There has recently been some debate about whether QE is inflationary, so this thread could be a good place for posting stories reporting price rises (and falls!). I am sure I will find at least one per day from one of the money printing hotspots around the world.
Npower to raise energy prices by 10.4%**
Tracker mortgages at low interests are allowing people front load their Capital Payments even though they are making smaller payments. This will give them some breathing space when rates eventually go up.
In the example below even though you are paying €600 less per month, in the first year you pay more than €3000 extra in capital
e.g €300k mortgage / 30 years
Capital remaining after 5 years
5% interest rate - €275,023.59
1.5% interest rate - €258,169.61
Capital remaining after 10 years
5% interest rate - €243,432.50
1.5% interest rate - €213,795.16
Capital remaining after 15 years
5% interest rate - €202,889.81
1.5% interest rate - €165,978.00
The point is that by keeping the mortgage payments the bank dictate, they are effectively front-loading their mortgage even though that payment amount has come down (from E1500 to E1000, give or take, in the example given)
They can also go off and take our a car loan, of course (though few enough are doing that, it seems)
If your interest rate comes down, your mortgage payment comes down automatically. You have to tell the bank that you want to keep the same level of payments. It’s a variable rate mortgage (tracked off the ECB rate), not a fixed payment.
Holy shit, I thought we were past the “I don’t understand a tracker mortgage…”
What jake76 is saying is that - even with these reduced payments - you’re still paying off capital earlier than under the original agreement. He’s even given a link and produced numbers to back this up.
The point is that under the original agreement, the earlier payments attract a higher percentage of interest (because the interest rate is higher). As you pay it off, the interest rate drops quicker than under the tracker (where the interest rate is low). So over the same 30-year period, a tracker actually eats into the capital quicker.
Which means tracker mortgages are being front-loaded.
Edit - you can try this out in Excel if you wish. Take a 360-month mortgage for E300k. One is @ 1½% , one is @ 5%. Repayments are E1,035.36 and E1,610.47 respectively. Even though the tracker is paying E580 a month less, by the end of month 12, it’ll have paid off E3,553 more capital than the 5% loan. At the peak, after month 209, the tracker will have paid off E37,826 more capital than the 5% loan. This is the crossover point where the higher payments have finally reduced the loan to the extent that the 5% loan will now pay off more capital than the tracker. It then quickly catches up so that both mortgages are paid off at the same time.
Okay, I get where you are coming from now, but the thing is that you end up still in the same boat, pretty much, as the difference is going to be small compared to be the difference if you kept payments higher. Most people will accept that they are paying less and go out and spend it. Or indeed, use it towards their affordability criteria so that they can borrow something else…
I paid off a 25 year mortgage in 12 years (well, I would have if I hadn’t sold up!) by overpaying and keeping payments constant while interest rates fell. Every time they fell, I had to ring up the bank and say ‘don’t reduce my payment, put the excess in capital’. They do not do this automatically. They automatically reduce your payments. They automatically reduce your payments by the amount the interest rate has fallen (i.e. the reduction in the interest expense). Your capital payment remains the same unless you explicitly say you do not want this to be the case.
Compared to if you keep the original payments up, certainly.
I agree that people will put the money elsewhere. Though at the rates trackers are at at the moment, I’m not sure it make sense to pay them off early - even allowing for 41%+ DIRT, it probably makes more sense to put money into a deposit to earn interest rather than save on it.
We’ve already seen that this isn’t the case.
The term of the loan is what remains constant, not the capital.
That’s the whole point of the sums myself and jake76 have done.
100k mortgage over 25 years @ 5% gives repayments of €6,924 p.a., €2,095 of this is capital repayment, €4,826 is the interest expense
100k mortgage over 25 years @ 1.5% give repayments of €4,791 p.a., €3,326 of this is capital repayment, €1,464 is the interest expense.
The reduction in your repayment is not equal to the reduction in the interest expense, your capital repayments **do not **remain the same unless you explicitly say you do not want this to be the case