Industry Insider: how the global financial crisis could help you pay off half your mortgage
March 2009 was also the month the UK stock market (and indeed others) finally found a bottom and, after a very painful few months for investors, the world started to look like a slightly better place.
However, as a colleague pointed out to me, what we thought then was financial Armageddon, has actually made a lot of people much better off – those lucky enough to have a tracker mortgage.
Having purchased a house in November 2006, when interest rates were a heady 5%, my colleague’s monthly mortgage bill was reduced by a huge £600 a month after the 2009 interest rate cut. Over the intervening years, she has saved more than £58,000 in mortgage repayments. Had she invested this £600 a month into the average UK equity fund, she would have a pot of money worth £86,000** today – enough to pay off half her mortgage and reduce the term by a decade.
Hindsight is a lovely thing and few people are this disciplined with their money. Even if they are, we all have our own life priorities, which sometimes supersede our savings. But the story does demonstrate how we could be saving more now to reduce our debts in the future when interest rates and our repayments may be a lot higher.
The last time we had an interest rate rise was July 2007. Britney was divorcing Kevin, Rihanna was at number one with ‘Umbrella’ and, fittingly, we had one of the wettest summers in living memory. Plus, the ban on smoking in public places also came into force in England.
When interest rates will finally rise again is anyone’s guess. We seemed to come close last year, but Brexit worries rather put paid to it. Neil Woodford, manager of CF Woodford Equity Income* and the newly launched Woodford Income Focus fund, has gone as far as to say that Mark Carney, the present governor of the Bank of England, “will probably leave his job in 2019 as the first governor not to have put up interest rates”.
Even if Mr Woodford is wrong in his prediction, it is unlikely we’ll move quickly from 0.25% to anywhere near the 5% we had a decade ago. And mortgage rates for those not on an old tracker are likely to remain relatively low as a consequence too. So there is still time to bolster the coffers. The trouble is, where to invest?
We are now a long way into the equity bull market and the UK stock market looks to be quite expensive. Indeed, most developed markets look a little toppy. The good news though, is that if you save regularly each month, any volatility in stock markets is less pronounced in your savings pot because you benefit from pound cost averaging.
Two UK equity funds I like as core holdings are Artemis Income and Liontrust Special Situations. For those of you who like investment trusts, City of London Investment Trust* and Lowland Investment Company are also worth consideration.
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Mr McDermott's views are his own and do not constitute financial advice.
**Source: FE Analytics, monthly savings of £600 over the past eight years to 28 February 2017 using IA UK Equity Income and IA UK All Companies sectors.
Click on the table below to enlarge:
- Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Mr McDermott's views are his own and do not constitute financial advice.
Darius McDermott is the managing director of Chelsea Financial Services and FundCalibre.
With a tracker mortgage, the interest you pay is an agreed percentage above the Bank of England’s base rate. As the base rate rises and falls, your tracker will track these changes, and so rise and fall accordingly. If your tracker mortgage is Bank of England base rate +1% and the base rate is 5.75%, you will be paying 6.75%. Tracker rates are lower than lender’s standard variable rate (SVR) and as they are simple products for lenders to design, they usually come with lower fees than other mortgage schemes.
The term is interchangeable with stock exchange, and is a market that deals in securities where market forces determine the price of securities traded. Stockmarket can refer to a specific exchange in a specific country (such as the London Stock Exchange) or the combined global stockmarkets as a single entity. The first stockmarket was established in Amsterdam in 1602 and the first British stock exchange was founded in 1698.
Investment trusts are companies that invest money in other companies and whose shares are listed on the London Stock Exchange. As with unit trusts, private investors buying shares in an investment trust are buying into a diversified portfolio of assets (to reduce risk), which is managed by a professional fund manager. Investment trusts differ from unit trusts in two important ways: they are listed on the stockmarket and so are owned by their shareholders and are closed-ended funds with a finite number of shares in issue. This means the share price of investment trusts might not reflect the true value of the assets in the company (known as the net asset value, or NAV) and if the NAV value of a share is £1 and the share price in the market is 90p, the trust is said to be running a discount of 10% to NAV. But this means the investor is paying 90p to gain exposure to £1 of assets. Investment trusts can also borrow money and use this money to buy investments. This is known as gearing and a geared trust is thought to be more of an investment risk than an ungeared one.
A bull market describes a market where the prevailing trend is upward moving or “bullish”. This is a prolonged period in which investment prices rise faster than their historical average. Bull markets are characterised by optimism, investor confidence and expectations that strong results will continue. Bull markets can happen as a result of an economic recovery, an economic boom, or investor irrationality. It is the opposite of a bear market.