Interest rates

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whathavewedone wrote: »

I honestly do think that we will see negative equity mortgages again but they will only be available to people with spotless credit records.

Think about it. The worst of the recession is over. The bottom of the market has been reached. House bought for 400k with mortgage of 300k is now worth 250k - what would it fetch at auction - £220k? Leaving owners who would be able to pay their mortgage at rates of up to 6% out on the street with 80k to pay back to the lender plus admin fees etc. How is that in the interests of the bank? People in their 30s would never have a hope in hell of getting back on their feet again so it would be far easier to just declare themselves bankrupt than work 3 jobs each in the hope of paying back that 80k before they retire.

The example I've given is of people who have a decent deposit but what about those who bought at the peak with 5, 10 and 15% desposits? The banks are far more exposed than they were in the last two recessions when prices didn't fall so sharply and people had less negative equity. In those circumstances repossession was obviously the best option.

The other difference is that in this recession the banks have been heavily criticised, one of them has been nationalised and others have received taxpayers money. The majority view is that they are under a duty to help people rather than repossess asap.

The Coventry are already offering 5 year fixed 100% mortgages on favourable terms to their existing borrowers and the recession is nowhere near over. At the end of the day the banks want their money. It makes sense to have borrowers paying their mortgages at 5% than to kick them out by sticking them on an SVR if interest rates are 12%.

I think if interest rates do shoot up to those figures it will be new borrowers who are exposed to them. After all they will be able to buy property much cheaper than existing borrowers did and should be able to afford to pay high interest rates for a year or two.

Finally if interest rates do go up at the end of the recession house prices will probably start to rise which means that if they can keep existing borrowers in their homes during that period they will probably be out of negative equity at the end of it. Less of a risk to the lenders than repossessing when prices are low and not many want to buy because of high interest rates. Their losses would be enormous.

Seems to me to be the most expedient way out of the mess anyway.

An interesting read, and much probably makes sense, but then when did the government/banks ever do anything that made sense.

whathavewedone

Well some banks did bring in negative equity mortgages at the end of the last recession. I think they will do it if it works out better for them than repossessing. People who have a load of other debt and seem likely to default won't be offered these mortgages I don't think. It would mainly help those who bought during the boom but (a) kept their jobs (b) had clean credit records (c) little or no debt apart from their mortgages and (d) were clearly able to service mortgage payments up to 6%.

I don't think any government would want to be remembered for raising interest rates after a boom and bust of these proportions and the carnage that would inevitably ensue if some measures weren't put in place to help those whose only mistake was to buy at inflated prices during the boom. All any of them really care about is votes at the end of the day.

If you think about it, people who had to pay a hundred grand plus back to the banks would either be paying back peanuts per month so that they could afford to rent and pay their bills or would go bankrupt or legislation would come in entitling them to housing benefit so that they could pay more money back to the banks - nonsensical as that would cost taxpayers.

I have no idea where interest rates will go by the way - this is just my theory about what would happen if they went sky high/looked as though they were heading that way once the bottom of the housing market has been reached.

If I had to put a tenner on it I'd say that whoever is in power is more likely to pretend that we have lower inflation than we really do in order to justify keeping interest rates at between 4 and 6% than to raise interest rates into double figures. Wouldn't put more than a tenner on it though!!

Paulgonnabedebtfree

whathavewedone wrote: »

If I had to put a tenner on it I'd say that whoever is in power is more likely to pretend that we have lower inflation than we really do in order to justify keeping interest rates at between 4 and 6% than to raise interest rates into double figures. Wouldn't put more than a tenner on it though!!

I thought they already did that to try avoiding high pay rises for the masses

ixwood

It's not only inflation that can force rates up. A currency crisis would too. Iceland's IR was 18% last time I looked.

And Labour governments always end in disaster, so I don't think it's that unlikely.

whathavewedone

Not convinced we're in quite as bad a situation as Iceland. They had very high inflation before they collapsed anyway didn't they? People in minimum wage jobs were being paid around 800 quid a week and a bottle of plonk cost about 20 quid?

We could all speculate endlessly about where interest rates will go but I don't think any of us really knows at the end of the day. Japanese style deflation and very low interest rates? Mild inflation? Hyper inflation?

I'm more interested in what people's thoughts are about how banks and the government will deal with the situation if interest rates do rise above 7% within the next 2-3 years.

Wookster

whathavewedone wrote: »

Not convinced we're in quite as bad a situation as Iceland. They had very high inflation before they collapsed anyway didn't they? People in minimum wage jobs were being paid around 800 quid a week and a bottle of plonk cost about 20 quid?

We could all speculate endlessly about where interest rates will go but I don't think any of us really knows at the end of the day. Japanese style deflation and very low interest rates? Mild inflation? Hyper inflation?

I'm more interested in what people's thoughts are about how banks and the government will deal with the situation if interest rates do rise above 7% within the next 2-3 years.

We are quite different to Iceland - our banking system is relatively smaller and believe it or not, we are (slightly) better run. A great deal of Icelandic based mortgages are denominated in foreign currency which means that the impact of the devaluation of the Korouna has been enormous - people pay off their mortgage and owe more at the end of the year than at the begining of the year.

