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Tuesday, January 06, 2009
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Asteve
Activist
Posts:930
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| 13/06/2008 5:13 AM |
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Reuters discuss savings rates...
They talk about likely incresing Bank of England base rates. However, as a word of caution... I most definitely would not deposit any money whatsoever in a Nigerian-owned "FirstSave" account... and there are unsubstantiated roumours about potentially less stable than hoped Icelandic banks - making me more nervous about the likes of Kaupthing, for example than the likes of a British building society - like Yorkshire - for example.
This should be factored into any decision about whether to buy now or to wait 1-3 years. When I can get better savings rates than most poeple pay for thei rmortgages, mortgage rates are only going in one direction... up. This doesn't affect potential FTBs - since they do not yet have any mortgage liability - and prices will necessarily drop further to reflect the increased costs of borrowing.
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chefdave
Activist
Posts:482
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| 13/06/2008 9:24 AM |
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"Savers are one of the few beneficiaries of the credit crunch, with increasingly attractive rates being offered as banks and building societies find it harder to raise funds on money markets."
I thought that building societies could only fund themselves through customer deposits rather than using the money markets. These rates look quite attractive and some are substancially higher than the base rate or LIBOR so I assume the idea is to hook you in on the headline rate then quietly drop it the following year.
I too was considering Kaupthing, but considered it too risky, even if it is FSA covered. I also considered opening a small account with Yorkshire as there's one very close to me in an attempt to potentially carpet bag, but as B&B are going to the wall and I have no idea if it will ever happen decided that it wasn't worth the hassle of having to inform someone else of my new address when I evetully move...again. Also as I've heard nothing of Yorkshire I don't know how exposed they are to BTL or IO mortgages etc.
I'm not sure about factoring in savings rates when looking at getting a mortgage is a must either. Looking at your mortgage rate and the potential for it to increase and by what amount is crucial but I don't see why should savings rates affect that decision. Here's my logic: If I had a 100k mortgage paying 6% interest and savings of 50k paying 4% interest then I would consider using all the money to pay off the mortgage as i would be saving 1k per year. The only downside is of course if you then have to borrow more expensively in case an emergency comes up, so it would be worth not throwing all your savings into paying down a mortgage. Thats as far as my calculations go in terms of getting best value for money from savings/mortgage.
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Asteve
Activist
Posts:930
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| 13/06/2008 10:41 AM |
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Nicely cynical there Dave... yes, expect a "Hoik you in and drop in a year... but, unlike instant access, a fixed term bond means that you don't have to be constantly checking up on the rates. It isn't too much hardship to go shopping around, is it? I can cope with that level of effort myself. ;)
You are right that building societies can not finance themselves on the "international money markets" - though, there are other mechanisms in principle than customer deposits... for example, bank deposits (equivalent to a bank loan) and there is nothing in principle stopping a building society raising capital using commercial paper. I'm no expert on whether or not this has actually happened. With a mutual building society, you are a shareholder... which means, as soon as you've deposited a quid, you are entitled to review the accounts... and those should tell you exactly how they are financed.
Building societies, of course, are also acting in the best interests of their members... (we hope) so I'd expect them to be looking to cherry pick from the least risky borrowers from Northern Rock (who need to reduce lending by £30bn really quickly) - so there is huge forced demand for re-mortgage... and I hope that any building society was looking to maximise this opportunity.
I am not aware of any alarming stories about Yorkshire BS... but, I hasten to add, that is not an endorsement and this is not financial advice - etc. etc. (all obvious, I hope).
Factoring in savings rates is important - since, if you're thinking of splashing out a 25% deposit on an average £200K house, that's interest on £50K that you're forgoing... in addition to your mortgage. 7% on £50K is £3500 (gross) each year. Not the biggest sum - but three-and-a-half-grand is enough to make it worth accounting... it is over a third of rent.
The biggest thing, however, is sentiment. I might bang on about LIBOR as if it is as commonplace as Posh-n-Beckham but the average mortgage free house vendor is likely blissfully ignorant that LIBOR exists - let alone what it means for the monetary system; economy; mortgage lenders and - ultimately long-term-consumer debt. The savings rate, however, is an obvious verifiable widely published and tangible rate.
If I were looking to buy a house I rented, I'd hope to discuss with the owner... I'd say... So, your maximum rent is £800/month; that's £9,600 gross - less a 15% management & maintenance cost - £8160 net pre-tax income... with an illiquid asset... You'd get £8160 interest on a cash deposit of £116,571 at 7% . Your cgt is 18% - so you need a sale price of £142,159 in order to break even and to free yourself from the worry of void periods; unexpected maintenance costs and further capital depreciation. What would you say to an offer of £145K? From my perspective, the sort of house that rents for £800/month seems to be offered for about £250K at peek last year. This makes for a 42% nominal price drop - and would make sense for me to buy - since rent/price ratio would be approximately neutral... assuming I could spare a 25% deposit as a down payment.
Your savings & mortgage debt buffer is a personal thing... it would need to be different for everyone to reflect personal circumstance. It is a nice luxury, but it isn't cheap.
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chefdave
Activist
Posts:482
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| 13/06/2008 12:01 PM |
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| That would be a most generous offer Asteve, especially considering you're assuming that they've made a profit and will have to pay CGT on the £116,571. I'm sure these savy property entrepreneurs havn't just jumped blindly into the abyss looking at asset appreciation without considering yields :) |
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Asteve
Activist
Posts:930
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| 14/06/2008 9:40 AM |
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I think it would be an honest offer... One that rewards me with an affordable home and one that rewards the owner with what is a fair market price right now. If, of course, they insist on holding the property, as rents fall and interest rates continue to rise - as more and more property comes onto the market... I might well reduce my offer accordingly.
In three years, the fair value might be half that... but, I'd prefer to get on with my life now. I'm not a speculator. |
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