mortgages

The bank doubles the terms of the moratorium on mortgages and credits of those affected by the crisis

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The banks have decided to extend the terms of the moratorium on the payment of the loans that clients have who are affected by the current economic and labor situation derived from the impact of the coronavirus. The set of entities will double the time during which the holders of your mortgages or loans for consumption, they can stop paying their quotas, with respect to the calendar approved by the Government in its economic and social aid package.

This measure will benefit “those people economically affected by the situation generated by COVID-19”, explain the employers of the sector (AEB and CECA) in a joint initiative. It is a “additional and complementary” action to those approved in the last Councils of Ministers, whose decrees demanded a series of requirements. If the banks follow those criteria of the Executive, as the statement published yesterday points out, the self-employed could also be accepted under certain conditions published in the BOE.

In the case of mortgages – as long as it is a habitual residence – the entities will apply a postponement of up to 12 months, compared to the six months imposed by the Executive in its plan. Measure is limited to the capital of the credit, which is usually the most important part of the share, even more in this context of interest rates at historical lows. The financial cost, that is, the interest, will have to continue paying them. In any case, the entities consider that “it will allow families to face the situation with more liquidity”.

The Economy mortgage moratorium allowed this postponement for half a year, to citizens affected by the economic impact of the coronavirus, with five conditions at once: be unemployed (or cease business); that the family income does not exceed 22,554 euros a year (home without children); the credit share (plus basic expenses and supplies) is less than 35% of the family’s income; and, lastly, that the effort represented by the mortgage burden on income has been multiplied by at least 1.3 times in the current context.

It also expands to six months the moratorium period in the case of other types of credits whose payment must face families who are experiencing financial hardship in these weeks. That measure was also incorporated by the Council of Ministers, with a three-month moratorium in which payment could be postponed. The entities extend this possibility up to half a year, also in the case of capital. The entities consider that this option “will significantly reduce” the amount of money that they had been paying until now, since this type of credit the weight of the interest is proportionally much greater than in mortgages.

Points to clarify

The employers clarify that the postponement will be implemented “according to the cases and depending on the criteria of the entity “, through a personal loan, a mortgage loan modification, or other financially equivalent formula. The councils of the AEB and CECA will approve in the next few days the agreement in which this initiative will be embodied, and which will specify its conditions and procedural aspects.

Since the coronavirus crisis began, banks they had already announced different solutions to help to those who are experiencing the worst and have expressed their willingness to collaborate with the measures adopted by the Government to mitigate the economic effects of this situation. For this reason, the measure announced yesterday is voluntarily assumed by each entity, and does not overlap other actions for the same purpose that Spanish entities have.

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Banks complete extension of government mortgage moratorium

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Thebanks are preparing a broader mortgage moratoriumthan the one approved by the Government a few weeks ago for vulnerable groups, as confirmed by different sources in the financial sector toThe Newspaper of Catalonia. The objective of the measure isbenefit people who do not meet the requirementsset by the Executive but also experiencing economic difficulties as a consequence of the coronavirus pandemic.

Entities are finalizing the details. The idea that is prevailing isfacilitate a grace period in the payment of principal but not interest, because this would involve accounting complications. On the other hand, applying the moratorium only to the principal, in practice, means extending the term of the loan and leaving it longer on the balance sheet, which is much easier for entities. Another point they are studying is to try not to consider the operation as a novation of the loan, because it would be more expensive for them and would make the process much more difficult and lengthy, with procedures that would be very complex to complete at this time, such as visits to the notary.

Three or six months

The deadline is also under discussion. Some entities aremore in favor of a three-month moratorium, such as that of the Executive, and others lean towards the six. This is a point in which it is essential for the sector to clarify whether or not they can benefit from the more benign treatment approved by the European Banking Authority (EBA) for the consideration of deferred installments as unpaid. If they are considered delinquent, entities are required to make provisions to face losses, which weighs down their income statement. For this reason, some banks weigh articulating the moratorium by means of a bridge loan with a low price and long maturity that can later be consolidated with the mortgage.

Another aspect that is under debate is whether to present the new moratorium as ajoint initiative of the financial industry or choose to have each entity announce it individually. Among the associates of the two large employers in the sector, the AEB (traditional banks) and the CECA (former savings banks), there are differing opinions. Some of the five great entities, in any case, are in favor of coordinated action.

