Why do people say the mortgage is the cheapest money you'll get?

0gac3yjefb5sv7 · 23-02-2020 7:07pm #1

Sorry if this is the wrong thread. Id imagine is better to borrow as little as possible to reduce interest payments?

limnam · 23-02-2020 7:08pm

I imagine it's only the same people that think there's a "ladder"

tastyt · 23-02-2020 7:13pm

They probably just mean that mortgage rates are lower than any other kind of lending an average person will have during their life.

Credit cards and personal loans will be of much higher rates than a mortgage.

People who say this though obviously disregard the term which means you pay back a huge amount overall, certainly not cheap money.

23-02-2020 7:23pm

tastyt wrote: »

They probably just mean that mortgage rates are lower than any other kind of lending an average person will have during their life.

Credit cards and personal loans will be of much higher rates than a mortgage.

People who say this though obviously disregard the term which means you pay back a huge amount overall, certainly not cheap money.

Actually if you include the term, mortgage lending is even less expensive relative to other lending options. A personal loan or credit card bill over the same period would be considerably more costly.

jlm29 · 23-02-2020 7:30pm

Pheonix10 wrote: »

Sorry if this is the wrong thread. Id imagine is better to borrow as little as possible to reduce interest payments?

It’s always good to spend as little as possible! But that said, if someone has a car loan and a mortgage, if they’ve a few spare euro at the end of the month, it makes sense to pay off the car loan early rather than pay down the mortgage, because the mortgage interest rate is so much lower. B

limnam · 23-02-2020 7:32pm

jlm29 wrote: »

It’s always good to spend as little as possible! But that said, if someone has a car loan and a mortgage, if they’ve a few spare euro at the end of the month, it makes sense to pay off the car loan early rather than pay down the mortgage, because the mortgage interest rate is so much lower. B

That's not exactly true

If you're on a 0% finance car loan it wouldn't make much sense.

We're fairly use to low interest rates on mortgages.

That hasn't always been the case.

23-02-2020 7:37pm

jlm29 wrote: »

It’s always good to spend as little as possible! But that said, if someone has a car loan and a mortgage, if they’ve a few spare euro at the end of the month, it makes sense to pay off the car loan early rather than pay down the mortgage, because the mortgage interest rate is so much lower. B

Not at all. I recently paid off two 4 year loans two years early and the savings were next to nothing.
Mortgage pay off all the way.

I Am The Law · 23-02-2020 7:38pm

There's nothing cheap when borrowing money.

Salary Negotiator · 23-02-2020 7:39pm

Skyrimaddict wrote: »

Not at all. I recently paid off two 4 year loans two years early and the savings were next to nothing.
Mortgage pay off all the way.

Savings over the same period would be less when paying off the mortgage.

LessOutragePlz · 23-02-2020 7:40pm

I Am The Law wrote: »

There's nothing cheap when borrowing money.

Unless your a big bank that gets bailed out then it's very cheap!

jlm29 · 23-02-2020 8:42pm

Skyrimaddict wrote: »

Not at all. I recently paid off two 4 year loans two years early and the savings were next to nothing.
Mortgage pay off all the way.

Obviously it depends on interest rates, but generally speaking, car finance rates are bigger than mortgage rates

Deub · 23-02-2020 9:13pm

Mortgage may not be the cheapest money you will get. It all depends of how long you have to repay it.

I have done a quick test and a mortgage for 35 years, I would pay 59% more than I borrowed. However taking a loan for 10 years and it is 44%.

I would find it more honest if companies were telling us the overall cost of a loan/ mortgage rather than the interest rate.

SteelyDanJalapeno · 23-02-2020 9:17pm

Some of the points in this thread make zero sense, people saying a 10 year you'll pay less than a 30 year mortgage?!

Obviously, it's an extra 20 years of interest.

You've compare like for like, apples for apples etc

SteelyDanJalapeno · 23-02-2020 9:18pm

Deub wrote: »

Mortgage may not be the cheapest money you will get. It all depends of how long you have to repay it.

I have done a quick test and a mortgage for 35 years, I would pay 59% more than I borrowed. However taking a loan for 10 years and it is 44%.

I would find it more honest if companies were telling us the overall cost of a loan/ mortgage rather than the interest rate.

They do, every bank will tell you the overall cost of a mortgage,

Deub · 23-02-2020 9:34pm

SteelyDanJalapeno wrote: »

Some of the points in this thread make zero sense, people saying a 10 year you'll pay less than a 30 year mortgage?!

Obviously, it's an extra 20 years of interest.

