Interest rates - worst case scenario over next 10 years?

evoke

I'm doing some budgeting for future interest rate rises. A couple of nortgage lenders are more than happy to lend me the maximum amount possible based on today's interest rates. It's an amount I can afford at the moment based on my current salary without a lot of difficulty.

Naturally, I need to take into account what would happen if interest rates rose sharply over the next decade. I'm currently working out my payments based on (mortgage) interest rates rising to 6%.

Given that some mortgage interest rates are already around the 4% mark for some fixed-rate mortgages, should I be checking figures for much higher mortgage interest rates (say, 10% or even 12%) to ensure that i'm not going to run into finanical difficulties?

The reason I ask is that some lenders i've spoken to give me illustrations based on 6% APRs - that's only 2% above some of their current APRs.

The amount borrowed will be £185K to £200K.

Finally, is it a false hope to just consider the BoE base rate which is currently at 0.5% as it could be very easy to ignore the actual lending APR rates?

Generali

There is no way to ensure you won't run into financial difficulties. If you get sick so you can't work for example then you are very unlikely to take anything other than a very big financial hit.

Don't forget that if mortgage rates rise to historic highs of 10 or 15% then it's unlikely to be for long and your wages will probably rise at a similar rate.

The sensible thing to do is to put down a reasonable deposit, have some rainy day money put aside and spend less than you earn.

Loughton_Monkey

There is an anomoly here, in that lenders have historically stuck to 2½ or 3 times earnings or similar. This went out of the window, of course, recently.

But the point is that even when mortgage rates were 12%, 15% etc. [Not uncommon] these multiples still applied. So logically, at 4% someone could afford 3 or more times the amount. I think many people under 30 are probably unaware of how expensive money was, for quite a time, and how it probably will be again some time in the future.

In 'my day', I think 25% to 35% of earnings going straight into Mortgage Interest was considered perfectly 'normal'.

Really2

Loughton_Monkey wrote: »

There is an anomoly here, in that lenders have historically stuck to 2½ or 3 times earnings or similar. This went out of the window, of course, recently.

We have had posters on here say they have had 4X+ in the 70's and 80's? As far as I know there as never been a limit.

michaels

Depending on your ltv, how about Yorkshire Builiding society 10 year fix at 4.99% - costs more but then you are covered for 10 years.

tyllwyd

I think it is difficult to predict how mortgage interest rates will change as the Bank of England rate rises - a few years ago, when the BoE rate was about 4 or 5 %, mortgage deals were pretty close to that. But obviously, now that the BoE rate is 0.5%, mortgage interest rates are a lot higher. I'd be surprised if the gap between the two stayed that large if the BoE rate went back to something like 5%. I think mortage rates going up to 10% isn't impossible, obviously, because it's happened before, but it really would be a worst case scenario.

Edited to say - just saw Martin's blog on exactly this topic. He doesn't think 9-10% is impossible if you are on a tracker.
http://blog.moneysavingexpert.com/2010/11/04/a-mortgage-warning-take-a-look-at-the-uk-interest-rates-history-since-1694/

mbga9pgf

budget for base at 8% worst case for 1 year i reckon.

the uk would be on its knees by that stage though.

Generali

Really2 wrote: »

We have had posters on here say they have had 4X+ in the 70's and 80's? As far as I know there as never been a limit.

For much of the 70s and early 80s there was a lack of available credit so lending large amounts to an individual would have been pointless as the lending institution could have taken less risk for the same profit by lending less to more people.

I agree however, I don't think there's ever been a limit mandated by law or diktat. The way things used to be done was that if an institution was doing something the BoE didn't like, they'd have a quiet word and that was usually that.

StevieJ

evoke wrote: »

I'm doing some budgeting for future interest rate rises. A couple of nortgage lenders are more than happy to lend me the maximum amount possible based on today's interest rates. It's an amount I can afford at the moment based on my current salary without a lot of difficulty.

Naturally, I need to take into account what would happen if interest rates rose sharply over the next decade. I'm currently working out my payments based on (mortgage) interest rates rising to 6%.

Rather than second guessing why don't you just take out a long term fixed rate, then you know

StevieJ

tyllwyd wrote: »

Edited to say - just saw Martin's blog on exactly this topic. He doesn't think 9-10% is impossible if you are on a tracker.
http://blog.moneysavingexpert.com/2010/11/04/a-mortgage-warning-take-a-look-at-the-uk-interest-rates-history-since-1694/

What that spreadsheet (and earlier years) says to me is that interest rates have been relatively low since the ERM debacle (18 years), those rates (3-7%) being the norm unlike 0.5% or 15% which were both the products of extreme economic activity.

HAMISH_MCTAVISH

UK base rates will, in all probability, rise for only one reason. To fight inflation caused by an excess of liquidity chasing a shortage of goods and services.

Too much money chasing too few products creates inflation, and the BOE fights this inflation by raising interest rates to destroy demand.

Now to get to there from here would require the economy and financial markets to move from the current position of insufficient liquidity (we are still in a painful credit crunch, with mortgage rationing endemic and other credit hard to come by), to a future position of surplus liquidity.

Quantitative easing was designed to alleviate the liquidity shortage by increasing available funding for the banks to lend into the wider economy, but instead has mostly been used to prop up banks balance sheets.

The inflation we have seen has been mostly due to currency value adjustment and one-off issues like tax increases. Whilst CPI is still above target, CPI-Y (which strips out things like tax rises) is in fact right around target. Raising base rates to combat this type of inflation through demand destruction would be counterproductive whilst the economy is still fragile, and could lead to deflation. Which is why the BOE hasn't raised them despite the CPI measure remaining above target for quite some time.

In all probability, rates won't rise at all for quite some time, and will not rise very far or very fast when they do. So whilst theoretically anything is possible, I personally doubt we'll see base rates of more than 3% within the next 5 years, or 5% within the next decade.