Low interest rates on savings

[platinumsage]

Yes, that's how it looks to me.

There'd be no point in taking option A if my intention were to pay it back immediately - only if I wanted to add it to the mortgage and pay it back later.

They still give people the option of paying the fee upfront but this appears to be sneaky to me, because I can't see any situation where it would be in the borrower's interest to do that. It seems like a deliberate attempt to trick people with an interest rate that appears attractive.

Lenders normally offer a range of deals with different fixed and discount rates and deal periods ranging from two to ten years. Whether paying the fee upfront makes sense or not will depend on the exact details of each deal, so I wouldn’t say they’re being tricky, they’re just offering the standard options - sometimes this will yield an interesting choice, sometimes a Hobson’s choice.

 

[hash tag]

Back to the mortgage thing. Previously there was the discussion about whether it can make sense to not pay off a portion of it, if you can gain more interest on investing/saving that money than the mortgage will charge you to borrow it.

I'm about to renew a mortgage deal, I want to do a fixed rated for 2 years and so they offer some options to cause confusion, the main one being that you can choose between
(a) a lower interest rate let's say 1.4% but you have to pay a one off fee of £1000
(b) a higher interest rate, let's say 1.7% but there is no one-off fee.

Worked out over the two years, going for the higher rate costs less.

But - they want to tempt you to pay the £1000 fee by offering to add it to the mortgage, so you don't have to pay it now, the monthly payments go up only marginally, and the cost over the next two years is now less than the other option.

I still have to pay it at some point, of course, but if I've decided that I am not going to pay off part of my mortgage even though I could... does logic then dictate that I should choose option (a) and add the fee to the mortgage? Or am I getting myself confused?

There might be other fees you might need to consider. Fees for switching mortgage to another property, for borrowing more money or redemption charges full term or early redemption

 

[teuchter]

There might be other fees you might need to consider. Fees for switching mortgage to another property, for borrowing more money or redemption charges full term or early redemption

Not at this moment - it's simply a matter of agreeing a new deal for a fixed period of time. I can pay off as much as I want without penalty as part of this.

 

[alex_]

Yes, that's how it looks to me.

There'd be no point in taking option A if my intention were to pay it back immediately - only if I wanted to add it to the mortgage and pay it back later.

They still give people the option of paying the fee upfront but this appears to be sneaky to me, because I can't see any situation where it would be in the borrower's interest to do that. It seems like a deliberate attempt to trick people with an interest rate that appears attractive.

You are paying a grand to avoid 400 quid interest per year per hundred grand borrowed.

So if you are borrowing more than 250k for a year, or 125k for two years - you are better off paying the 1k.

rolling it in, means you pay an extra 14 gbp per year interest on the grand over the mortgage.

 

[teuchter]

You are paying a grand to avoid 400 quid interest per year per hundred grand borrowed.

So if you are borrowing more than 250k for a year, or 125k for two years - you are better off paying the 1k.

rolling it in, means you pay an extra 14 gbp per year interest on the grand over the mortgage.

Using my actual numbers - it doesn't work out like that. I would be paying £1k to save about £750 over the period of the 2 year deal.

It only makes sense for me to pay the £1k if my intention is to borrow it for a period of time, and invest it to get a return that is higher than that £14 per year over the mortgage term.

 

[kabbes]

You are paying a grand to avoid 400 quid interest per year per hundred grand borrowed.

So if you are borrowing more than 250k for a year, or 125k for two years - you are better off paying the 1k.

rolling it in, means you pay an extra 14 gbp per year interest on the grand over the mortgage.

I think you misread — it’s a saving of 0.3% not 0.4%. So that’s £300 per year per £100,000 borrowed. Or £750 over two years on £250,000.

teuchter — the question is whether that excess £250 you end up paying by choosing the lower rate deal (plus the interest on the £1000 itself over two years, which is an extra £28) can be made up through investing the £1000 you’ve additionally borrowed. It would need a return of about 14% pa, which is possible but not massively likely. It sounds to me like you’re better off not paying the grand and sticking with the higher rate.

