November 03, 2005

Pay off the mortgage - or do something else with the cash?

Blog reader M Pawson asked about the pros and cons of paying off paying off a mortgage early – see ‘Reasons for repossessions’, below.

M Pawson is in the enviable position of being able to clear his mortgage, but doesn’t know whether it makes sense to.

We’re always getting questions about this – increasingly from borrowers who are thinking of interest-only mortgages, where they don’t make any repayments at all, but try to do something better with the cash elsewhere.

It’s all about expectations of returns. Oh yes - and risk....

Take a £200,000 mortgage and for simplicity’s sake say the rate, for the duration of the 25 year term, is 4.5 per cent.

Borrower Jill goes the repayment route and her bills are £1,112 per month. The total cost of Jill’s credit, on a repayment basis over 25 years, works out at £133,499. So to own the home outright, including the capital repayment, Jill hands over £333,499.

Borrower Simon goes for interest only. Simon’s monthly bills, just serving the 4.5 per cent interest, will be £750. If Simon pays that every month for 25 years he’ll have parted with a total £225,000 – and yet he still won’t have paid back a jot of the capital borrowed.

But Simon is paying £362 less per month than Jill. Say he shoves that extra cash into a tax-efficient savings scheme, such as a unit or investment trust held inside an Isa (so no capital gains tax).

In theory – excluding tax and costs etc – if his £362 per month compounds up at the same rate as the mortgage, Simon will roughly end up in the same position as Jill in 25 years’ time. He’ll have £200,000 to clear the debt. Try This is Money's calculators.

But if he is investing in equities, he could reasonably hope to get more than the rate he was paying on his mortgage, over time. Say his savings compound up at a modest five per cent per year: then, his £362 per month would grow to a total £217,693.

That would pay off his house entirely and leave him an extra £17,000-odd. If the equities compounded up at an average six per cent, he’d get an extra £53,000, and at seven per cent, he’d get an extra £94,000…

All that sounds ominously like the sales patter used by companies flogging endowments as mortgage repayment vehicles back in the eighties and nineties. No reminders needed about what happened there.

And that’s the risk. M Pawson’s no-risk strategy would be to pay the mortgage off right now. Or he decides to try and do something more clever with the cash – and risks getting it wrong.

- Richard Dyson

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October 28, 2005

Hotlines to hell

Liberal Democrat MP David Laws has found out that one in three calls to the Child Support Agency go unanswered or are cut off. An appalling statistic, doubtless, but at least now that the problem is aired something can be done to fix it.

What about the phone nightmares that we're all put through when we try to contact the multitudes of private-sector companies that we deal with? For starters, someone should conduct some research into how long customers are kept on hold when they try to contact - of all firms - BT.

Or how about Barclays, or Lloyds TSB, or Intelligent Finance...? It's not the call centre staff that customers have a problem with. In fact many of us feel rather sorry for these folk, see here. The real problem is with the menu-spouting computerised creature from hell that greets you in the first instance.

And why do these organisations all have trillions of phone numbers covering every service under the sun? It seems that whatever number you call when you want some simple thing, like a new chequebook, you're told you've rung the wrong department.

- Richard Dyson

October 25, 2005

Denied a good rate? - then complain

Have you applied for an attractive credit card or loan and then been given a worse rate than the one on offer? One reader, Alan, posted the following in response to our Capital Junk blog, below: "I applied for a 0% Capital One card online and was accepted. They sent the credit agreement by post. On studying the small print, there was no 0% but instead 29.5%."

You're far from alone. Rules were introduced last year to try and stamp this out, but it looks like companies are flouting them - see here.

The rules say that two thirds of successful credit applicants should get the advertised offer. But it's unenforceable nonsense. For a start, many card companies offer several deals all at once, advertising in different media. How is the Office of Fair Trading, which is supposed to police this issue, going to keep track of all that?

Secondly, there's no rule saying how many applicants a credit company can reject outright. A firm could reject every single applicant for a certain advertised deal, if it wished. What's more likely is that it would accept a minority of applicants and then (seeing as it now has the rejected applicants' details conveniently stored) offer the rest a another, worse deal in due course.

That way the company gets to advertise great deals and appear in Best Buy tables, when in fact the majority of what it's selling is lousy. And nobody ever gets to know...

So what can you do? Well, it's worth complaining to your local Trading Standards office, though I wouldn't be too hopeful of achieving much that way. What's more important is to make a noise about it on the web. Companies offering credit are never going to come clean about this issue, so all we can do is hope to shame the worst offenders. So please keep posting.

- Richard Dyson

October 20, 2005

Capital junk

Card company Capital One has to be Britain's most prolific junk mailer. Heaven only knows how many forests that awful company ploughs up in its quest to flog credit, but you could print a bible on what it shoves through my letterbox each year. And that's just MY letterbox. Every time I get a mailing, and that's about every two weeks, I open it up and write on the top: 'please don't send me your trash ever, ever, ever again'. Then I shove it back in the reply-paid envelope and post it. Any reasonable person would think that that, surely, would be an end of it.

Oh no. Whatever I write, however hard I beg, plead, or berate in my little jottings, there's no difference and no halt. Capital's unstoppable tide of junk gushes away through the door like untreated sewerage.

A mate has suggested a new plan: don't open Capital's junk, he says, just forward it all to the home address of one of Capital's bosses. Details are available from Companies House. I quite like that idea, except for one thing: we can't be sure that he would re-cycle it....

More seriously, I suspect that Capital has one of the worst records for turning card applicants away or offering them a worse deal than the one they applied for. Last year UK boss Fergus Brownlee admitted that just 28 per cent of people who applied for a particular best-buy rate got that specific rate. The rest were rejected outright or offered something worse, see here.

There's nothing illegal about doing that - but there's no doubt that some companies do it more than others, and it's very hard to identify the worst offenders. So if you've been rejected by Capital One or offered a worse deal than the one you applied for, and you think there's not much wrong with your credit rating, let us know by commenting here on the blog.

- Richard Dyson

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