Go further

“The government measure benefits many people, but alsoexcludes many other. We are fine-tuning our moratorium and most of the other entities as well, although some are more behind than others in the preparations. We believe that each one will do it in its own way, but they will be similar formulas because there are not so many alternatives either, “they summarize in one of the main banks.” Our idea is to somehow jointly replicate the 2012 code of good practices that regulated the mortgage debt restructuring. We are all willing to go beyond what is set by the government, “they point out in another large bank.

According to various entities, theBanco de España is urging the sector to apply the Executive moratorium very rigorously, while encouraging him to adopt the new, broader moratorium. On the one hand, the agency, they say, wants the government measure to be applied correctly and has demanded to be informed of which postponements are granted and which are rejected. The aim is to avoid situations like those that occurred in the previous crisis, in which sanctions were imposed on some entities for rejecting applications. At the same time, the sources assure, the supervisor is in talks with the entities to know and assess the conditions they are planning to apply to the additional moratorium.

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The potential wave of mortgage defaults could cause the payment system to fail

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Rows of houses in Las Vegas.

Jacob Kepler | Bloomberg | Getty Images

Last week, mortgage regulator Fannie Mae and Freddie Mac announced a tolerance program for borrowers who are unable to pay off their loans due to the effects of the coronavirus.

The Department of Housing and Urban Development, which includes the FHA loan program, has announced the same. This is a huge relief for borrowers, who can now delay payments without penalty. Unfortunately there is a snag.

Mortgage lenders, companies that collect monthly payments, are required to transfer those payments to investors who own these loans in mortgage-backed securities even if the borrowers do not pay. Managers also need to pay insurers and tax authorities.

Under normal circumstances, managers have liquidity reserves to do so if only a few borrowers don’t pay, but the industry is now seeing a potentially unprecedented wave of lost mortgage payments.

“Nobody predicted the question that would lead to servicers, so they need the ability to have the liquidity to make it happen, and if there isn’t some kind of skill through a liquidity structure, then the servicers won’t be able to fulfill their obligations to investors and the whole process will be halted, “said Bob Broeksmit, CEO of the Mortgage Bankers Association.

“The risk for the service sector is that requests for the advancement of these payments to investors will outweigh their liquidity capacity to do so,” he added.

The MBA sent a letter last Sunday to Federal Reserve Chairman Jerome Powell and Treasury Secretary Steven Mnuchin asking for cash to support mortgage services.

“While a mortgage manager may have some additional flexibility for the loans held in his balance sheet, it is necessary to anticipate the loans that support Fannie Mae, Freddie Mac or Ginnie Mae MBS – which make up more than 60% of the mortgage market,” he said. written Broeksmit in the letter.

“The widespread national tolerance of borrowers to the levels proposed in response to the COVID-19 epidemic, however, extends far beyond any previously anticipated obligation to anticipate services, and is beyond the capabilities of the private sector alone. support, “he wrote.

The MBA estimates that if about a quarter of all borrowers apply for it and receive a loan tolerance for six months or more, the servants’ claims could exceed $ 75 billion and could well exceed $ 100 billion. This would easily fail the mortgage financial system.

Most of the mortgages are guaranteed by Fannie Mae and Freddie Mac, or are insured by the government through the FHA. While mortgage managers must first pay the bill to investors, Fannie, Freddie and Ginnie Mae, who securitize FHA loans, will ultimately stay in the know.

“At this point with Fannie and Freddie, for the defaults we expect to see if this is a short-term event, let’s say six to eight weeks, we believe that Fannie, Freddie and the servicers are financially equipped to be able to overcome this time” Mark FHFA director Mark Calabria, who oversees Fannie Mae and Freddie Mac, said in an interview Thursday. “If this goes further, then we may have to seek public assistance from Congress, from the Fed.”

While mortgage managers were under pressure during the subprime mortgage crisis and many failed, losses continued for a much longer period of time. The effect of COVID-19 will be rapid on borrowers. With millions of people losing jobs and income, the number of mortgage defaults will likely increase in April and worsen in May.