 

[kabbes]

Also, come to think of it, you don’t physically have the extra £1000 to invest anyway, because you’ve already spent it on buying a lower rate. So I think it’s just clear that the lower rate isn’t worth spending a grand.

 

[teuchter]

Also, come to think of it, you don’t physically have the extra £1000 to invest anyway, because you’ve already spent it on buying a lower rate. So I think it’s just clear that the lower rate isn’t worth spending a grand.

If I have £1k in my hand right now then my options are

• Baseline scenario is, I pay the higher interest rate for 2 years with no £1k fee involved. At the end of everything I still have the £1k in my hand.
• Pay £1k now to save £750 compared to the baseline over the next two years (obviously doesn't make sense)
• Borrow an additional £1k for the term of the mortage, to save £750 over the next two years. Say this borrowing costs £210 over the remaining 15 years of the mortgage. The £1k in my hand, I have to invest, so that it becomes £2,210 at the end of the term. I then can pay back the £1k and I get back the £225 cost of borrowing. I am still left with £1k in my hand but I have saved that £750 compared to the baseline scenario.

This all reminds me of that puzzle that involves something about people splitting a bill and getting change from the waiter and ending up with more than they started, and you have to work out where the reasoning has gone wrong.

How do you come up with 14%pa by the way? By my reckoning:
Cost of borrowing £1000 at 1.4% per year is 15 years x £14 = £210.
If I use a compound interest calculator, it seems that £1000 invested for 15 years at 5.1%pa leaves me with £2108 at the end.

(I know there would also be tax complications to take into account)

 

[kabbes]

You need to recoup the lost £278 (£250 net cost plus £28 interest) over two years, not fifteen years. That’s because in two years, the deal runs out and you need to remortgage again.

By the way, in your baseline scenario, you have to assume you can invest that £1000 in exactly the same way as in scenario 3. That’s why I think you can ignore the investment of the £1000.

 

[Smangus]

I'm crap with money , I understand it and investing etc but am completely undisciplined with it. Luckily Mrs Smang doesn't particularly understand it but is really disciplined, so together things have worked out. We are both a bit risk averse and have public sector pensions which is lucky so we don't have to worry about retirement income.

So we have put most of our spare money into the mortgage, overpaying as much as we can and converting to shorter terms by 2-3 years when re-mortgaging as we go. the upshot is that our term has reduced from 25 to 17 years over time and we will be paid off in 2.5 years time. So for the last 5-7 years of our working lives we'll put the money that would have gone to the mortgage into savings/investments. We only overpaid by about £100-150/month but it adds up overtime so the compound effect is considerable ,especially in times of low interest rates.

If you factor house price increases then that's not such a bad thing, even if it is not particularly liquid. Our house has nearly trebled in value over 15 years. That's a poor reflection on our society but there's nothing we can do about this and we don't intend to move or upgrade. It will give us some leeway to down size when we retire if we want to though.

I have an ethical ISA and savings acct with Triodos. They earn nothing but there's not much in them anyway.

Actually come to think about it my best investment is probably all my ltd grunge and psychedelic vinyl I collected in my mis-spent youf, some of it is worth a bit of money apparently

 

[teuchter]

You need to recoup the lost £278 (£250 net cost plus £28 interest) over two years, not fifteen years. That’s because in two years, the deal runs out and you need to remortgage again.

By the way, in your baseline scenario, you have to assume you can invest that £1000 in exactly the same way as in scenario 3. That’s why I think you can ignore the investment of the £1000.

Yes you're right, that's where I'm going wrong. I could invest the 1k in the baseline scenario.

 

[20Bees]

I may be late to the party but I have only just learned about the gov.uk Help To Save scheme aimed at low earners. I qualify as I receive Working Tax Credit. It has some odd features but basically saving the maximum permitted amount of £50/month for four years, will earn a ‘bonus’ of £600 at the end of the second year and £600 again at the of the fourth year. It’s not a high amount but as a percentage it’s pretty decent - 50% after two years and 25% after four years - and half or a quarter of “not much” is a lot better than half of nothing!

