Money for nothing…
The Bank Rate or the rate of interest charged by the Bank of England is important news, but as a history buff, when I sat down and worked out what it would cost me to buy a house I used a rate of 19%.
Why? I remembered seeing this as an advertised rate for a mortgage in Feburary 1991. The base rate at the time was 13.38%, but building societies often add 6% or so to their rates.
When I finally took out a mortgage in 1997, the base rate was 7% and I got a deal for 5.25% for 2 years, but I still worked out against that larger base rate, just in case the worst happened.
The Bank of England publishes this data at https://www.bankofengland.co.uk/boeapps/database/Bank-Rate.asp . You can see from here that the peak has been 17% in November 1979. Our current deal is 3.49% on top of the base rate => 20.49%, so actually the 19% wasn’t a bad worst case scenario.
Why are you talking about doom and gloom, surely this is terrifying some people out there?
That is not my intention. It’s just we’ve been very lucky the past few years with interest rates being so low and I am sure for many, it’s a nasty shock.
For me, it was an “OK, let’s take stock” moment rather than “let’s make a budget”.
Our plan has always been to pay off the mortgage as quickly as we can. Equity is only equity if you have no debts.
Which will leave us in a different situation once the deed is done.
I am lucky to have a full state pension and a 20 year BT pension (although my earnings weren’t that great, it is index linked). If I die, half of these will go to my spouse. These are not touched with a ten foot barge pole.
Like everyone in the country, I can have an ISA. While in debt, I didn’t do this but I was spending more than £20K per annum on my mortgage, so that’s a no brainer. I’m tempted to do three cash ones then some stock market ones.
Beating inflation
Saving rates never match borrowing rates. Full stop. So, any investments really need to earn more than inflation to be worthwhile.
Which is the game.
Of course, there is also liquidity. I’m over 50 and have 16 years before I can draw my state pension. I need to be able to feed, clothe, and run my house.
If I can save £20k per annum, I can live pretty comfortably off that, if I need to, even with inflation at 4%.
Of course, if I can maximise my earning potential over the next five years, that’s got to be key too. It would allow me to down shift when I get to 60.
That’s kind of what it’s all about. A big safety net, if we need it.
Posted: February 10th, 2024 under 42.