Moneyweek: 0% interest rates are dangerous...

Dithering_Dad

I'm just happy that I don't care about whether other people have mortgages or rent or whether my house is 'gaining' or 'losing' in value. I'm relieved that I'm not involved in the home v rent sniping and that I'm finishing work today for xmas.

Lotus-eater

Dithering_Dad wrote: »

I'm just happy that I don't care about whether other people have mortgages or rent or whether my house is 'gaining' or 'losing' in value. I'm relieved that I'm not involved in the home v rent sniping and that I'm finishing work today for xmas.

I finished in November, just thought I'd make you jealous

swiss69

0% interest rates are good for me...My tracker mortgage would be 0.45% and I would be paying £40 a month on a £100k mortgage! (Int only of course!!)...They can stay at 0% for the next ten years as far as I am concerned!

lady_lucan

swiss69 wrote: »

0% interest rates are good for me...My tracker mortgage would be 0.45% and I would be paying £40 a month on a £100k mortgage! (Int only of course!!)...They can stay at 0% for the next ten years as far as I am concerned!

Er - aren't all trackers pegged at a percentage above base rate? And how ever would you raise the capital to repay the mortgage at the end of the term if you're on an interest only?

HammersFan

carolt wrote: »

No - saw recent figures showing 50-60% (can't recall exact number, but definite majority) of mortgages were on fixed rates, c. 35% on trackers and rest on SVR etc.

So majority of mortgage holders not benefitted at all.

And do none of them have loans/credit cards/savings? Really?

As a renter, I don't borrow to pay my rent, strangely enough, so mortgage rates don't really affect me.

35% of mortgage holders is a lot of people. Most doing very nicely at the moment.

Maybe you should ask your landlord for a cut in rent - if he / she has a mortgage they'll most likely be quids in.

Honestly Carol, if you're not going to buy with interest rates this low and with sellers taking big discounts, I don't think you ever will.

And what happened to the 'payment shock' issue for people coming off fixed rates. Another dog that didnt bark.

Generali

35% of new mortgages taken out in October 2008 were trackers which is a very different thing. CML started measuring trackers as a mortgage type in April 2005 since when 18% of mortgages taken out have been trackers (1,353,900 of 7,258,900 mortgages).

The reality is likely to be that trackers are a pretty small proportion of mortgages as most people have the same mortgage for years and cant be bothered to move it all the time. Hefty up front fees won't have improved peoples' desire to change mortgage providers.

tradetime

carolt wrote: »

I have to admit I still find this deflation business a bit baffling. Whilst house prices are clearly falling and I expect them to do so for a while, and commodity prices have fallen from their recent ludicrous highs, isn't this just a normal, reasonable symptom (NOT cause) of recession, and of prices returning to more sustainable levels.

Why do we need to 'fix' things at all? Why is this so bad? In previous downturns, house prices etc fell too, and then in due course, the economy recovered. It's not as though any of the things I buy - bar petrol - have shown any major reduction recently - food and essentials are still very high compared to recent levels and show no signs I'm aware of of reducing any time soon.

Is it just the govt trying to deflate away its own debt/the nation's?

If our RPI figures are now heading towards more reasonable levels, can't we just breathe a huge sigh of relief and leave well alone?

As fa as I can see, chucking huge amounts of money at banks or reducing interest rates has had no economic impact at all - yes, its stopped the banks collapsing, but other than that, except for a few mortgage holders on trackers, everyone else is worse off - average mortgage, loan and credit card rates are up, savers' rates are down.

Explain, please?

Ok, sorry but this could be another long post, and will likely bore most to tears, but I'll give it a go anyway. If you don't like being bored, look away now.

To understand the problem as I have said elsewhere you have to separate price movements from deflation and inflation otherwise most people can't see the problem, after all if things become cheaper that must be good, and if things become more expensive that must be bad.

Price movements are merely a symptom, or a side effect of the two. But prices can and do move up and down in all sorts of assets due to the simple supply / demand equation. Thus it is not the fact that house prices are falling that is the problem as such, nor that commodity prices are falling up to a point. The movement of price in relation to supply / demand brings about natural balance. So if the price movement is due to supply / demand imbalance then there is no need to take any action as the market will naturally find the correct balance.

We live on a planet with finite natural resources and we have an ever expanding population, this creates a constant upward pressure on demand. Since our resources are finite, lets take oil as an example, finding new supply, and getting at that supply adds cost to production, so price will rise over time, the same case can be made for all our natural resources, thus the supply of money and credit must expand and that money must move around (the velocity of money) and so inflation is the normal state, but steady, slow controlled inflation.

Prudent monetary and fiscal policy should be used to control that inflation. One could say it's a bit like riding a bicycle down a steep hill, there is a propensity for it to run away, so you tap on the brakes from time to time as the speed picks up too much. In the same way our central bank will "tap on the brakes", in its simplest form by raising rates, this slows the expansion of money and credit as people are less prone to borrow. This slowdown in supply of money helps force efficiency from producers of goods to reduce or constrain costs as much as possible and at the same time discourages excessive consumption, a current example would be all sorts of people owning more than one house. The important thing here is that the slowing expansion of money and credit was controlled as improvements in producer efficiency can only constrain prices so much.