What we do have in common though are banking systems in crisis, overblown housing bubbles which are now bursting and a trade deficit.

The pounds fall is probably a major contributing factor to the 10% food inflation & recent fuel price rise we have been seeing.

If there was a damaging run on the pound the BoE may be forced to raise interest rates which would have a disastrous effect on people's already limited capacity to pay down debt.

whathavewedone

Well that's precisely why I think that borrowers who bought in the boom with the ability to pay rates up to 6% would be allowed to do so. It would cripple the banks if hundreds of thousands defaulted owing hundreds of thousands of pounds.

samsuka

ad44downey wrote: »

Raging inflation will take hold within the next 3 years and interest rates will then shoot up to heady levels. Woe betide anyone who borrows large amounts of money now in the belief that interest rates will stay at 1%. They're going to come seriously unstuck

I would love to know how people are coming up with this sort of view? It shows a serious lack of understanding for basic economics and is akin to someone on Speakers Corner shouting about the end of the world!!!

The BoE sets rates based on inflation expectations in 2-years time. They currently think that inflation is likely to undershoot the 2% target for the next 2-years based on the fact that we are in recession and commodity prices are all on their knees (bar gold).

The fact is that inflation is likely to remain low for quite a long time, as commodity prices are unlikely to rise, and oil prices in particular which were partly driven higher by funds, are under pressure from a massive oversupply (hence huge contangoes in the market place) and every major country, in particular the US, pushing hard for lower oil demand. US average mpg levels have barely risen for years, but with Obama pushing for greater efficiency rates, even a small rise in avg MPG levels in the US will have a huge knock on effect on oil demand.

Even when all the commodity & huouse prices went through the roof in the last few years, interest rates only peaked at 5.5%, so with the devestation that the recent slump has caused likely to hinder growth for the next 5-years at least, and with China slowing down along with the rest of the world, commodity prices are likely to remain subdued for quite some time, and so with them inflation and interest rates.

samsuka

whathavewedone wrote: »

I'm more interested in what people's thoughts are about how banks and the government will deal with the situation if interest rates do rise above 7% within the next 2-3 years.

We have just had the, or one of the largest and longest commodity and asset price booms over the last 10 years, where we had the price of oil hit $150, a huge house price bubble, commmodity prices going through the roof, a weak dollar (benefitting all non-dollar based economies buying assets priced in dollars), China with 10% - 12% growth buying up everything under the sun, a fund buying spree of virtually everything etc. etc. etc.

And still UK & US inflation barely reached 5% for a few months, and UK bank rates peaked at 5.5%. So why on earth people think that rates or inflation will go anywhere past 4% in the next few years baffles me as we come out of the slump.

They are pumping in money but its not even close to replacing the money that has been taken out of the system, and as soon as there is even a hint of inflation they will suck the money out again and raise interest rates. And when interest rates are only 1%, and they rise to 2%, the effect will hit inflation quickly.

Have no fear, rates will be low for a long time yet and there is little if any basis for them to suddenly start rising sharply again. If a 10-year boom can't push interest rates to 7%, i don't see how a country coming out of a long painful recession can.

So the moral of the story is, don't worry about inflation in the future, but do take advantage of the once-in-a-lifetime opportunity to fix your mortgage for as long as possible and use it as a chance to pay off your mortgage that much quicker and have a better life. Just give it a few months first as i think you will find rates getting better and better as the government starts putting pressure on lenders to offer better deals.

Ta

S

Thrugelmir

samsuka wrote: »

I would love to know how people are coming up with this sort of view? It shows a serious lack of understanding for basic economics and is akin to someone on Speakers Corner shouting about the end of the world!!!

The BoE sets rates based on inflation expectations in 2-years time. They currently think that inflation is likely to undershoot the 2% target for the next 2-years based on the fact that we are in recession and commodity prices are all on their knees (bar gold).

The fact is that inflation is likely to remain low for quite a long time, as commodity prices are unlikely to rise, and oil prices in particular which were partly driven higher by funds, are under pressure from a massive oversupply (hence huge contangoes in the market place) and every major country, in particular the US, pushing hard for lower oil demand. US average mpg levels have barely risen for years, but with Obama pushing for greater efficiency rates, even a small rise in avg MPG levels in the US will have a huge knock on effect on oil demand.

Even when all the commodity & huouse prices went through the roof in the last few years, interest rates only peaked at 5.5%, so with the devestation that the recent slump has caused likely to hinder growth for the next 5-years at least, and with China slowing down along with the rest of the world, commodity prices are likely to remain subdued for quite some time, and so with them inflation and interest rates.

Interest rates were artificially low as funds from Asia were used to underpin the debt fuelled boom of the West. The UK Government will have to offer competitive interest rates to fund the growing PSBR.

The oil producers can fix the price by adjusting production. Russia controls the price of gas in a large proportion of Europe. Commodity prices are currently low however the Chinese are taking every opportunity to buy into key companies. So taking a longer term view there will be little that we as the UK have direct control over.