BoE base rate - mini debate

Thrugelmir

rjgb wrote: »

So it could arguably be best to get a mortgage with as long a fixed rate as possible now at, say, 5.5%, to protect yourself from rises, rather than get a product which reverts to a variable rate within 2/3 years.

However, as the other poster says, it is of course all guesswork.

Fixed rates are unlikely to get cheaper. As lenders need to attract funds from depositors to fund them. Banks and building societies will need to compete with each other. Higher rates for savers = higher lending rates.

rjgb

So overall it seems people on this forum generally believe that the base rate will stay low for the next twelve months. Seems a fair reckoning.

However, there appears to be split opinions as to what will happen after that period. Some think the rate will stay low (below 3%) for a good while yet, while others think it could shoot up once Labour are out of power.

IMO, the banks appear to be forecasting that rates will rise fairly substantially in the next 18months to 3 years. Fixed rate mortgages are set at fairly high rates (relative to the base rate). Although banks want to insure themselves against further house price falls, they are doing this largely by demanding high deposits of 20+%. Keeping the mortgage rates high seems to me to be insurance for the banks against base rate hikes.

Anyone think this is a reasonable interpretation of what the banks are expecting?

Heyman_2

rjgb wrote: »

Anyone think this is a reasonable interpretation of what the banks are expecting?

I think the banks are going after the heads-they-win, tails-they-win scenario and are pricing their products appropriately. Tracker products at 3 - 4% above base and the huge fees on some Fixed products demonstrate this.

purch

the banks appear to be forecasting that rates will rise fairly substantially in the next 18months to 3 years. Fixed rate mortgages are set at fairly high rates

Prices of Fixed Rate Mortgages bear no relation to any predictions about where Base Rates will be at any time in the future.

The Price will be where the Lender can borrow those funds for a similar period, plus whatever margin they deem fit.

Radiantsoul

purch wrote: »

Prices of Fixed Rate Mortgages bear no relation to any predictions about where Base Rates will be at any time in the future.

The Price will be where the Lender can borrow those funds for a similar period, plus whatever margin they deem fit.

I agree that fixed rates are based on what funds lenders can borrow from on wholesale markets. But the wholesale price is a measure of future interest rate expectations.

purch

the wholesale price is a measure of future interest rate expectations

Yes, it is, but we both know that it is not a direct measure.

The price of 5 year money is more a measure of the perceived current risks, and over the following years than a guesstimate of where the Base rate will be in 2014.

Thrugelmir

Radiantsoul wrote: »

I agree that fixed rates are based on what funds lenders can borrow from on wholesale markets. But the wholesale price is a measure of future interest rate expectations.

The remaining mutual building societies use very little in the way of wholesale funds. They are reliant on attracting depositors to fund mortgage lending. Increasingly they are getting squeezed by the cash calls in the wider market - gilt issues, share rights issues, bank fixed term deposits. Hence the pressure on fixed rates in this quarter. A number of BS's offer 3% plus for fixed term deposits to fund their 6% plus lending rates.

bubblesmoney

base rates seem to have shot up nearly 30% in one day probably due to movements that seem to be occuring in the treasuries market. this will have an effect here as well pretty soon. so expect 30y fixed rate mortgages to shoot upwards pretty soon in the uk as well.

but i will remain on my tracker even if interest rates rise. it is important to consider the size of the outstanding mortgage along with interest rates to see what one can afford if interest rates rise rather than just focussing on interest rates only. each persons circumstances will differ. interest rates rising wont affect people with smaller mortgages significantly in monthly outgoings atleast not in my case. use mortgage calculators and work out outgoings for 10% interest rate rises (or what ever rises you deem as appropriate) and see whats affordable and then make a decision on trackers or fixed rates.

please note below the nearly 30% rise in mortgage rates in 1 day for the 30y fixed rates in usa due to movements in treasuries i guess.

PasturesNew

Quasar wrote: »

As a saver of course I'd like the interest rates to go up, but I think people with mortgages need to be thought of first, so I don't mind earning less in interest if it means that families keep a roof over their heads.

And what about people relying on interest to keep a roof over their head?

Quasar

PasturesNew wrote: »

And what about people relying on interest to keep a roof over their head?

Eh, that's the eternal dilemma: what is fortunate for one is not for another. I don't think the present economic system has a solution to that one, because interests up favour the saver, interests down favour the mortgage payer. Perhaps this global crisis ought to spark off a fairer system, but I'm not holding my breath.