Is it Time to buy and secure a long-term fixed rate mortgage?

Dithering_Dad

The BoE was originally given their independance with the provisor that they would keep CPI under 2%, and generally they have done a pretty good job of it, hence the low mortgage rates we have enjoyed for years.

Unfortunately, since the credit crunch the BoE seems to have lost its independance and is trying to prop up the housing market at all costs by focussing on the RPI instead of the CPI.

CPI (Consumer Price Index) is a basket of consumer items that EXCLUDES house prices. RPI (Retail Price Index) is a basket of consumer items that INCLUDES house prices.

When the BoE should have been focussing on the RPI figures before and during the housing boom (which would have helped to aleviate our current difficulties), they focussed on CPI. Now that we are in the poo, they are focussing on the RPI and ignoring the CPI. This will also be a fatal mistake. By the time they again switch their attention to the CPI, it will be too late and inflation wil be out of control. They will have to increase interest rates to counter the threat of inflation and we will once again see 8 to 15% interest rates.

http://news.bbc.co.uk/1/hi/business/7959564.stm

Surprise hike in consumer prices


The rising price of imported goods - particularly fruit, vegetables and toys - has caused an unexpected rise in one measure of UK inflation. The Consumer Prices Index (CPI) was pushed up to an annual rate of 3.2% in February, from 3% a month earlier.
But a sharp fall in mortgage repayments caused the Retail Prices Index (RPI), which includes housing costs, to fall to zero for the first time in 49 years.
Economists had predicted that both measures of inflation would fall.

Economists might have predicted that both measures would fall, but I haven't - I was banging on for ages about the dangers of CPI getting out of control while they concentrated on house prices and the RPI.

I was mocked on this very board when I suggested that people who were desperate to buy a house should do it sooner rather than later because while they might get a cheaper house by waiting, they will certainly have a much higher mortgage rate.

My advise remains the same - buy a house soon with a fixed rate mortgage. You will benefit from the huge drops in house prices and will also benefit from the historically low interest rates.

Wait an your house will be a few thousand pounds cheaper in price and a few thousand more expensive per year in mortgage payments.

scousethife

your only interest is in YOU!

and the value of YOUR house!

You arnt offering advise to help anyone you are just a selfish prat

lostinrates

Hello DD.

It depends really, on how much further the drop could be, doesn't it? A big rate on a small loan seems tolerable.

Not that I'm not looking I'm looking very seriously. I'm potentially going to feel the ground with an offer tomorrow. I wish DH did that side of things though.

Graham_Devon

Dithering_Dad wrote: »

My advise remains the same - buy a house soon with a fixed rate mortgage. You will benefit from the huge drops in house prices and will also benefit from the historically low interest rates.

Wait an your house will be a few thousand pounds cheaper in price and a few thousand more expensive per year in mortgage payments.

The other option of course, is not to buy now, but carry on saving so you have a larger deposit to put down on a cheaper house. That way, you shouldn't be trapped by the negative equity your reccomendation would bring.

Fixed rates today are around 6%. So you'd be doing all this, to save 2-3% on an 8-9% rate.

penguine

What's the longest fix available?

I wouldn't think interest rates would be as important as house prices if you have to remortgage in 5-10 years.

ad9898_3

Interesting advice DD, I am saving to buy the detached house I'm after for cash or a very small LTV, 20% max. I do see your point about high rates in the future, I agree it will happen, however if rates hit 8% to 15% again, then house prices will go into a decline that will make the current rate of fall look benign.

My feeling is if rates did hit even 10%, the average house price will drop to that of the mid eighties. And before all the usual crew say 'I would buy 2', there will not be anywhere near enough cash buyers to support higher prices, most people in this country are stumbling under a mountain of secured and unsecured debt.

Dithering_Dad

There is always a trade off between the price of the house and the costs of ownership. As I have said many times on here, the price of the house should only be one consideration in a house purchase.

If I were a first time buyer, I would be considering the following:

House prices that have already fallen 15% from peak - large drops already locked into your purchase price

Sellers who are currently only hearing bad ecomonic news - easier to negotiate discounts than when they can see 'green shoots' or 'lights at ends of tunnels'

Historically low interest rates - possibility to negotiate a low long-term fixed rate mortgage before inflation gets out of control and interest rates go double digit.

Tradesmen desperate for work - Renovations or alterations carried out at cost price, even new builds sometimes need work to tailor them to your own taste.

Stamp Duty holiday - There is always a possibility that this holiday could never end, but operating on the assumption that it will end, this is a nice incentive.