You've compare like for like, apples for apples etc

For me the cheapest is the one where I pay less. So yes, I am not comparing apples with apples but it shows that mortgage is not always the cheapest money you will get.

pwurple · 23-02-2020 10:44pm

So, go ahead and pay off the mortgage in ten years then instead if it's the same amount? You'd save yourself more. You're not tied to the 30 years at all. None of my mortgages ever lasted the original term.

I mean, why would you go get a loan at 7% when there is a loan for the same amount at 2.7% available? Just pay it over whatever period you want.

Valhallapt · 23-02-2020 10:52pm

If your on a tracker mortgage, then you factor in inflation, its costing you almost nothing.

You won’t borrow cheaper than a mortgage, but it ain’t free.

boege · 23-02-2020 11:54pm

Use short terms lending for purchases that depreciate over short terms (cars, holidays).

Use long term lending for assets with long term values (houses).

Always borrow as little as possible and repay as quickly as possible.

pwurple · 24-02-2020 12:01am

boege wrote: »

Always borrow as little as possible and repay as quickly as possible.

Absolutes like this are just begging for contradiction.

I agree in a personal finance capacity, but for business, to expand, to be entrepreneureal, to take risks and do well you should ideally borrow the optimal amount needed for growth. That's better than risking your own money. And don't pay it back quickly, write off the interest against tax.

Ray Palmer · 24-02-2020 3:33pm

The statement is true but the understanding is the problem.

Yes the cheapest money you can borrow if you pay it off in the same time you would if it had been taken as a short term loan.

At a time where you could borrow easily people were told take out more to buy your car. Then pay off the car part of the mortgage as if you took a regular car loan. People being people didn't understand and pay off as a regular loan.

As for zero financing, firstly they charge you more for the car by not removing certain charges they will remove if you had cash. There are also hefty punishments and clauses about repayments. If you are getting zero interest you are paying in some manner.

BrokenArrows · 24-02-2020 7:37pm

Because it's the cheapest money you can borrow. Nowhere else can you get money at such a low interest rate. (Doesn't apply to temporary special offers like 0% credit cards)

Valhallapt · 24-02-2020 11:10pm

boege wrote: »

Always borrow as little as possible and repay as quickly as possible.

Id disagree with this, you should max out mortgage borrowing when you are young, let inflation erode the debt over time, then boast to your grand kids that you only paid 500k for your house as they fork out 2.5m for similar....

Graham · 24-02-2020 11:49pm

Ahhh inflation. Covered a multitude of house-buying/borrowing sins.

Good old days.

A certain amount of tongue-in-cheek there, but also a large element of truth.

macplaxton · 25-02-2020 2:48am

IME the cheapest money I ever borrowed was a UK Student Loan. Interest at RPI inflation rate, deferable in 12 month periods if earnings less than 80% average wage. If you never earn enough it got written off after 25 years.

In the last year I was paying it, I got money off the balance - because the first batch of loans were tied to RPI inflation rate whatever happened, so the interest went negative.

jimmycrackcorm · 25-02-2020 3:01am

Pheonix10 wrote: »

Sorry if this is the wrong thread. Id imagine is better to borrow as little as possible to reduce interest payments?

Yes and no. If borrowing more could allow you to get a faster growing asset then the returns could in some cases outstrip what you pay in interest.

That's how some people made money flipping houses. Not that I'm condoning the behaviour that let to our bailout.

witnessmenow · 25-02-2020 10:41am

Edit: this is wrong, but I will leave it here so others can learn why!

I'm far from an expert in this, but compound interest is the real killer of a mortgage, in early years the majority of your monthly payments are going towards the interest of the loan and not paying off the capital. So even though the interest is lower, it might often not be the cheapest money you will get.

Example scenario - You have two loans

Mortgage - 250k Loan with 30 years left @3%;
Personal Loan - 10k Loan with 1 years left @8.5%

You win 10K on a scratch card and you decide you want to pay towards your loans.

Assuming no early payment fees for either loan, It might seem like a good choice to pay off the personal loan, as that has the higher interest rate, but the cost of credit for a 1 year loan at those rates is €450

According to halifax overpayment calculator, paying 10k off your mortgage at that rate would save you €13,849 over the life of the loan.

That's a difference of over €3k, not insignificant.

Saying that there might be other reasons why paying off the personal loan might make more sense, but in a pure money out sense the mortgage is the way to go.

TimeToShine · 25-02-2020 10:46am

witnessmenow wrote: »

I'm far from an expert in this, but compound interest is the real killer of a mortgage, in early years the majority of your monthly payments are going towards the interest of the loan and not paying off the capital. So even though the interest is lower, it might often not be the cheapest money you will get.

