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.

*A Moneywise First 50 Fund.

**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.