Will there ever be a situation.....

dimbo61

Well boys and girls reading this I did take out a long term fix ( 5 years) and have no regrets.
I needed security because of the size of the mortgage ( some will remember 15.4% rates ) I went for offset ( and it worked well for me ) and unlimited overpayments.
Your rate is not important its how much you pay back to the lender that is
A " mortgage is a debt of death" and I hope to have it repaid long before then !

rothers

dimbo, what was the rate on your tracker and your 5yr fix, if you don't mind me asking?

Pincher

I had a 3 year 5.29% fixed rate in 1998, stayed with the SVR as the BOE drifted towards 3.5%, then fixed at 4.99% for five years in 2004. Came out of the 4.99% on 31st September 2009, and then Alistair Darling started dropping interest rate on 4th October.

So I ended up paying the long term average of ~5% most of the time anyway, as well as on average. If we can get 25 year fixed rate mortgages, like some other countries,at around 5%, it will save so much aggravation, and switching fees.

andrewmp

Pincher wrote: »

People with ultra-slim trackers are like people who have bought a Put option that's in-the money, but you can't sell it, because you need a house to live in.

Theoretically, what you want to do is to buy a Call option on the BOE rate for hedging (not speculating). The idea is that, if the BOE goes up, you pay more on the mortgage, but you get your money back by selling the Call Option. The problem is, regular people don't have access to long term hedging instruments cheaply.

If I could, I would much rather spend the £999 arrangement fee on getting a five year term Call Option (or futures contract) on BOE. Effectively, it's an insurance policy against BOE rate going up, for which there is an insurance premium. The amount per basis point you buy is proportional to your mortgage size, so it's very easy to unitise. So if you have a £100,000 mortgage, you buy 100 options, and if you have a £570,000 mortage, you buy 570 options.

The beauty is, you never have to switch mortgage, incurring survey, conveyance, arrangement fees. It's a purely financial instrument that allows you to lock in rates on your own terms.

What's the difference between that and a long term fixed rate?

andrewmp

Pincher wrote: »

Other countries are able to come up with 25 year fixed rates, which is what a lot of people want as well. This fixing and tracking every two years non-sense is just the financial industry's way of fleecing us.

.

You can get them in this country. I know, as I got one.

Pincher

andrewmp wrote: »

What's the difference between that and a long term fixed rate?

Long term would be 10 to 25 years, whereas it is unlikely you will get Call or Put options longer than 5 years, which are specialist OTC instruments you write up on order. Liquid standardised tradable options go up to a year ahead.

For long term funding, you usually issue 10/25 year bonds, which are liquid tradable paper, unless they have funny conditions, in which case only professionals will trade with each other, because they know how to value them. I don't think the building society is allowed to offer tradable bonds.

A building society issues a 3 year bond to a saver at 4.5%, and then lends the money in the form of a 3 year fix mortgage at 5.5% is the way to understand it. The building society is a counter party between the saver and the borrower. All they have to do is make sure the asset (the house) is worth the debt it guarantees, so the building society can pay the bond holder back, if anything goes wrong.

Potentially, a building society can issue a 25 year bond, but the saver can't redeem it without penalty, and can't sell it on,
so you wouldn't buy it in the first place. So how does the building society fund a 25 year fixed rate mortgage? To do a swap rate, you will need somebody with a 25 year cashflow to swap with, which is tricky to find.

It's all very simple until they complicated things by calling them collaterilised debt obligations and added leveraging around it, until nobody understood the risk and only salivated at the rewards. Oh, and they lent on assets that wasn't worth enough to cover the debt. Hence the Sub-Prime crisis.

Thrugelmir

Pincher wrote: »

Long term would be 10 to 25 years, whereas it is unlikely you will get Call or Put options longer than 5 years, which are specialist OTC instruments you write up on order. Liquid standardised tradable options go up to a year ahead.

For long term funding, you usually issue 10/25 year bonds, which are liquid tradable paper, unless they have funny conditions, in which case only professionals will trade with each other, because they know how to value them. I don't think the building society is allowed to offer tradable bonds.

A building society issues a 3 year bond to a saver at 4.5%, and then lends the money in the form of a 3 year fix mortgage at 5.5% is the way to understand it. The building society is a counter party between the saver and the borrower. All they have to do is make sure the asset (the house) is worth the debt it guarantees, so the building society can pay the bond holder back, if anything goes wrong.

Potentially, a building society can issue a 25 year bond, but the saver can't redeem it without penalty, and can't sell it on,
so you wouldn't buy it in the first place. So how does the building society fund a 25 year fixed rate mortgage? To do a swap rate, you will need somebody with a 25 year cashflow to swap with, which is tricky to find.

It's all very simple until they complicated things by calling them collaterilised debt obligations and added leveraging around it, until nobody understood the risk and only salivated at the rewards. Oh, and they lent on assets that wasn't worth enough to cover the debt. Hence the Sub-Prime crisis.

Building societies issue PIBS - Permanent Interest Bearing Securities - these are tradable.

andrewmp

Pincher wrote: »

Potentially, a building society can issue a 25 year bond, but the saver can't redeem it without penalty, and can't sell it on,
so you wouldn't buy it in the first place. So how does the building society fund a 25 year fixed rate mortgage? To do a swap rate, you will need somebody with a 25 year cashflow to swap with, which is tricky to find.

It's all very simple until they complicated things by calling them collaterilised debt obligations and added leveraging around it, until nobody understood the risk and only salivated at the rewards. Oh, and they lent on assets that wasn't worth enough to cover the debt. Hence the Sub-Prime crisis.

My building society gave me a 25 year fixed rate mortgage, how did they fund it, or do they gamble?

Pincher

andrewmp wrote: »

My building society gave me a 25 year fixed rate mortgage, how did they fund it, or do they gamble?

The actuaries just has to work out the long term interest rate expectation, slap on a safety margin and profit margin, and charge you something like 8%~10%. Or they could find an underwriter.

The Americans relied on Freddie Mac and Fannie Mae to do the under-writing for long term fixed mortgages. Because of the sheer volume of mortgages, the risks tend to cancel each other out, and they can open hedging positions if required, so it's very safe, and they can squeeze the margins narrower.
They also sold on the cashflow (effectively a bond) from mortgages, which generated more cash for lending out.

It all fell apart because mortgage brokers lied on applications and lent to poor sods who couldn't keep up the payments, on assets with over-inflated valuations. As the underwriters, they paid out until the Federal Reserve bailed them out.

But it was working fine till then.:)

Pincher

Thrugelmir wrote: »

Building societies issue PIBS - Permanent Interest Bearing Securities - these are tradable.

I always assumed Building Societies were limited to deposit taking: otherwise they might as well be banks. This is really interesting, thanks.