Martin Lewis explains it well:

Help to Save

The Help to Save scheme pays those who are eligible a 50% bonus on their savings, up to a max bonus of £1,200 over four years. In this MoneySavingExpert guide, we cover how the account works, who’s eligible and how to get it.

www.moneysavingexpert.com

 

[kabbes]

I meant to write this a few weeks ago when we were talking about this stuff but forgot. So now it’s a random bump that you can take to be like the Next Lesson About Investment.

In this thread we’ve been talking a lot about “funds”. Some of them have been “passive” funds that simply track an index (like the FTSE all-share or the MSCI ESG index). Some are “active” ones like the Linsell Train U.K. fund, in which fund managers actively choose to buy and sell based on what they think will do well.

It struck me, though, that people may not know the difference between an “investment fund” and an “investment trust” and this is actually quite important. Without explicitly realising the difference, things can sometimes get quite confusing.

Investment Funds
Funds, which are the things we have been talking about, work quite straightforwardly. The total fund value is simply the total value of all the shares and other investments it owns. The fund is divided into units and the value of a unit is just a proportion of this total investment value. So if the fund has a billion pounds of investments and there are a billion units, each unit is worth a pound. If the investments the fund owns go up in value to £1.25bn then each unit is now worth £1.25. Easy. Underneath the fund, you do effectively own one-billionth of everything the fund has for every unit you own.

Investment Trusts
“Investment trusts”, by contrast, are weirder, if still straightforward to understand. For a start, they’re totally misnamed, because they aren’t in any way trusts! They’re actually publicly tradable companies that exist purely to invest money. You buy shares in the company like you buy shares in any other company. You don’t own a proportion of the underlying assets, you just own a share in a company. The value of that share is certainly heavily influenced by the investments the company owns but it also goes up and down with the vagaries of the stockmarket plus investors’ perceptions of how well the investment trust is being run. On any given day, the total value of the investment trust might therefore be higher or lower than the total value of the assets it owns. Investment trusts will pay dividends but this dividend will not be the total of the underlying dividends, it’s a decision made by the people running the investment trust. As investment trusts are companies, they can do things like borrow money. In general, investment trust values are a lot more volatile than the value of an investment fund.

The FTSE 100 (ie the biggest 100 companies in the UK) actually contains two investment trusts (Scottish Mortgage and 3i). That means if you own units in a FTSE 100 passive tracker fund, part of what you own is actually shares in these companies — your investments include companies that make investments. The FTSE 250 (i.e. the next 250 companies) actually contains a whopping 77 investment trusts. So having a pure FTSE mid-cap tracker is a weird thing, which includes a substantial proportion of companies that exist to invest in other companies.

What does it mean?
I would probably stick with investment funds unless you know what you’re doing. Funds are rather WYSIWYG — transparent. Your investment generally doesn’t have credit risk (although its value will of course be volatile) because you have a clearly defined proportion of the underlying assets, which do physically exist. Investment trusts are much more opaque and they can potentially go bust, like any company. You’re relying on their good governance. They can also make very big returns, because they can borrow to invest. But I think proper research is justified before buying into them.

 

[AnnO'Neemus]

Thank you for all this information and advice about investment and financial stuff, it's really interesting and useful.

We should be taught a lot more in school about managing money and budgeting, and about mortgages and pensions and stuff, and debt and interest rates. It's all essential stuff.

 

[mauvais]

You need to recoup the lost £278 (£250 net cost plus £28 interest) over two years, not fifteen years. That’s because in two years, the deal runs out and you need to remortgage again.

Whilst this is true, it seems to me that without paying the fee, at the end of the two years you owe more money so you would have to actively pay off the difference otherwise it costs you more over the cost of the remaining overall mortgage. Depending how much and how long, that might be significant.

