Interest rates will rise faster and higher than anyone expects

chucky

Really2 wrote: »

Base rate will be more related to how you expect the economy to perform over the next few years.

it's funny that the usual suspects are always on about wanting rates to go up but they're not always starting new threads about wanting economic growth...

DervProf

Really2 wrote: »

Higher base rates are used to cool down heating up economies. (yes and inflation but I am getting to that)

The BoE seemed to ignore that between 2003 and 2007.

Really2

DervProf wrote: »

The BoE seemed to ignore that between 2003 and 2007.

You think we were overheating at that time, compared to who?

chucky

DervProf wrote: »

He's not using base rates to relate to anything. He's simply summarising a few facts and voicing his (reasonable) opinion.

Base rates at 0.5%, and there is overpaying. True.

There is also a rise in arrears. True.

sorry dervprof that's complete rubbish, 0.5% is the base rate and the average mortgage rate is around 4%ish.

if it was a reasonable opinion it would have read 4% not 0.5%. so if mortgage rates were 0.5% there would be much, much less arrears, much, much less repossessions and even more mortgage overpayments. that's not the case because mortgage rates are not 0.5%. so sorry that's not reasonable at all.

JonnyBravo

Graham_Devon wrote: »

This forum always seems to miss the middle ground. And that commentator summed it up brilliantly, IMO tonight. Something has to give. We can't keep putting everything up, from rents, to general living costs, to massive increases in domestic fuel, to massive increases in transportation costs....There is nothing descreasing apart from the normal folks wages, and yes, ipods. People simply do not have the money to keep up. But no matter what your persuassion on the economy, the reality is exactly what he said.

Interesting post.
I largely agree. I think the thing to "give" though will be wage inflation. It's creeping up on us.


As an aside, it's respite, not a restbite. I like the concept of a restbite. A snack before bedtime perhaps?

Really2

For anyone interested in GDP her is how it looks over the last 40 years.


As you can see, the last 20 years do not seem that "hot" compared to the past.

wotsthat

Graham_Devon wrote: »

We've got the usual "Most people are overpaying" and "I paid x amount in 2007" posts. Along with the usual talk of 15% rates.

What no ones mentioned is the real facts. Base rates at 0.5%, and yes there is overpaying. But there is also a rise in those in arrears. There is also a rise in those being moved to IO mortgages as they cannot afford the repayment, and the reposession prediction by the CML has been adjusted upwards, and that's based on rates not moving for the prediction period.

Graham you are cherry picking the facts to fit your agenda and in the process probably missing the bigger picture.

There's a rise in arrears and this is worrying. However, you are giving it undue significance. From the CML 12th May 2011 http://www.cml.org.uk/cml/media/press/2914

Out of the 11.3 million outstanding first-charge mortgages in the UK at the end of March 2011, a total of 9,100 properties were taken into possession in the first quarter of 2011 (0.08% of all loans). This was 15% up from the 7,900 in the fourth quarter of 2010 (the fourth quarter of the year typically sees a lower number), but 10% lower than the same period a year ago, and equal to the average quarterly number of repossessions throughout 2010.

The total number of mortgages in arrears also continued to fall, and numbers fell in all but the deepest arrears band. At the end of March, the number of mortgages with arrears equivalent to 2.5% or more of the outstanding balance showed an improvement to 166,900 (1.47% of all loans), just under 2% down from 170,000 (1.5% of all loans) at the end of December 2010, and an 11% improvement on the 187,300 (1.65% of loans) a year earlier. On this measure, the first quarter saw the lowest share of mortgages in arrears since the third quarter of 2008.

There's a rise in those moving to IO because they can't afford the payments. This has been debated on this forum and the figures aren't that clear in differentiating between those with affordability issues and those taking advantage of lower rates. However, I'd again suggest that too much significance is given to this. From the CML 13th May 2011 http://www.cml.org.uk/cml/media/press/2915

From 2007, there has been a clear shift away from interest-only mortgages, in particular for first-time buyers. Prior to the financial crisis it was typical for around 30% of loans to first-time buyers to be on an interest-only basis. In March 2011, only 4% of first-time buyers took out an interest-only mortgage.

This talks about FTB’s but would suggest that less people are on IO now compared to 2007.

As for the “We've got the usual "Most people are overpaying" and "I paid x amount in 2007" posts” this is just disingenuous. Currently record amounts of capital are being repaid and there have been plenty of worked examples to show how a reducing mortgage is less ‘at risk’ to increasing rates.

It isn’t great out in the real world (hence the low BOE rate) but some perspective is required.

Engeroosi

What percentage of mortgage holders are actually benefiting from the base rate being 0.5%? What percentage are on fixed rates and therefore lining the banks pockets!? And what percentage are on variable rates where they are at the mercy of the individual banks, NOT the base rate?!

wotsthat

Engeroosi wrote: »

What percentage of mortgage holders are actually benefiting from the base rate being 0.5%? What percentage are on fixed rates and therefore lining the banks pockets!? And what percentage are on variable rates where they are at the mercy of the individual banks, NOT the base rate?!

It's difficult to be sure. I'm on the Nationwide BMR rate (which is variable but guaranteed not to be more than 2% above the BOE base rate. New borrowers don't have access to this rate after the end of their fix etc. This article seems to say, without any figures, that most Nationwide borrowers are on the BMR.

http://www.thisismoney.co.uk/mortgages-and-homes/article.html?in_article_id=534817&in_page_id=8

If this is the case then most mortgage holders at one of the biggest mortgage lenders will be benefiting from the base rate so quite a lot.

As for what % are at the mercy of the banks because they are on variable rates. Well probably quite a lot. Nationwide will certainly pass on rate rises to their BMR customers. However, if base rates went to 3.5% any time soon (unlikely IMO) then this would still only lead to a mortgage rate of 5.5%.

There's also the argument that if rates are increasing due to an improved economy then banks will be more likely to compete and the differential between BOE rate and mortgage rates will reduce.

DervProf

chucky wrote: »

sorry dervprof that's complete rubbish, 0.5% is the base rate and the average mortgage rate is around 4%ish.

if it was a reasonable opinion it would have read 4% not 0.5%. so if mortgage rates were 0.5% there would be much, much less arrears, much, much less repossessions and even more mortgage overpayments. that's not the case because mortgage rates are not 0.5%. so sorry that's not reasonable at all.

So, Graham should have typed......

"Base rates at 4%, and yes there is overpaying." ?

I'm sure there would be a few people queuing up to correct him on that.

I can't see why you are pulling him up over this.

He stated what the base rate is (although he did use the plural, there is only one base rate). He said there is overpaying, which I suspect there is. He also stated that there is a rise in those moving to IO mortgages, due to financial difficulties. It's hard to deny that that must be happening.

He then went on to summarise what he thought about the situation, a summary that I pretty much agree with.

The reason for the difference between base rate and actual lending rates ? It is my understanding that the banks are trying to recapitalise, and that is how they are going about it. The BoE know it. The government know it. The low base rate is mainly for the benefit of the banks, and to prevent a catastrophe in our property market.