Example scenario - You have two loans
Mortgage - 250k Loan with 30 years left @3%

Personal Loan - 10k Loan with 1 years left @8.5%

You win 10K on a scratch card and you decide you want to pay towards your loans.

Assuming no early payment fees for either loan, It might seem like a good choice to pay off the personal loan, as that has the higher interest rate, but the cost of credit for a 1 year loan at those rates is €450

According to halifax overpayment calculator, paying 10k off your mortgage at that rate would save you €13,849 over the life of the loan.

That's a difference of over €3k, not insignificant.

Saying that there might be other reasons why paying off the personal loan might make more sense, but in a pure money out sense the mortgage is the way to go.

What about the time value of money? I wouldn't consider that as falling under "other reasons" - someone earning 30k today is better off paying the personal loan rather than saving 3k over the course of 30 years by which time his or her salary will have doubled or tripled and the value of the "gain" is insignificant in comparison.

AlmightyCushion · 25-02-2020 10:48am

witnessmenow wrote: »

I'm far from an expert in this, but compound interest is the real killer of a mortgage, in early years the majority of your monthly payments are going towards the interest of the loan and not paying off the capital. So even though the interest is lower, it might often not be the cheapest money you will get.

Example scenario - You have two loans
Mortgage - 250k Loan with 30 years left @3%

Personal Loan - 10k Loan with 1 years left @8.5%

You win 10K on a scratch card and you decide you want to pay towards your loans.

Assuming no early payment fees for either loan, It might seem like a good choice to pay off the personal loan, as that has the higher interest rate, but the cost of credit for a 1 year loan at those rates is €450

According to halifax overpayment calculator, paying 10k off your mortgage at that rate would save you €13,849 over the life of the loan.

That's a difference of over €3k, not insignificant.

Saying that there might be other reasons why paying off the personal loan might make more sense, but in a pure money out sense the mortgage is the way to go.

In that case it would make sense to pay off the personal loan and then pay the monthly repayments from the personal loan against the mortgage.

antoinolachtnai · 25-02-2020 10:48am

witnessmenow wrote: »

I'm far from an expert in this, but compound interest is the real killer of a mortgage, in early years the majority of your monthly payments are going towards the interest of the loan and not paying off the capital. So even though the interest is lower, it might often not be the cheapest money you will get.

Example scenario - You have two loans
Mortgage - 250k Loan with 30 years left @3%

Personal Loan - 10k Loan with 1 years left @8.5%

You win 10K on a scratch card and you decide you want to pay towards your loans.

Assuming no early payment fees for either loan, It might seem like a good choice to pay off the personal loan, as that has the higher interest rate, but the cost of credit for a 1 year loan at those rates is €450

According to halifax overpayment calculator, paying 10k off your mortgage at that rate would save you €13,849 over the life of the loan.

That's a difference of over €3k, not insignificant.

Saying that there might be other reasons why paying off the personal loan might make more sense, but in a pure money out sense the mortgage is the way to go.

That is assuming you spend the 900 euros per month that would otherwise have been put to the ten grand loan on your lifestyle.

If you put the 900 euros/month toward paying down the mortgage then the outcome will be quite different.

Salary Negotiator · 25-02-2020 10:51am

witnessmenow wrote: »

I'm far from an expert in this, but compound interest is the real killer of a mortgage, in early years the majority of your monthly payments are going towards the interest of the loan and not paying off the capital. So even though the interest is lower, it might often not be the cheapest money you will get.

Example scenario - You have two loans
Mortgage - 250k Loan with 30 years left @3%

Personal Loan - 10k Loan with 1 years left @8.5%

You win 10K on a scratch card and you decide you want to pay towards your loans.

Assuming no early payment fees for either loan, It might seem like a good choice to pay off the personal loan, as that has the higher interest rate, but the cost of credit for a 1 year loan at those rates is €450

According to halifax overpayment calculator, paying 10k off your mortgage at that rate would save you €13,849 over the life of the loan.

That's a difference of over €3k, not insignificant.

Saying that there might be other reasons why paying off the personal loan might make more sense, but in a pure money out sense the mortgage is the way to go.

You havent factored in what you can now do with the cash that is no longer servicing the higher interest loan if you paid that off first.

What would the total interest savings be if you cleared the personal loan and then diverted extra €850(ish) into the mortgage?

witnessmenow · 25-02-2020 11:24am

Some stir I've caused :pac:

Fair enough points. For completeness i decided to work it out

According to the calculator:

Mortgage Value after a year (no overpayments): €244,780

After a year of overpaying €870: €234,196

Difference: €10,584

Total payments over the year: €10,440

Interest saved in first year: €144

But that isn't the end of it as with this method you have less of a mortgage left at the end of year 1 than taking the 10k and putting it in. It's €234,502 left after the lump sum.

