nothing to do with the other.
Congratulations America
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