What do you think will happen if...

whathavewedone

inflation is high by the end of the recession and we have interest rates of 8% or above?

My view is that the banks that have been nationalised/partially nationalised will be leaned on to offer fixed rate mortgages of no more than 7% to people who bought at inflated prices during the boom irrespective of whether or not they are in negative equity provided that they have no other debts and their incomings are clearly enough to service the mortgage payments at those rates.

The reason I think this is because

(a) the carnage that would ensue if everyone who bought at inflated prices was exposed to high interest rates would mean that whoever was in power at the time wouldn't get in again for a very long time.

(b) it wouldn't make financial sense for the banks. In the last recession house prices were not so inflated to begin with and the falls were not so great. It made sense for the banks to repossess people in negative equity to the tune of 10, 20, 30k as these are amounts of money which they could reasonably expect to recover over a period of time by garnishing wages etc. Trying to recover £100k or more in many cases is another story entirely. Huge numbers of people would simply go bankrupt. On the other hand, if they allow people to pay at around 6 or 7% they make money.

Alternatively they might just pretend that we don't have high inflation and keep interest rates artificially low. Stranger things have happened...

Views?

pickles110564

Even if they offered fixed rates at 7% some people who bought at stupid prices will not be able to meet the repayments.

1echidna

whathavewedone wrote: »

Alternatively they might just pretend that we don't have high inflation and keep interest rates artificially low. Stranger things have happened...

Views?

It is my belief that this would be the case. The rule to raise interest rates to counter inflation would be dropped as has the golden rule concerning gov't borrowing. 'Exceptional circumstances demand exceptional measures' and 'protecting hard working famililies' are a couple of justifications I can think of but there may be many more. One reason why I think additional investment in property may not be a bad idea in the not too distant future. The real value of property may not increase fast but perhaps better than other asset classes.

whathavewedone

I agree that a lot of people would be stuffed at interest rates of 7% - perhaps 6% would be a more realistic figure, being around the long term average. I think those that couldn't pay their mortgage at rates of 6% would be pretty stretched anyway. I only see help being offered to those who remained in employment throughout the recession, didn't get into arrears, don't have any other debts and who can clearly afford to pay their mortgage at the set rate.

In other words it would only save those who would only be at risk of repossession because (a) they bought at the top of the market and (b) interest rates were unusually high.

In other words it would exclude those who were already stretched when interest rates were low.

I also wouldn't see it happening until the market had clearly bottomed out.

In the event of high inflation I would hope that whoever is in power would take this course of action in favour of fiddling the figures and keeping interest rates artificially low but I wouldn't bet my house on it.

1echidna

There is also a benefit to businesses of low interest rates. There is always pressure, at times more vocal than others, for low interest rates from those who have an interest in the stock market or business leaders.

Thrugelmir

Lending rates will be determined by the cost of borrowing the money by the banks. Unfortunately more home owners don't have mortgages than do. So as a political issue not a vote winner.

So if rates are higher. Then there will be more repossessions and house prices will fall. This will allow a new generation of FTB's to enter the market. A cruel world for some.

whathavewedone

It would be a vote winner though because it wouldn't cost taxpayers anything. The risks to the banks would be low because they would only lend to people who were clearly able to pay at the rates set. The alternative for them would be to lose money rather than make money.

If the 40% of people who do have mortgages made little difference either way then why is the economy taking a nosedive? Of that 40% there are probably a good number that are in positive equity, that are not sub-prime, that are paying their mortgages every month on the nose. Yet we're still in the poo aren't we?

The banks are screwed because they irresponsibly lent to people who couldn't afford to pay their loans back. How is it possibly in the interests of banks to reposses people who had survived the worst of the recession and who were capable of paying their mortgage at rates of around 6%? Why would it be preferable for them to turf them out and instead of getting the money back plus interest have to hound them for the rest of their days for debts that many would have no hope of paying back in their lifetime?

If interest rates go up that will mean that we have inflation, the worst of the recession will be over and house prices will start to rise. The risk to the banks would be minimal.

Negative equity mortgages were offered by some banks at the end of the last recession. The Coventry is already offering 100% mortgages to existing customers.

NB: House prices have already fallen and are continuing to fall. This will allow FTBS to enter the market. The introduction of NE mortgages at the end of the recession will not make any difference to FTBS either way as it will simply enable people who have no wish to move to stay in their homes, or if they do wish to move to bring their NE with them and add it on to their new mortgage on the super cheap house that they are buying at the bottom of the market.

Thrugelmir

whathavewedone wrote: »

It would be a vote winner though because it wouldn't cost taxpayers anything. The risks to the banks would be low because they would only lend to people who were clearly able to pay at the rates set. The alternative for them would be to lose money rather than make money.

If the 40% of people who do have mortgages made little difference either way then why is the economy taking a nosedive? Of that 40% there are probably a good number that are in positive equity, that are not sub-prime, that are paying their mortgages every month on the nose. Yet we're still in the poo aren't we?

The banks are screwed because they irresponsibly lent to people who couldn't afford to pay their loans back. How is it possibly in the interests of banks to reposses people who had survived the worst of the recession and who were capable of paying their mortgage at rates of around 6%? Why would it be preferable for them to turf them out and instead of getting the money back plus interest have to hound them for the rest of their days for debts that many would have no hope of paying back in their lifetime?

If interest rates go up that will mean that we have inflation, the worst of the recession will be over and house prices will start to rise. The risk to the banks would be minimal.

Negative equity mortgages were offered by some banks at the end of the last recession. The Coventry is already offering 100% mortgages to existing customers.

NB: House prices have already fallen and are continuing to fall. This will allow FTBS to enter the market. The introduction of NE mortgages at the end of the recession will not make any difference to FTBS either way as it will simply enable people who have no wish to move to stay in their homes, or if they do wish to move to bring their NE with them and add it on to their new mortgage on the super cheap house that they are buying at the bottom of the market.

With a further 1 million or so people potentially heading for the dole queue. Companies cutting hours, overtime and freezing pay. The jury is out on how many people will default on their mortgages.

Rising inflation will merely reduce disposable income further for the majority in the short term. Coupled with rising interest rates and taxation it's had to see this creating an enviroment for a significant rise in house prices.

Coventry BS obviously will support their existing mortgage holders irrespective of their LTV. Those with a 100% will be paying a real rate of interest on their mortgage. The Coventry BS have funded this lending by issuing savers fixed rate bonds at attractive interest rates.

amcluesent

It's pretty clear that the HMG want to use an inflation to take the sting out of all manner of debt, plus it handily reduces the real cost of public-sector wages, which won't "keep up".

Clown is quite happy to leave 'call me Dave' Dave with the poisoned chalice of high inflation, collapsing exchange rate and 3m unemployed.