Wednesday, April 22, 2009

One Pence Mortgage

A couple in Britain pays almost nothing for the mortgage on their house. When news broke out about a British couple paying a paltry one pence (five sen) a month for their mortgage, it set tongues wagging.

However it came as no surprise. After all, banks are paying what pensioners grumbled were “less than peanuts” interest for their hard-earned savings. They seemed blessed as their interest-only mortgage payments plunged from £1,500 (RM7,950) a month to almost zero.

On closer examination, it doesn’t appear that rosy. While the base rate on their £400,000 (RM2.12mil) house in south-west London, had plunged from 5.5% to 0.5% they still have a huge debt that is not getting any lower. The principal, that is.

Perhaps, they could have negotiated with the bank to maintain their payments and reduce the mortgage. This would have reduce the amount of interest they have to pay down the years. Regardless of the interest rate, the top priority should have been to pay off the debt (principal) as much and as quickly as possible.

Paying an interest-only mortgage is risky business, more so when the property value continues to slide, especially during an economic crisis. They bought their house in 2007 and property have depreciated by about 20%. That means it is worth about £320,000 (RM1.69mil) or less. In other words, they would have lost about £80,000 (RM424,000) on paper – despite having to pay almost zero interest on their loan.

Having said that, the worst off are probably pensioners and widows who had saved all their lives and survived on the interest from their savings. These fat-cat bankers are paying little or no interest on savers’ accounts.

No comments: