Why interest rates will surge upwards.

mikelivingstone

For those of you with large mortgages or who are thinking of large mortgages, now may not be the time to give a sigh of of relief over interest rates, instead you will be best paying down your debt as fast as possible. This is a bit of a technical discussion that was started on the house prices crash website, but I think the practical implications will be of great interest to MSE readers. See: http://www.housepricecrash.co.uk/forum/index.php?showtopic=104647 Essentially the premise is that with the US and UK Governments are borrowing too much and in the medium term this will result in $ and £ currency devaluation with nasty inflation (i.e. not of wages or houses, but essentials like food and fuel). This means that Government bond holders are effectively losing money, and so the Sovereign wealth funds and other investors will start selling US/UK Government bonds on mass, causing the price of bonds to collapse. As bond prices are what set interest rates (a collapse in bond prices pushes interest rates up), when this collapse happens 2010/11, interest rates will soar, possibly as high as 10%. This will force many families into bankruptcy and further drive down US/UK house prices. http://images.moneysavingexpert.com/images/forum_images/smilies/speechless-smiley-040.gif

skap7309

Yes i totally agree, it is common sense. Basically anyone looking to get a mortgage should look at a looooong fixed rate. I certainly will.

cogito

As bond prices are what set interest rates (a collapse in bond prices pushes interest rates up),

I think you are confusing the fact that a reduction in bond prices increases the yield. Nothing to do with interest rates.

mikelivingstone

cogito wrote: »

I think you are confusing the fact that a reduction in bond prices increases the yield. Nothing to do with interest rates.

That's not a confusion. If the Government wants to borrow, it will need to match the yields given by its own existing bonds and be within a reasonable risk premium's worth below any other bonds out there. There is talk of the UK's triple A rating being at risk. If that is the case, why not buy the highest quality bluechips like BP or the bonds of other Governments. Anyway, the Government isn't the main factor impacting the economy, that's the bank. A bond market collapse will certainly do for their borrowing. The UK Government really does now need to start looking at gradually raising interest rates back to at least 3%, otherwise the eventual medicine will be worse and people will end up with 10-15% mortgages and 45% APRs on their credit cards.

Dithering_Dad

It all seems to point in the direction of the HPC guys on both here and the HPC forum to get their fingers out and start buying ASAP while you can get a decent low-rate fixed mortgage.

If interest rates do go into double figures, mortages will be prohibitively expensive and people will have to wait even more years before they buy. Meanwhile inflation is wiping out their house deposits faster than house prices are falling.

If I really believed what these guys were saying and was in a position to buy, I would buy now and negotiate a good 10 year fixed mortgage rate. OK, my new house might depreciate a few percent as house prices continue to fall (though I dare say that I could build some of that into my offer price) but I would save an absolute packet on my mortgage payments when interest rates started to soar.

This is why I keep banging on that anyone thinking of buying should factor in more than just the percentage falls in the market. The person who will benefit most from the current financial turmoil will be the one who is pragmatic enough to risk a short-term 'loss' as his newly bought house depreciates in order to get a long-term gain of cheaper monthly mortgage payments.

Come the recovery (and it will come eventually), who will be sitting pretty - the guy who bought at the bottom of the market but who has been paying mortgage interest of between 12% and 15% for 8 years, or the guy who lost 5 - 10% on the price of his house initially but has had this a 6% fixed mortgage for 8 years.

People need to decide whether they believe we're in for a sustained period of high interest rates and then act accordingly.

mbga9pgf

Dithering, if rates go up to >10% prices will correct accordingly. Those on current trackers with ridiculously large mortgages would default enmasse, flooding the market with repos.

Wage rises will also mean the debt is being eroded more quickly.

People buying now run the risk of facing the potential of a depressionary correction, in which case its best to wait, or, an inflationary correction, in which case its best to wait.

the moment we see real, solid evidence on the inflationary correction will be the time to buy. I dont believe we are there yet. Nor do I think we are headed that way.

Dithering_Dad

You guys cant have it both ways. You're quick to point out (and correct) that most mortgage holders in this country are not benefitting from the current low interest rates because most are on fixed rate deals. You cannot now suddenly turn the argument and suggest that when interest rates rocket, everyone will go bust because "they're all on trackers"...

If debt is eroded quickly, then better to get your debt (mortgage) now while they're cheap. The debt will be inflated away and yet you'll have a cheap fixed rate. You can't lose.

the_ash_and_the_oak

Dithering_Dad wrote: »

It all seems to point in the direction of the HPC guys on both here and the HPC forum to get their fingers out and start buying ASAP while you can get a decent low-rate fixed mortgage.

If interest rates do go into double figures, mortages will be prohibitively expensive and people will have to wait even more years before they buy. Meanwhile inflation is wiping out their house deposits faster than house prices are falling.

If I really believed what these guys were saying and was in a position to buy, I would buy now and negotiate a good 10 year fixed mortgage rate. OK, my new house might depreciate a few percent as house prices continue to fall (though I dare say that I could build some of that into my offer price) but I would save an absolute packet on my mortgage payments when interest rates started to soar.

This is why I keep banging on that anyone thinking of buying should factor in more than just the percentage falls in the market. The person who will benefit most from the current financial turmoil will be the one who is pragmatic enough to risk a short-term 'loss' as his newly bought house depreciates in order to get a long-term gain of cheaper monthly mortgage payments.

Come the recovery (and it will come eventually), who will be sitting pretty - the guy who bought at the bottom of the market but who has been paying mortgage interest of between 12% and 15% for 8 years, or the guy who lost 5 - 10% on the price of his house initially but has had this a 6% fixed mortgage for 8 years.

People need to decide whether they believe we're in for a sustained period of high interest rates and then act accordingly.

Problems (or at least serious questions I would have):
a)uncertain job prospects

b)15% deposit equals hsbc offering a fix north of 6%

c) I have no idea how long it will be before rates head high (and if I were to borrow - it would seem they are already high!)

d) my income is earnings related not interest-savings related. For a pensioner (and my 04 STR grandparents fit into this category - your points seem more persuasive - but then on other hand they wont need to borrow. For me (as a wage earner) it makes sense to me to wait while rent is still cheaper than mortgage interest (which despite headlines of 8p borrowing, it is for me). If rates were to rise could find a weird situation in which renting remains cheaper than mortgage interest for many years...regardless of price. In such a scenario it seems to make sense to me to continue to rent and put the excess money into shares rather than a house (though this wouldn't be just yet either)

the_ash_and_the_oak

I mean...I think I agree that we could easily find a situation where prices fall dramatically but price and availability of money are still out of reach for most (exacerbating the falls I guess) and that people could find themselves renting for longer than they thought.

I don't necessarily see that as a particularly bad situation (in personal terms) but I agree if it is important to a person that they own they might want to consider that they remain priced out, even after large falls

mikelivingstone

Dithering_Dad wrote: »

It all seems to point in the direction of the HPC guys on both here and the HPC forum to get their fingers out and start buying ASAP while you can get a decent low-rate fixed mortgage.

If interest rates do go into double figures, mortages will be prohibitively expensive and people will have to wait even more years before they buy. Meanwhile inflation is wiping out their house deposits faster than house prices are falling.

If I really believed what these guys were saying and was in a position to buy, I would buy now and negotiate a good 10 year fixed mortgage rate. OK, my new house might depreciate a few percent as house prices continue to fall (though I dare say that I could build some of that into my offer price) but I would save an absolute packet on my mortgage payments when interest rates started to soar.

This is why I keep banging on that anyone thinking of buying should factor in more than just the percentage falls in the market. The person who will benefit most from the current financial turmoil will be the one who is pragmatic enough to risk a short-term 'loss' as his newly bought house depreciates in order to get a long-term gain of cheaper monthly mortgage payments.

Come the recovery (and it will come eventually), who will be sitting pretty - the guy who bought at the bottom of the market but who has been paying mortgage interest of between 12% and 15% for 8 years, or the guy who lost 5 - 10% on the price of his house initially but has had this a 6% fixed mortgage for 8 years.

People need to decide whether they believe we're in for a sustained period of high interest rates and then act accordingly.

When interest rates go up, it would be better not to have a large mortgage irrespective of whether you have a 10 year fix or not. House prices will be probably still be lower in 2019 than they were in 2007 and at if you took out a 10 year fix you'd have to get a new one by 2019. Anyway, all the good fix deals seem to be vanishing as we speak, the markets know what it about to happen and this is why SVRs haven't really fallen despite the interest rate cuts.

Graham_Devon

I think it's a shame that the Tories will again, have to take this on and raise interest rates. People are still going round saying "ahhh but under tories interest rates were 15%" and totally ignoring the reason why.

Unfortunately, the tories, again, will be left with no other option after a labour reign.