Money Management Tristan on 14 Feb 2009 11:02 pm
Tracker Mortgage Advice During Period Of Low Interest Rates
Given that the economy of the UK and most countries around the world is not in good shape, it’s no surprise that governments worldwide are lowering interest rates in an effort to increase the flow of money in the economy.
You see in economics, there are two theories about how government can control the flow of money in an economy:
- Fiscal policy - control of taxes
- Monetary policy - control of interest rates
When I studied economics at school, I had no “real world” experience, so found this subject incredibly dull. It’s only now as an adult that I find it fascinating, especially as the effects of monetary policy and fiscal policy can be seen in real time on the UK economy.
The Bank of England have been using monetary policy to steadily lower the base rate in an effort to increase the amount of disposable income that UK consumers and businesses have.
But how does this work?
Simply put, if you were a typical UK homeowner, who had borrowed £100,000 on a tracker mortgage, you will now be paying £4,000 a year, or £333 a month, less in interest than this time six months ago. The theory goes that most borrowers will see this as a windfall and go out and spend the extra money they have in their pocket.
I would strongly advise not to do this. Not because I’m a doom-monger who only wants to see the UK economy worsen. Simply because when interest rates revert to a more normal level (somewhere between 4% and 5%), those people that had gotten used to having this “extra” disposable income as “normal” will suddenly feel the pinch.
If you use the extra money that you have to either pay off some of your mortgage early, or invest for the future, you will be far better placed to deal with the inevitable interest rate rises in the future.
The same goes for any businesses that are suddenly feeling an easing in their interest payments. Use the extra money to build up reserves, or pay off the capital on the loans, mortgages and/or overdrafts.
By following a frugal strategy whilst interest rates are low will no doubt lengthen the recession by not playing into the hands of the policy makers in the Bank of England and the government, but from your own perspective as UK consumers and businesses, you will be better placed to strive once the UK economy does recover.
on 16 Feb 2009 at 12:28 pm 1.millionaire blog .co.uk said …
Millionaire Mind and Making Money Blog Carnival No. 8…
Welcome to this weeks edition of millionaire mind and making money online. Id like to present some interesting articles from my fellow finance and investment blogger friends.
Lets start with some resume advice. In todays climate a CV could be the key t…
on 15 Mar 2009 at 3:12 am 2.“How to administer your money” carnival - 03/14/2009 said …
[...] presents Tracker Mortgage Advice During Period Of Low Interest Rates posted at Find Financial Freedom, saying, “Advice for those people on tracker mortgages that [...]
on 03 Apr 2009 at 4:02 am 3.Plumber said …
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on 04 Jun 2009 at 2:52 pm 4.Paul Taylor said …
Fascinating article, well thought of and well written with some very good advice in!