Wednesday, 7 July 2010

Windfall from Low Interest Rates on Mortgage

Do you have the benefit of an older mortgage linked to the Bank of England Base Rate which has tumbled to 0.5% possibly saving you hundreds or even thousands of £’s each month?

I have received yet another booklet from Mortgage Express, one of the Mortgage Providers who sold products to Buy To Let Landlords at reasonable margins, such as 1.75% above BOE Base Rate before the Credit Crunch.  The booklet claims to offer support to struggling landlords.  Mortgage Express no longer sells mortgages and seems to have one goal in mind – to reduce their loan book.  The message in all their literature has the same theme - either sell up or make lump sum capital repayments to reduce your debt. 

Whilst this might not be bad advice for some people it is only right that people understand the motives behind the message ‘we need you to repay your debt as we are in trouble’ – that’s how I read it.

I am not going to offer advice to anyone as to whether they should use any surplus cash to repay their mortgage debt but I do think people should be given a balanced view and consider their own circumstances as repaying their low interest mortgage debt might not be the right thing for them at the moment.  I would prefer that people think about things as a whole:-

  • Is the debt on their home or on a Business Asset eg Buy to Let? – Business loan interest is often tax deductible and is unlikely to be this cheap again.
  • Are there any other debts which are attracting higher interest rates, eg overdraft, credit cards, home mortgage – maybe these should take priority?
  • What interest rates can be earned after tax from putting the money in to savings accounts? Yorkshire Building Society are offering 3.5% before tax (2.84% after tax) for a 2 year fixed bond.
  • How else can the money be invested and is it possible to get a higher return than the current debt is costing?
  • What effect will it have on my tax payable if I repay some of my business debt?

There is a bigger picture than just reducing your mortgage commitment.

I am paying between 1.75% and 2.25% to Mortgage Express for some of my Buy To Let mortgages but my home mortgage attracts a higher interest rate with another provider. It makes no sense to me to repay Mortgage Express any lump sum, I would rather pay off my home mortgage or put it into a savings account earning 2.84% net of tax until interest rates go up, then consider reducing the debts.  Never forget that people only become insolvent when they run out of cash so Cash is King.

But on the other hand, I also believe that there is a great opportunity to make a good return at the moment from building individual quality homes – the huge shortage of new build properties brought about by the Credit Crunch can only bring more opportunities for those who can still find the finance to build.  So maybe I can get a better return by reinvesting in new build rather than repaying low cost debt.  Even buying land and getting Planning Permission to build might be a very good investment right now.

I am aware of course that interest rates can only go up and there is a risk, but business always brings risks and this is one that on balance I believe might be worth taking.

1 comment:

Nick said...

Good comment, but in your own example I would add another point ..... you get tax relief on your BTL interest, but not on your home loan. Another reason to pay off the home loan before the BTL.