The federal government is working on a plan to send money to consumers, but it is up to consumers how they spend it. A family is more likely to use the money for food and other physical needs than the monthly mortgage payment, especially when they are offered a delayed payment plan.

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Mortgage holders find it difficult to contact banks for money vacation holidays

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Mortgage holders clamoring for a “payment vacation” during the coronavirus crisis are waiting for hours to get to the banks of Britain, and many have given up.

Twitter has been inundated with complaints from customers who are unable to speak to anyone from their bank. Some claimed that they were waiting for up to three and a half hours. Many expressed their anger at the lack of a simple online form that could be used to request a payment vacation.


@ mrsoundman70 said: “Lloyds Bank. I know it is a difficult time right now, but I was held for 98 minutes trying to talk to someone. I am a self-employed without a job until the unexpected future that is trying to contact someone for a vacation. I have to take care of my family. ‘

At NatWest, a client, @northamptonesco, said she was “put on hold for 3.5 hours” to talk about a mortgage vacation. Many callers are deeply frustrated by the lack of an online facility to apply for a mortgage vacation.


@ LauraGR08339330 said: “2 hours of waiting. I understand how extreme this situation is, but please release an online form that we can fill out. Save all a lot of hassle Or a link in our self-service accounts so we can tick a mortgage vacation box. The automatic message says 90 minutes of waiting. “

Bank social media teams have said that customer times have significantly increased.

On Thursday afternoon, NatWest told customers on Twitter that “the team is extremely busy at the moment, but is working through the calls as quickly and efficiently as possible.”

Asked by the Guardian if there was an alternative for customers who needed to request a payment vacation, a NatWest spokeswoman said: “At this time, a call to the bank is needed to discuss options for a mortgage vacation. But he added that the bank is urgently exploring other ways in which customers can interact with it.

Lloyds said in a note: “We are receiving a much higher number of calls from customers than normal and we are doing our best to help as quickly as possible.” But despite comments from Twitter users, he said that customers can apply online for a payment vacation.

Barclays said that many mortgage holders will have to call to discuss the agreements and automatically warn that a payment vacation is the right choice. He said that some customers will be better advised to convert their repayment mortgage into an interest-only mortgage, which can result in a drastic reduction in monthly costs. But he said the switch to interest only would last 12 months at most.

Nationally, Britain’s second-largest mortgage lender has said that customers can apply for and get a full online payment vacation.

Some customers have successfully passed and organized their mortgage payment vacation. On Twitter, @mattdechine was more optimistic than others. “Managed to settle the mortgage payment vacation for 3 months. I felt so anxious to do it and it made things even more real. The Lloyds Bank consultant was excellent. It took a while to get over (over an hour) but it’s worth it. We will make it. ”

It is important to note that not everyone who contacts their lender will receive a payment vacation. Any unpaid interest will still have to be reimbursed, although credit ratings should not be affected.

The lender is likely to distribute the outstanding payments over the remaining term of the mortgage, so borrowers will see an increase in their monthly payments.

For example, someone with a £ 200,000 25-year mortgage at 2.6% interest applying for a three-month payment vacation will see their repayments rise from £ 907 per month to £ 920 for the remainder of the period, assuming who have paid for two years so far.

On this site there is a useful calculator for holidays for the payment of mortgages.

Some lenders may consider increasing the residual term of a mortgage, which will have the effect of maintaining the same repayments.

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Mortgage rates will drop again after the latest Fed cut

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An estate agent, left, talks to potential home buyers during an open house in the 16th district of Heights, Washington, DC.

Andrew Harrer | Bloomberg | Getty Images

Mortgage rates are poised to fall again after the Federal Reserve’s recent dramatic moves to combat the economic impact of the deadly coronavirus pandemic.

The Fed said on Sunday it will begin buying $ 200 billion in mortgage-backed bonds, a move that will stabilize and likely lower mortgage rates, which rose dramatically last week. This is part of a brand new $ 700 billion quantitative easing round in response to the COVID-19 crisis. The central bank has also reduced rates to zero.

Mortgage rates had fallen to all-time lows two weeks ago, but a wave of refinancing applications overwhelmed lenders and pushed investors back into mortgage-backed bonds. This in turn led mortgage rates to jump more than 50 basis points in a day and peaked in January by the end of last week. The Fed’s move will likely reverse that course once again.