 

[bimble]

Early last month i put a sort of trial token money into one of those vanguard accounts, the 'Global Balanced Fund' one. I just had a look and see that i've lost money, not much at all, 0.05% down, so haven't lost not enough to buy a kitkat but - today is the day that i should get my lump sum (proper money) hitting my current account and looking at the loss makes me wonder if maybe I need to think more carefully about what my attitude to risk really is.
But then again if i put it all in a bank or in a box under the bed i'd 'lose money' that way too just less obviously, right?

 

[bimble]

I would probably stick with investment funds unless you know what you’re doing. Funds are rather WYSIWYG — transparent. Your investment generally doesn’t have credit risk (although its value will of course be volatile) because you have a clearly defined proportion of the underlying assets, which do physically exist.

what do you mean, like i'd own a % of the offices/ desks / machines or whatever that produce the profit that the shares value is based on and therefore there is no credit risk (risk to the money put in?) that sounds like it makes no sense, what am i not understanding ?

 

[baldrick]

Early last month i put a sort of trial token money into one of those vanguard accounts, the 'Global Balanced Fund' one. I just had a look and see that i've lost money, not much at all, 0.05% down, so haven't lost not enough to buy a kitkat but - today is the day that i should get my lump sum (proper money) hitting my current account and looking at the loss makes me wonder if maybe I need to think more carefully about what my attitude to risk really is.
But then again if i put it all in a bank or in a box under the bed i'd 'lose money' that way too just less obviously, right?

If you were 0.05% down after a year I'd perhaps worry but a month isn't really anything to be concerned about.

 

[bimble]

If you were 0.05% down after a year I'd perhaps worry but a month isn't really anything to be concerned about.

Sure, its more about me and my attitude to risk & loss - cos if you stick it in a bank you don't see the loss, it just sits there looking the same, but here you do, and i don't want to be a person who logs in to check or reads about share prices and gets all excited or upset about whatever emotional contagion has been going on that week.

 

[baldrick]

Sure, its more about me and my attitude to risk & loss - cos if you stick it in a bank you don't see the loss, it just sits there looking the same, but here you do, and i don't want to be a person who logs in to check or reads about share prices and gets all excited or upset about whatever emotional contagion has been going on that week.

I see what you're saying now, sorry. Yeah initially I just used money I could afford to lose, a small dribble in every month that I would otherwise have spent on takeaway. So even if it went down I would have spent that money anyway if that makes sense.

 

[Winot]

But then again if i put it all in a bank or in a box under the bed i'd 'lose money' that way too just less obviously, right?

Yes. Inflation has just gone up to 1.5% and is likely to stabilise at 2% per annum. That’s losing more than your 0.05% in a month.

UK inflation rate more than doubles in April

Inflation in the UK rose by 1.5% in the year to April, compared with 0.7% in March.

www.bbc.com

(In any event, a month is too short a period to look at, and 0.05% is just noise)

 

[bimble]

I've got a bloke who keeps calling me, who is looking for people to invest in his "Guaranteed return of 8% per annum " property company in essex. That is not a clever thing to agree to do is it or is it. he has made glossy leaflets and everything.

 

[platinumsage]

I've got a bloke who keeps calling me, who is looking for people to invest in his "Guaranteed return of 8% per annum " property company in essex. That is not a clever thing to agree to do is it or is it. he has made glossy leaflets and everything.

No it's a scam. I'd be worried about where they got your number.

 

[bimble]

No it's a scam. I'd be worried about where they got your number.

Ah, no he got my number legitimately he helped me with something when i bought my house.
what the last bit here means i have no idea tho.

 

[kabbes]

what do you mean, like i'd own a % of the offices/ desks / machines or whatever that produce the profit that the shares value is based on and therefore there is no credit risk (risk to the money put in?) that sounds like it makes no sense, what am i not understanding ?

No, maybe the word “physical” was inadvisable, because I meant it figuratively. What I am referring to is that the shares that an investment fund owns are allocated directly to the members of the fund. There’s nothing “in between”. The shares exist (and these used to be physical certificates although not any more), and your value of your part of the fund is whatever proportion you have of the value of those shares.