Deflation on the other hand is not a controlled slowdown it is a contraction or reduction in the supply and velocity of money and credit, this leads to an artificial reduction in demand, it's not that demand is not there, but that there is not enough money to support or pay for the demand. Since demand has fallen there will be downward pressure on prices, when producers can no longer meet this with improvements in efficiency they will eventually reduce supply and in doing so will be forced to lay off workers, as unemployment begins to rise so demand falls further, those unemployed will begin to default on their debts, this leads to a growing fear of defaults and a reduction in lending, a further contraction in the supply and velocity of money and credit (further deflation) For companies with fixed-rate debt, forced price reduction and subsequent cuts in production and revenue makes the debt more problematic. That is, a fall in the price they can charge for their products lowers their revenues and makes it harder for them to make their loan payments, and thus a downward spiral begins, default and fear of default.

Where debt levels are already high and particularly where that debt was taken to support the payment of overpriced assets, such as our housing market this can be disastrous. If the situation is not brought under control quickly then a deflationary crash and an ensuing depression are the most likely outcome. A deflationary crash could be summed up as a sustained, deep general decline in peoples willingness and ability to lend and borrow, while a depression tends to be a deep sustained reduction in production. Since a decline in production reduces a debtors ability to pay and service their debt a depression supports deflation, and since a decline in credit reduces new investment in economic activity deflation support depression, the two are self supporting.

A recession on its own is part of most normal economic cycles, a normal recession acts almost as a natural selection in the economic landscape, it weeds out weak and inefficient companies, the strong survive and the weak disappear. We emerge from recession leaner and stronger. But when the normal cycle is prevented, by allowing excessive money and credit expansion, most probably caused in our case by keeping interest rates too low for too long , and throw in a bit of reckless lending to really inflate some asset bubbles all disguised by a good supply of cheap imported products to give the impression that prices are not rising and thus hiding the effect of the inflation that is going on, then you have a recipe for the soup we find ourselves in today. If we escape the full disaster that could unfold here, then I sincerely hope it will have scared us enough to put the necessary controls in place to prevent the next one, because if we do not it will be unpreventable, that is assuming this one is.

WTF?_2

HammersFan wrote: »

35% of mortgage holders is a lot of people. Most doing very nicely at the moment.

Maybe you should ask your landlord for a cut in rent - if he / she has a mortgage they'll most likely be quids in.

Honestly Carol, if you're not going to buy with interest rates this low and with sellers taking big discounts, I don't think you ever will.

And what happened to the 'payment shock' issue for people coming off fixed rates. Another dog that didnt bark.

Two points spring to mind.

(1) Rates may be low NOW but they will have to go up considerably down the line, certainly over the 20/25 years of a mortgage. Trackers will be useful for 1, maybe 2 years but the banks have already priced new ones up to take account of this.

(2) Irrespective of the momentary rate of interest, why borrow a greater capital sum than you need to when prices are falling rapidly?

What we have is a bonus for some existing mortgage holders, bought at a high long term price, and likely to have little effect in actually doing anything other than dragging out the decline in prices.

Generali

!!!!!!? wrote: »

Two points spring to mind.

(1) Rates may be low NOW but they will have to go up considerably down the line, certainly over the 20/25 years of a mortgage. Trackers will be useful for 1, maybe 2 years but the banks have already priced new ones up to take account of this.

(2) Irrespective of the momentary rate of interest, why borrow a greater capital sum than you need to when prices are falling rapidly?

What we have is a bonus for some existing mortgage holders, bought at a high long term price, and likely to have little effect in actually doing anything other than dragging out the decline in prices.

Hardly anyone has a tracker. Lots of people have taken them out recently but that's not the same thing.

I can't find stats for it but I'd bet that the largest percentage of mortgagees are on the SVR because it's a pain in the [donkey] changing and most people can't be bothered to fill out the paperwork.

carolt

HammersFan wrote: »

35% of mortgage holders is a lot of people. Most doing very nicely at the moment.

Maybe you should ask your landlord for a cut in rent - if he / she has a mortgage they'll most likely be quids in.

Honestly Carol, if you're not going to buy with interest rates this low and with sellers taking big discounts, I don't think you ever will.

And what happened to the 'payment shock' issue for people coming off fixed rates. Another dog that didnt bark.

Here's the post I just posted to a very similar query from ISTL on another thread:

Why would I buy when even the head of Barclays says he expects prices to fall by another 15% this year? (as does Citigroup)?

With the houses I'm looking at, that's a saving of around 40K+ plus 25 years worth of interest - not a small sum of money.

Plus interest rates for FTB's are still quite high - the examples you quoted were for existing mortgages only. With interest rates widely expected to fall, it would make absolutely no (financial) sense to buy now. Without a desperate emotional/practical NEED to buy, which I don't have, I just couldn't justify it.

Plus if falls are greater, I'll save even more.


Re the rent - I wouldn't ask for a cut because we already pay under market rates; conversely, I wouldn't agree to a rise either.