I would consider all of the above and decide whether I would be financially better off long-term by buying sooner rather than later based on a lot more than just the price of a house.

Naturally I would also factor in whether I (and my family) were sick of the impermanance of renting, whether I wanted to buy in a certain area due to decent schools for my kids or closeness to work or simply because it was a pleasant area to live.

I really do believe that we will have double digit interest rates. If I get a fixed mortgage now I will benefit because my debts (mortgage) will be at secured at a low rate (say 4.5%) and my savings will be secured at a higher rate (say 10%). My assets (house) may devalue due to the continuing fall in house prices, but this loss wont be realised until I sell, and as I have just bought the blimming thing, this wont be an issue.

If someone bought in 3 month's time with a 10 year fixed mortgage rate, they would have 10 years worth of low mortgage payments, years of high interest on their savings and the initial loss on their assets would have been wiped out as house prices recover. They would almost certainly be in a better financial position than someone who had waited a further 2 or 3 years for the bottom of the market and were then landed with a 10% mortgage rate and so could not afford to save any money and take advantage of the high savings rate.

Naturally, this all hinges on whether you believe we will have double digit interest rates. If you don't then carry on as you were. If you do, then start house hunting!!

Graham_Devon

I personally don't believe we will have double interest rates. If we do, it will be very short term.

However, I do believe that even 8% interest rates (I would think this will be about normal in 2-3 years), would knock house prices even further down. (More repo's, less people able to make the multiples because of higher payments etc)

I can see what you are saying, but I think in doing what you are suggesting, you would seriously be shooting yourself in the foot to save a minimal amount in interest payments.

You'd be buying in a falling market, in preperation for high rates, which will only cause further falls.

My personal belief, is that your suggestion would only work if you are looking to buy, and live in the house for over 10-15 years for it to work. I don't think anyone can say with certainty they will live in that house for 10-15 years.

Dithering_Dad

Graham_Devon wrote: »

The other option of course, is not to buy now, but carry on saving so you have a larger deposit to put down on a cheaper house. That way, you shouldn't be trapped by the negative equity your reccomendation would bring.

Fixed rates today are around 6%. So you'd be doing all this, to save 2-3% on an 8-9% rate.

Hi Graham.

If you put down a decent deposit, you won't be in negative equity, especially if you also use the current economic depression to negotiate a further discount from a seller. I'm really talking to the many people on here who have large enough deposits to secure a 75% or even 60% LTV and who can therefore command the better fixed interest rate deals.

Have a pop over to the mortgage board, they have a thread running the about fixed rates and are finding some great deals. The best ones I found for my LTV was a 5 year fix at 4.79% or a 7 year fix at 4.97, which are pretty good rates even without the fear of future double digit rates. These mortgage are with the Woolwich. They also allow 10% (for 5 yr) and 5% (for 7 yr) overpayments, which is very important for me as I still have the MFW bug.

There seems to be general agreement with most economists and even between the bears and bulls of this board, that the housing crash will continue, but at a much slower rate. If people want to wait a further 3 or 5 years before the bottom is reached, then I admire their fortitude, but as a family man I couldn't wait this long, especially if I had been waiting several years already.

If people don't want to wait for a further 3 or 5 years, then I advise them to buy soon and arrange a fixed rate mortgage.

I'm not being a bear or a bull, nor a 'crash denier'. I am simply advising others what I intend to do myself. As soon as I can I will be arranging a fixed rate mortgage (probably 7 years) to protect myself.

This is no different from 2 years ago when I was worried that the crazy house prices and indebtedness of the UK population (and government) would all end in tears. I advised people to embark on a period of mortgage overpayment to protect themselves (I followed my own advice). Some people pooh poohed me and told me they could get better returns in stockmarket investments, other people agreed with me and joined the Mortgage Free support group I started. I'll let you guess which group of people are financially better off two years later (oh, ok I'll give you a clue - not the ones who invested their money in a stockmarket that was at 6500 when they were poh-pohing and is now at 3900 ).

Dithering_Dad

penguine wrote: »

What's the longest fix available?

I wouldn't think interest rates would be as important as house prices if you have to remortgage in 5-10 years.

You can fix for 25 years if you like. I'm considering a 7 year fix because it will fit in with how long I think we will live in our current house.

ad9898_3

Dithering_Dad wrote: »

You can fix for 25 years if you like. I'm considering a 7 year fix because it will fit in with how long I think we will live in our current house.

Sound advice if you have a mortgage, forget trackers, the boat was missed their last year. Fixed rates are where it's at now.