What that means is that you are not exposed to the credit risk of the fund manager. If the fund manager goes bust, the shares of the fund all still exist and they are still owned by the members of the fund. If Vantage go under, it doesn’t mean that Apple and Google and GSK go under, and so long as your fund owns shares in those companies, there is little effect on you. There is still credit risk associated with Apple and Google and GSK, but this is part of the risk you know about when you invest in the fund, and it is diversified over many investments.

By contrast, when you invest in an Investment Trust, you have no direct right to the underlying investments and the value of what you own is not a proportion of those underlying investments. You just own a share in the IT itself. If the Investment Trust is mismanaged and goes bust, you lose what you invested. That’s credit risk.

 

[kabbes]

I've got a bloke who keeps calling me, who is looking for people to invest in his "Guaranteed return of 8% per annum " property company in essex. That is not a clever thing to agree to do is it or is it. he has made glossy leaflets and everything.

His “guaranteed” return, even if it is “guaranteed” based on his contractual obligations (because most of them have get-outs), is only guaranteed if his company continues to exist. In reality, you are exposed to the credit risk of his company going bust.

These kind of investments are a lot like buying a bond. You get a fixed return and you are exposed to credit risk. What you have to ask yourself is whether 8% is a good return on a bond with this kind of credit risk. It rarely is. His company would be equivalent to something like a CCC or lower, I would have thought — junk bond status. If you went to the bond market, you would probably expect double-digit returns for that kind of risk.

ETA: I’m a little out of date. CCC yields in the US (which are easier to look up) are currently 7.19%. But a year ago they were 17.86%. The long term average is 14.42%.

US High Yield CCC Effective Yield Market Daily Analysis: Bank of America Merrill Lynch | YCharts

In depth view into US High Yield CCC Effective Yield including historical data from 1996 to 2024, charts and stats.

ycharts.com

 

[kabbes]

Ah, no he got my number legitimately he helped me with something when i bought my house.
what the last bit here means i have no idea tho.View attachment 269277

A fixed and floating charge means you have recourse to what is left of the assets of the company goes bust. Just like you do with a bond

 

[platinumsage]

Usually these things pay out for a year or two if you're lucky, and then the director realises, if they didn't already, that they can wind up the company and keep all your money, usually via setting up a series of other companies that end up with the assets.

 

[bimble]

His “guaranteed” return, even if it is “guaranteed” based on his contractual obligations (because most of them have get-outs), is only guaranteed if his company continues to exist. In reality, you are exposed to the credit risk of his company going bust.

These kind of investments are a lot like buying a bond. You get a fixed return and you are exposed to credit risk. What you have to ask yourself is whether 8% is a good return on a bond with this kind of credit risk. It rarely is. His company would be equivalent to something like a CCC or lower, I would have thought — junk bond status. If you went to the bond market, you would probably expect double-digit returns for that kind of risk.

I think i understand what you're saying. If for whatever reason his company stops existing then what i get back is totally unknown. I think its too much excitement for me, though 8% sounds great. The amount of times he's called is also a bit offputting, if it was such an amazing opportunity he wouldn't be calling me, some woman he's never met, every other day.

 

[kabbes]

I think i understand what you're saying. If for whatever reason his company stops existing then what i get back is totally unknown. I think its too much excitement for me, though 8% sounds great. The amount of times he's called is also a bit offputting, if it was such an amazing opportunity he wouldn't be calling me.

8% sounds great until I point out that it will take 12.5 years (ignoring reinvestment) to get back what you gave him. So if he winds up within a decade, you don’t get back even what you started with. How many of these kinds of companies last ten years?

ETA: also, it’s not “marketable” or “liquid”, which is just another way of saying that once you’re in, you’re in. There is rarely a quick and easy way back out again.

ETA again: the reason he’s trying to get you to give him money for 8% instead of going to the bank is because the bank won’t lend him money for this investment at 8%. That’s also worth reflecting on.