“It will help prevent MBS spreads from widening further to Treasury yields. It will keep mortgage rates in a happier area below 4%. It will pave the way for a return of 3% or less in the coming weeks,” Matthew Graham, chief operating officer of Mortgage News Daily, wrote.

Lower rates will help those who are stressed by temporary job losses, although the government has so far not addressed the potential increase in mortgage defaults that such losses could cause.

“As was done during the QE phase of the Great Recession, the Fed’s purchase of MBS is expected to help mitigate some of the blow to Americans, potentially reducing mortgage payments or giving them an incentive to buy a home,” said Dave Stevens, former CEO of the Mortgage Bankers Association and former commissioner of the FHA.

Homebuyers are shaken by threats to their health and wealth. Traffic has been slow in open houses in the D.C. on Sunday, with real estate agents stating that some offers they expected last week never came. Lower mortgage rates may help some, but buying homes has always been a very emotional process, as it represents the largest single investment of most consumers.

“By acting swiftly to cut rates and engaging ongoing support, the Fed may have” flattened the curve “in the real estate market – lessening some of the urgencies that families may have felt buying or refinancing now as they get lost and keep demand even more. strong in the future, “wrote Danielle Hale, chief economist at realtor.com. “However, the Fed acts because the road ahead for the economy is uncertain and the real estate market could be directly and indirectly affected.”

The benefit for current homeowners from the Fed’s move is much more immediate.

“Today’s dramatic action by the Fed, lowering rates to zero, buying Treasury bills and MBS and encouraging banks to go to the discount window, will significantly reduce stress in the system,” said Mike Fratantoni, chief economist at the Mortgage Bankers Association. . “The MBA predicts that these actions will lower mortgage rates, helping homeowners save money through refinancing and thus providing a boost to the wider economy.”

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Mortgage rates go back to the peak of January amid the coronavirus epidemic

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After falling to an all-time low just two weeks ago, mortgage rates are on the rise again. This as estate agents try to face a new normal in what was supposed to be a vibrant spring property market.

The average 30-year fixed rate dropped to 3.13% on March 2, the lowest ever recorded by Mortgage News Daily. This rate is now up approximately 3.65% as mortgage bond yields rise and lenders keep rates higher as a way to handle overwhelming refinancing demand.

Applications for refinancing a home loan increased 79% last week over the previous week, according to the Mortgage Bankers Association. Loan applications for home purchases only increased by 6% for the week.

The jump in rates comes just as real estate agents in some parts of the country cancel the open houses scheduled for this weekend. Fears of the coronavirus have some sellers withdrawing and some buyers searching entirely online.

“We are currently telling our sellers that open houses are not recommended,” said Jane Fairweather, a Long & Foster real estate agent in Bethesda, Maryland. “To keep agents and buyers safe, we choose not to keep them open for now.”

In a quick survey, 16% of real estate agents reported seeing a decline in buyers’ interests in relation to coronavirus and 1 in 4 sellers are changing the way they market their homes, some going entirely online, according to the National Association of Realtors. Only 3% of real estate agents said they removed customers from the market because of the coronavirus.

As with anything in the real estate sector, the reaction is local, with some markets not seeing such an effect.

“While my business is still busy so far, I have felt that there are some slowdowns in other areas. It may still be stopping and it hasn’t hit me yet,” said Laura Barnett, a RE / MAX agent in the Dallas-Fort Worth area.

The more expensive real estate markets are likely to have a greater effect, as buyers are more influenced by stock market movements. The recent route has already pushed back New York shoppers, and this is the case with other major metropolitan markets.

“The immediate effect was the downside, the worry and fear associated with the unknown,” said Steven Cohen, agent of Keller Williams in Boston. “The aversion to the congregation in open houses and the concern that the devaluation of assets, the devaluation of shares will reduce the general economy, including the value of real estate.”

This weekend is likely to tell, as shoppers decide whether to venture or not. The nation’s home builders will also closely follow the traffic in model homes. A monthly sentiment index will be released next week and the National Association of Home Builders has indicated that it would add questions to the survey on potential supply chain outages.