Salary Negotiator · 25-02-2020 12:31pm

witnessmenow wrote: »

Some stir I've caused :pac:

Fair enough points. For completeness i decided to work it out

According to the calculator:

Mortgage Value after a year (no overpayments): €244,780

After a year of overpaying €870: €234,196

Difference: €10,584

Total payments over the year: €10,440

Interest saved in first year: €144

But that isn't the end of it as with this method you have less of a mortgage left at the end of year 1 than taking the 10k and putting it in. It's €234,502 left after the lump sum.

OK, so I've sat down and worked out the figures. Lets assume there are 3 options here,

Option 1 - Do nothing and just pay off the loans each month

Option 2 - Pay €10K into the mortgage and reduce it to €240,000 @ 3% for 30 years

Option 3 - Clear the personal loan, make 12 overpayments to the mortgage of €872.20 and then continue the original payment of €1,054.01 for the duration of the mortgage.

The total interest payable for:

Option 1 is €129,910 (Mortgage interest of €129,443 and loan interest of €466)
Option 2 is €124,732 (Mortgage interest of €124,265 and loan interest of €466)
Option 3 is €115,308 (Only mortgage interest as loan fully paid off)

It's worth noting that in option 3 not only is there a monthly over payment in Year 1, because the capital has been reduced by these 12 over payments from Year 2 on by maintaining the original repayment of €1,054.01 this now includes a smaller over payment of €45.69

witnessmenow · 25-02-2020 8:43pm

Salary Negotiator wrote: »

OK, so I've sat down and worked out the figures. Lets assume there are 3 options here,

Option 1 - Do nothing and just pay off the loans each month

Option 2 - Pay €10K into the mortgage and reduce it to €240,000 @ 3% for 30 years

Option 3 - Clear the personal loan, make 12 overpayments to the mortgage of €872.20 and then continue the original payment of €1,054.01 for the duration of the mortgage.

The total interest payable for:

Option 1 is €129,910 (Mortgage interest of €129,443 and loan interest of €466)
Option 2 is €124,732 (Mortgage interest of €124,265 and loan interest of €466)
Option 3 is €115,308 (Only mortgage interest as loan fully paid off)

It's worth noting that in option 3 not only is there a monthly over payment in Year 1, because the capital has been reduced by these 12 over payments from Year 2 on by maintaining the original repayment of €1,054.01 this now includes a smaller over payment of €45.69

According to halifax calculator your numbers for option 2 are wrong, they say a 10k lump sum pay off would save €13,849 over option 1. I think the difference is you made it 240k @ 30 years you changed the monthly payments to be lower, which you wouldn't normally do when overpaying

Salary Negotiator · 25-02-2020 9:30pm

witnessmenow wrote: »

According to halifax calculator your numbers for option 2 are wrong, they say a 10k lump sum pay off would save €13,849 over option 1. I think the difference is you made it 240k @ 30 years you changed the monthly payments to be lower, which you wouldn't normally do when overpaying

Yes, I should have added an additional monthly over payment to keep the repayment constant at €1,054.01. I did for option 3 but not 2. Thanks for checking.

So, now my figures are

Option 1 - is €129,910 (Mortgage interest of €129,443 and loan interest of €466)
Option 2 - is €116,001 (Mortgage interest of €115,534 and loan interest of €466)
Option 3 - is €115,308 (Only mortgage interest as loan fully paid off)

awec · 25-02-2020 9:35pm

macplaxton wrote: »

IME the cheapest money I ever borrowed was a UK Student Loan. Interest at RPI inflation rate, deferable in 12 month periods if earnings less than 80% average wage. If you never earn enough it got written off after 25 years.

In the last year I was paying it, I got money off the balance - because the first batch of loans were tied to RPI inflation rate whatever happened, so the interest went negative.

Yes, my UK student loan is my cheapest. Current interest rate is 1.75% I believe.

Sleeper12 · 25-02-2020 9:42pm

Main reason is that the interest rate is the cheapest rate you'll ever get for a loan. Some credit cards are charging close to 20 percent interest. The other reason that this is the cheapest money you'll ever get is that you are buying a house /apartment. Within a few years you will be paying less in mortgage payments than you would paying rent. In a few decades you will be rent & mortgage free & you will own a valuable property.

Why do people say the mortgage is the cheapest money you'll get?

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