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From the Blog

Is it Always Wise to Pay a Loan Back Early?

Paying a loan back early is something that can seem really great. You will no longer have that debt hanging over your head, you will have more money available each month as you will not have the repayments to make and you could potentially save a lot of money. However, there can be disadvantages to paying back some loans early and it is therefore looking at the pros and cons before making up your mind.

Some loans will have an early redemption fee. This means that there will be a charge associated with paying it back early. Sometimes it may just be a month’s interest, or a small lump sum to cover the admin costs. However, it can be a significant amount of money. It is therefore always worth finding out from your lender what the fees will be and then working out if it will be cheaper to pay the loan off early. The fees may be more expensive if it is a bigger loan, but then the total interest payments will be as well.

Some people do get concerned that if they use their savings to pay off a loan then they will be foolish. They worry what might happen if they need money and they do not have any. However, it is worth looking at things with regards to the cost. If you keep money in a savings account then you may get a small amount of interest. It is highly likely that you will pay more money in interest on a loan. Therefore it would make sense to use the savings instead of borrowing money or use them so that you can borrow less. If you do need money in the future but have no savings, you could always borrow more, but this may not be very likely, particularly if you are careful. In the meantime you can take advantage of having no loan or borrowing less and the huge amount of money that will help you to save.

There are some loans though, which are better not to pay off early, but they are rare. One example of this is a UK student loan. At the moment these are paid back over 30 years, but repayments are based on earnings and so if you do not earn very much, you will not have to make any repayments. Paying this loan back early is often seen as inadvisable. This is because many people will not pay back the full loan in the term. Once the thirty years is up the loan is written off. This means that even if the full amount has not been paid back, it is gone. It can be hard to now what you will be doing in the future and whether you will always be working and always earning enough to pay back the loan. However, if you are likely to take time off work to have children, perhaps work part time to look after you family or work in a field where there is a risk of you losing your job, then you could find that it is better to not pay it off as you could end up paying back a lot more than you need to.

It can also be cheaper not to pay off a loan in a few rare cases. An example would be when someone has an interest only mortgage and the money that they are saving up to pay it off is invested well. This investment could potentially make a lot more money than would be saved by not paying the interest payments on the mortgage. Specifically if interest rates were low and investment returns high then it would be more advantageous financially not to pay off the loan early.

However, most loans do not work like this. Most loans have to be paid back in full, sometimes over a specific term and sometimes it is possible to decide yourself when to pay it back. Paying back as quickly as possible means that the loan will be cheaper and so it means that you will potentially save a lot of money. This is why many people feel that it is the best option in most cases.

Is a Tracker Mortgage a Wise Idea?

A tracker mortgage has a variable interest rate which will change when the base rate changes. The base rate is the interest rate which is controlled by the Bank of England and if they change the rate, which they make a decision on monthly, then the rate that you pay will change as well. You will find that your lender will change your rate within a day of the change of rate being announced. Your lender will add on a fixed rate to the variable tracker rate, which will be their profit. It is worth comparing tracker mortgages to choose the one which looks like it offers the best value for money. This fixed rate could be one factor to consider but you also need to think about the customer service the lender has, whether you like the idea of borrowing from them, what other costs they have, how flexible they are and anything else you feel is important.

A tracker mortgage is a very good idea when interest rates are dropping. Often when a rate drops, lenders will not be in a hurry to drop their variable rates. They will want to take advantage of being able to borrow at a lower rate and still charge a higher one and therefore make more profit. As lenders do start to drop their rates, in order to become more competitive, they may do the same thing, but it is unpredictable. You could lose out compared to having a tracker because the rate for that will drop right away.

When rates are rising you may not be so lucky though. A tracker rate will go up immediately, but other variable rates may not rise so quickly. However, lenders will want to keep their profits as high as possible so it is unlikely that they will delay too long before increasing their rates as well. It may be that someone with a tracker will not lose very much in this situation and probably will gain a lot more when rates drop.

A tracker does have that fixed rate with it though which will always have to be paid regardless of the base rate. This could be a disadvantage if it is very high but great if it is low. All lenders will add on a charge like this – you will see it in their variable rates, as they will be higher than the base rate. However, on a variable rate, they may change how much they charge but with a tracker they usually do not. It can depend on what is in your agreement though.

Some people prefer to have a fixed interest rate. These will not last for the full term of the mortgage but perhaps for a few years or up to five. The advantage of these is that you will know exactly what you will be paying and so if you do not have a lot of spare money, you will be protected against rate increases. However, if the rate falls you will end up paying extra. Lenders usually set the fixed rate quite high so that they still make a profit even if the base rate goes up.

So there are quite a few things to consider when you are deciding whether to have a tracker mortgage. You need to think about whether you are happy to have a variable rate, which could go up as well as down. You need to check the price against other lenders and see whether you can get good value for money. You need to also see who is offering tracker mortgages and decide whether you think that you will be happy having a mortgage from that company. There are a lot of things to think about. If you time your tracker well and get one as rates are falling then you could really see some advantages. It is not easy to predict what interest rates will do though, but the lower they are, the more likely they are to rise and vice versa. You can also find out what the head of the Bank of England has to say about rates and what they plan to do with them in the future based on the current state of the economy.