The real estate market is already struggling with a record supply of homes for sale and the fear among consumers of their personal and financial well-being will not help. It will undoubtedly not be business as usual for spring housing.

“I will say that people are engaging in all kinds of greetings, except the handshake. I am being touched, touched at the elbow and bent,” said Cohen. “Sometimes they go around with their mini-Purell, literally sterilizing as they move around the properties.”

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Mortgage refinancing applications rise 79% while interest rates fall

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Another major drop in mortgage rates resulted in a sharp jump in borrowers asking to refinance their real estate loans.

The increase brought the total volume of mortgage applications up 55.4% last week compared to the previous week, according to the seasonally adjusted index of the Mortgage Loans Association. The volume has increased 192% annually.

Refinancing applications increased by 79% over the week and increased by 479% over a year ago. This has been the highest level of refinancing since April 2009. The drop in mortgage rates over the past few weeks generated an unexpected refinancing boom, but last week when rates fell even more sharply due to deep concerns of the coronavirus market, the news clearly rang out with borrowers. The refinancing rate rose to 76.5% of total applications from 66.2% the previous week.

The average contract interest rate for 30-year fixed rate mortgages with compliant loan balances ($ 510,400 or less) corresponded to the December 2012 MBA survey of 3.47%, from 3.57%, with points rising to 0.27 from 0.26 (including the origin commission) for loans with a 20% deposit. This rate was 117 basis points lower than a year ago.

Other mortgage rate readings, such as the weekly Freddie Mac index, recorded an average rate that hit a record high.

The average contract interest rate for 30-year fixed rate mortgages with jumbo loan balances (above $ 510,400) has fallen to its lowest level since the series was added in 2011, 3.58%, from 3 , 63% with points that decreased to 0.20 from 0.21 (including the origination tax) for loans with a 20% drop.

“Taking into account the current economic situation and how many rates have fallen, MBA is almost doubling the forecast for the origination of the refinancing for 2020 to $ 1.2 trillion, an increase of 37% from 2019 and the stronger refinancing volume since 2012, “said Joel Kan, an MBA economist. “As lenders will manage the wave of applications and manage capacity, mortgage rates are likely to stabilize, but will remain low for now. This in turn will support borrowers who wish to refinance or buy a home this spring.”

Mortgage applications for house purchases have gone up by 6% a lot milder for the week and have gone up by 12% every year. Potential homebuyers are clearly assessing these very low interest rates compared to their concerns about the effect of coronavirus on the overall economy and employment. They are also facing a record supply of homes for sale.

Mortgage rates fell to all-time lows and made a sizeable move higher on Tuesday as news of potential government stimuli circulated to combat the financial effects of COVID-19.

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Bank of England interest rate reduction: what it means for your money and your mortgage

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The Bank of England announced an interest rate shock to help sustain the economy as the deadly coronavirus continues to spread in the UK.

On Wednesday morning, the Bank’s Monetary Policy Committee reduced rates from 0.75% to 0.25%, bringing loan costs back to the lowest level in history.

Policy makers said the cut was a response to the “economic shock” of coronavirus and “would help sustain business and consumer confidence in a difficult time, strengthen business and household cash flows, reduce costs and to improve the availability of financing “.

The last time the base rate was cut, it returned in 2016, when it fell from 0.5% to 0.25%. Since then it has increased twice to reach 0.75%. But interest rates have generally been at record lows since the 2008 financial crash.

Bank of England governor Mark Carney said this morning that the economic impact of coronavirus could be “great and acute” and that economic activity is likely to weaken materially in the coming months.

A few hours pass before the new chancellor, Rishi Sunak, is expected to announce further measures to support the economy over the next year, including contingency plans to help self-employed workers while the epidemic continues.

Will my mortgage be affected?

An interest rate cut means good news for borrowers and bad news for savers, as it means that they will earn less with their money.

Under today’s emergency cuts, some mortgages will become cheaper, thus increasing the money in our pockets every month.

Homes with tracker mortgages should see their rates fall – as these mortgages fluctuate along with the base rate.

However, if you have a flat rate, monthly payments will not change.

Standard variable rate mortgages (SVRs) can change – these are the default plans that many “mortgage prisoners” are trapped in, and the rates that people default on at the end of the fixed contract.

