Interest rates and recession effect on mortgage

Want2Buy

Hi All,

I have been looking for a mortgage and just had a meeting with Clydesdale bank. They have 3 products available to me (haven't been through credit check yet) and I need to decide which is best.

One is a 3 year fixed rate at 6.2 (ish) % on a 90% LTV as a first time buyer.

The other is a 3 year variable rate - currently at 4.something % on a 90 % LTV.

(The third is a 95 % LTV for FTB but has rates of interest that makes the repayments a bit too expensive for us).

The monthly repayments on the variable rate are obviously cheaper than on the fixed rate. But as a first time buyer I'm a bit nervous about the uncertainty that the variability introduces. Although, essentially, the only certainty with the fixed rate is that I'll certainly be paying more. But it's attractive because if we set up our budget to accommodate that then at least we know we won't be plunged into a compromised situation in terms of monthly affordability should the BoE go crazy.

I'm wondering if anyone knows, historically, what happens to interest rates during a depressed economy. My thinking is that BoE won't increase interest rates dramtically until at least we begin to emerge from recession and it sounds like the UK will take a while to reach that state. But I'm not sure if my thinking is flawed.

Does anyone have any opinion/thoughts/advice about this? Thanks

econo_2

Crystal balls are hard enough at the best of times but in this period it is for magicians only! I'll give it ago but there are far more qualified people that could probably do a better spot of ball gazing here!

The concern and crux of it for me is how long we are going to trundle along with injections into the money supply until inflation becomes a real quick concern and rates rapidly rise?

I'd worry at the 3 year peg that you may find yourself coming out just as we're in the middle of a 10% rate period. A 3 year variable is asking alittle much of the BOE to be able to contain rises IMO. So that would be a non-starter for me.

I'd really try and find a competitive 5 year if you can. These really are unchartered times and having a fixed monthly payment that you know you can afford for a period that may be only half way through it is the way I would go.

Maybe others have a different angle on it?

Mini_Bear

I agree with econo, a 5-yr fix will give you the necessary protection. i would also try to get a deal that allows you to overpay - some offer up to 10% yr. This will allow you after say three years if in negative equity to decrease your LTV wen you come to remortgage.
What a lot of people seem to forget to do is work out the repayments based on a range of potential future interest rates. My father has always advised to go up to 15%. If you cannot afford the mortgage payments at an interest rate of 8%+ you really must consider whether gettin a mortgage is appropriate at this time. For every 1% increase in interest rates i expect the banks to pass this on in full to the consumer. so if we get back to a 5% interest rate you are looking at mortgage interest rates of 10%+. Banks are desperate for cash and know that a lot of consumers will be in negative equity and unable to remortgage.
A mortgage is a millstone - my advise is to wait a little longer save more and take advantage of the lowering prices. Good luck OP!

ray123

6.2% seems very high. There are other matters to take into consideration:
1 The amount the loan is for and therefore the saving per month choosing the var over the fixed.
2 Are their early repayment charges for either mortgage within the 3 year period, and if so, how much.
3 Both deals are only fixed for 3 years and within that time, the rates are likely to remain low. Nobody can predict the future.

I would choose the variable rate, as you should save money in the 3 year period.

Generali

If it was me, I'd be looking for a 10 year fix if you can still get them in the UK.

There are going to be a lot of wild fluctuations ahead most likely. That will protect you best.

Lotus-eater

I don't understand how they work out where to have interest rates. Why are people so sure they are going to rise?
Being sensible, how high could they rise, I know we just don't know, but in a normal environment where would they go?
Obviously we're not in a normal environment.... but I think you get the idea.

mbga9pgf

QE = Lots of stoked up inflation that is VERY difficult to remove from the system once it is there. It may have to be removed by the taxation - payback to boe route which is very slow and drawn out, thus if inflation takes hold, we could be looking at quite a nasty sustained period of inflation. If you look back to income tax in the 1970's, you will see what I mean by nasty....

Inflation will also rise due to reduced supply. Every man and his dog in industry is cutting back. factories closing, experienced workers laid off. all of this has a big knock on in terms of industry once life returns to some form of normal demand. Demand usually picks up quicker than supply can keep up, this traditionally causes higher prices which are counteracted by huge rises in Interest rates.

good explanation of the life we can expect for the next 10 years here... The recession at the end is gonna be a whopper! All the governments are doing today is postponing the inevitable.

mitchaa

ray123 wrote: »

6.2% seems very high. There are other matters to take into consideration:
1 The amount the loan is for and therefore the saving per month choosing the var over the fixed.
2 Are their early repayment charges for either mortgage within the 3 year period, and if so, how much.
3 Both deals are only fixed for 3 years and within that time, the rates are likely to remain low. Nobody can predict the future.

I would choose the variable rate, as you should save money in the 3 year period.

Interest rates can only go up from now on in so advising someone to take out a variable mortgage and take on all these risks is stupidity in my eyes.

Fix Fix Fix...At least you know what you are paying. Bring on inflation i say, it devalues existing debts

Generali...Words of wisdom and experience, i would listen