This move is at the discretion of the lenders: banks must not change these rates in line with the Bank of England.

SVRs are expensive, so if you have one, don’t automatically attach it even if your rate is reduced – check out our guide on how to remortgage, here.

Those on tracker mortgages will likely see their monthly costs decrease.

As the name suggests, they “track” the base rate, so mortgage costs are expected to drop by an average of £ 20 per month on a typical £ 150,000 mortgage.

A small number, however, won’t see rates go down where their deal has what is called a “collar”, which prevents rates from falling below a certain level.

You should be contacted by your lender in the event of an impact.

I am about to apply for a mortgage: what should I know?



Today’s announcement may be good news for you

Mortgages are currently at historically low levels, so it may be worth entering into a low-cost fixed agreement to take advantage of it.

A good mortgage broker will be able to talk to you through these options in more detail.

Fixed rate mortgages provide a temporary safe haven from rate hikes as they guarantee a fixed interest rate for a specified period of time.

The current climate would be a good time to conclude a low deal, however, keep in mind that if you take out a fixed rate mortgage and the base rate drops, you will not benefit from reduced payments.

What about savers?

While today’s announcement is expected to help businesses and the economy provide relief, it will not be good news for savers.

Savings rates have been extremely low for years and are now likely to drop further, even if you have a fixed rate account you should be on the safe side.

If not, it’s time to reconsider your savings account.

Andrew Hagger of Moneycomms, explains: “Many families benefit from fixed rate mortgages, so they will not receive any financial advantage following today’s news.

“If your credit card provider is the one who links your rate to the base rate, you will see cheaper loan costs but the impact will be minimal – 0.5% less on a credit card balance of £ 2,000 equals savings of £ 10 of interest in a year – less than a pound a month.

“They are the ones with overdrafts that could do some help – but with most banks charging around 40% interest, a 0.5% cut won’t make any significant difference to people’s finances. .

“Savers will take a breath and hope that the already pitiful rates they receive will not be further reduced.”

How exactly does the base rate work?

When the Bank of England lends money to commercial banks, banks have to pay interest and the amount is determined by the base rate.

The base rate will also affect “exchange” rates, the interest rates charged by banks when they lend to each other.

If the base rate increases or decreases, lenders often pass these costs on to consumers by changing their interest rates on loans or savings products.

While this may sound complicated, it essentially means that the base rate will impact two areas of your finances: how much interest you can earn on your savings and how much it costs to borrow money.

In principle, a lower base rate is good news for borrowers because the interest rate they pay back is probably lower – however this will depend on a number of factors such as the loan time you take and your credit score ( which measures your risk factor).

A higher base rate is good news for savers, who will earn better returns. The current low base rate indicates that some mortgage transactions are historically affordable.

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Sterling in Michigan faces the Department of Justice probe of mortgage practices

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Sterling Bancorp in Southfield, Michigan is under investigation by the Department of Justice for issues related to its mortgage business.

The $ 3.3 billion asset company revealed in a regulatory filing last Friday that it had received jury quotes from the agency seeking documents and information associated with its residential lending practices and related matters. Sterling said he was cooperating in the investigation.

Sterling has also revealed that it is collaborating with the Currency Controller Office, which is reviewing the bank’s credit administration and its compliance with the Bank Secrecy Act and anti-money laundering laws. The company has been operating under a formal agreement with OCC since June linked to the compliance of BSA and AML.

The company also decided to permanently discontinue its beneficial loan program, an initiative suspended late last year. The company verified the documentation for previous origins and implemented systems and controls to ensure that policies and procedures are followed.

Tom Lopp took over from Gary Judd as Sterling’s president and CEO on November 30th.

The company also launched an internal audit led by a special committee of independent directors and external consultants.

The ongoing review established that some employees “committed misconduct related to the origin of these loans, including verification of income and requirements, dependence on third parties and related documentation,” said the filing.

As a result, Sterling said that a “significant number of employees” had been sacked, including the senior vice president who is overseeing the subsidized loan program in California, or that they have resigned.

While Sterling is working on initiatives to diversify loan production and review new mortgage products, the company said that “the implementation of any new loan product takes time and could be subject to” regulatory review.

Due to these problems, Sterling said it had no longer paid dividends in the short term, had suspended dividends from its bank to the holding company and delayed the presentation of the annual report.

Finally, Sterling revealed that a shareholder lawsuit was filed with the United States District Court for the Eastern District of Michigan against the company and some of its officers and directors. The lawsuit alleges that there have been violations of federal securities laws, primarily related to the information that led to Sterling’s initial public offering, subsequent presentation and during earnings calls.

“While the company intends to vigorously defend this action, it is too early to determine the potential outcome,” said the filing.

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overpaying debt or investing every month?

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Mortgage freedom is the ultimate dream for homeowners, but what is the fastest way to become debt free?

After the bursting of the housing bubble and the subsequent financial crisis of 2008, central banks lowered interest rates to historic lows to boost the economy.

More than a decade later and rates have increased only marginally. It means that the loan is cheap, but traditional savings accounts can’t keep up with the rising costs of the things we buy and use every day. Over the same period of time, equity markets recovered, soaring at record highs.

Homeowners are faced with two options: overpaying the mortgage every month or investing extra payments on the stock market.

Overpayment is safer, but when the loan is so cheap, taking a little more risk when investing may leave you better in the long run.

Amy Clarke, 23, a Hull state employee, juggles the dilemma. First time buyer, he is looking to spend around £ 200,000 on his first home with his boyfriend. He earns around £ 30,000 and has so far saved £ 10,000. Save around £ 400 per month.

Patrick Connolly of advisors Chase De Vere said:

The low interest rate environment has offered many people the perfect opportunity to overpay their mortgages and thus reduce the amount of money they need to pay faster, which can save them significant amounts of interest payments over the long term. term.

If Miss Clarke wants to consider making overpayments, she must make sure that her mortgage provider allows this without charging a penalty.

If you are paying a mortgage interest rate of 2.5% per year, for example, any additional amount you use to repay the mortgage is actually saving your 2.5% on that amount.

If, on the other hand, he wants to invest some extra cash, then he needs to earn more than 2.5% on his investments to make this decision worthwhile.

Although investments would generally be expected to return more than 2.5% in the long term, there is absolutely no guarantee that this will happen. Considering that, with the overpayment of a mortgage, Miss Clarke will make guaranteed savings, although the amount she will save will fluctuate with the passage of her mortgage interest rate over time.

However, another consideration he should have is that if he uses all his cash savings to buy a property, he must accumulate more cash savings as a rainy day fund to deal with any emergencies or short-term needs.

You can reduce your investment risks by making monthly payments, which helps manage market timing risk, because if your investments decrease in value, you will simply buy at a cheaper price the following month. It can also help manage risks by choosing an investment that is spread over a large number of stocks.

Good options are passive funds, which track the performance of a low price of a stock index. It could stick to a UK equity fund such as the HSBC FTSE All Share Index or diversify further by monitoring equity markets around the world with a fund such as the L&G International Index Trust.

Alternatively, a diversified global investment fund that invests in stocks around the world could be a good option and could consider F&C Investment Trust or Monks Investment Trust.

Financial planners Dan McKissock Connor Broadley said:

Although overpaying can offer you a better return than saving cash, your money is actually stuck in your mortgage and is not easily accessible.

The advantage of overpayment comes from the fact that you pay your mortgage first, with the result that you pay less long-term interest.

It is therefore essential to balance the desire for long-term returns with the savings towards shorter-term goals, where it will be more important to be able to access your money.

One way to potentially get a higher return than the mortgage interest would be to invest the long-term surplus funds instead of holding them in cash.

For example, within five years, Legal & General’s Multi-Index 3 fund returned an average of nearly 5% per year and Vanguard’s LifeStrategy 40 fund returned an average of more than 6% per year. .

Both funds offer low-cost exposure to a diverse range of assets towards the lower end of the risk scale.

Investing using your own shares and units The Isa allowance (up to £ 20,000 annually) means that any tax return will effectively remain tax-free.

With an investment, the value of your investment can increase or decrease in the short term and, of course, there can be no guarantee that past performance will be repeated. If you prefer certainty and want to avoid risks, you should consider carefully if you would feel comfortable with this approach.

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