Interest Rate Rises - Predictions....??

sonastin

On a very simplistic note, governments used to use interest rates to control people's spending habits and thereby control inflation. If you can borrow cheaply, you buy more stuff so prices go up to meet the demand and inflation rises. If borrowing costs a lot, you tighten your belt and shop less so inflation should come down. In the 70s and 80s, inflation was rampant so interest rate rose to giddy heights to try to stop it.

The problem with todays economy is that inflation isn't being caused by people going out shopping too much. Rising fuel prices and global food prices are causing the significant inflationary pressures. Raising UK interest rates won't control those prices so it would only serve to add more pressure to the average household purse and small business. And at the moment, the BoE and govt focus is trying to stimulate domestic spending, not cause even more financial stress.

But at the same time, one of the biggest costs for most households is housing. And while interest rates remain low, housing costs can remain at their over-inflated high level. If you put up interest rates, it would tip a number of people over the unaffordable edge, forcing sales/repossessions. That (in theory) would bring property prices down as the market is flooded with "must-sell" properties rather than the current "would like to sell but not at a low price" offerings. And if property prices come down, the theory is that housing costs in general come down and people have more money to spend on other stuff, thus stimulating the economy.

I will leave it to you to decide a) which school of thought you subscribe to and b) when you think the BoE will switch from the former to the latter. Of course, other factors can (and probably) will come into play to change interest rates at any point.

geoffky

They went up to 17% in the 80s and its was a nightmare..i remember getting a letter every month telling me of paymernt rises..beleieve me you never want to go through that one as it was crippling... with inflation at 5% it could all unwind very quickly and the boe might not have much choice if it all goes not to plan..(as most things do not).if i was getting a mortgage i would be fixing for ten years..

geoffky

bris wrote: »

It's impossible to say but one thing to bear in mind is that people tend to borrow to their max, so if interests rates go up, these people start to struggle. The bursting point is anyones guess, but above 3% and there will be an awful lot of people in serious trouble. Can the banks or Government let repossesions in their thousands happen? I think not so we should see low rates for a long time yet.
But that's my view, i'm not often right.

What makes you think they will not let it happen when they
have on so many occasions before....

nickpe

Well the above really has been fascinating and again very informative to me.

I will tell you the reason i asked and again please contribute your thoughts............... (apologies to anyone if you have read my other posts where i have posed the same question)..........

Basically i am in the position where we are wanting a larger house, we have saved a good deposit which will cover the deposit required for a new property.......however rather than sell my current property i am considering renting it out, HOWEVER, because i do not have enough equity in my property i am told i am unable to get a buy to let mortgage but i can do a "Consent to let" - where basically they allow your current mortgage to continue as is on my old house.... now my current mortgage cost is £300 per month and this in on Nationwides standard variable rate which i believe is around 2.5%.
Now the scenario is this........... i am told by many people in my area after doing some research, that the rental market is thriving because people simply cannot get mortgages and i have been advised i can expect £425 to £450 if i rented it out......... therefore providing i had the property tenanted and PROVIDING INTEREST RATES DIDNT RISE TO A LEVEL which meant the mortgage costs would be higher than the rent - then it would be affordable and IN THEORY sounds a great idea.

And basically from our point of view if we rented ours out now would be the perfect opportunity to be in a position to buy propertys we would never have been able to afford 5 years ago because of the fact property prices have come down.

Do you think what i am proposing is a good idea or very risky in the event interest rates do go up????
Please be aware aswell of the mortgage costs i am aware there is landlords insurance and running repairs etc.

franklee

nickpe wrote: »

now my current mortgage cost is £300 per month and this in on Nationwides standard variable rate which i believe is around 2.5%.

Ah that's a slightly different question then as the bank's SVR isn't tied to the BoE base rate. I'd expect a bank's SVR more likely to rise faster than the BoE base rate. Some mortgages track the BoE base rate.

BTW do you fancy lending me two pounds now and I'll pay you back one pound in a while to settle the debt? Perhaps not ...

franklee

sonastin wrote: »

The problem with todays economy is that inflation isn't being caused by people going out shopping too much. Rising fuel prices and global food prices are causing the significant inflationary pressures. Raising UK interest rates won't control those prices so it would only serve to add more pressure to the average household purse and small business. And at the moment, the BoE and govt focus is trying to stimulate domestic spending, not cause even more financial stress.

But surely a lot of this is caused by the weakness of the pound which makes the things we import, including food and energy, more expensive. Rising interest rates does affect this as it strengthens the pound easing the costs of imports. However that then knocks our exports.

Not forgetting our debts, we need to be able to borrow to service those so there is a limit to the devaluation as otherwise who would want to lend to us other than at higher interest rates?

womble12345

Bear in mind that if you dont have a BTLmortgage then you have to use part of your income multiple on your current house, therefore if you are already borrowing 4x salary on your current hhouse they wont let you borrow much moreforyour new house.

nickpe

Hi there - so in answer to my question are you saying its a bad idea for me to consider renting out my current home to allow me to purchase a new property?

franklee wrote: »

Ah that's a slightly different question then as the bank's SVR isn't tied to the BoE base rate. I'd expect a bank's SVR more likely to rise faster than the BoE base rate. Some mortgages track the BoE base rate.

BTW do you fancy lending me two pounds now and I'll pay you back one pound in a while to settle the debt? Perhaps not ...

Wyndham

If you're going to be stretched if interest rates go up, then it seems a bad idea to even start to me. It depends how much it would take. Personally I'd be stretched if interest rates went about 10% - and I suspect they won't (but again, no one knows). But if I were going to struggle if rates went up by 1%, then that would be telling me something.

But I'm careful with money, I don't take risks. You may prefer to.

pararct

sonastin wrote: »

On a very simplistic note, governments used to use interest rates to control people's spending habits and thereby control inflation. If you can borrow cheaply, you buy more stuff so prices go up to meet the demand and inflation rises. If borrowing costs a lot, you tighten your belt and shop less so inflation should come down. In the 70s and 80s, inflation was rampant so interest rate rose to giddy heights to try to stop it.

The problem with todays economy is that inflation isn't being caused by people going out shopping too much. Rising fuel prices and global food prices are causing the significant inflationary pressures. Raising UK interest rates won't control those prices so it would only serve to add more pressure to the average household purse and small business. And at the moment, the BoE and govt focus is trying to stimulate domestic spending, not cause even more financial stress.

But at the same time, one of the biggest costs for most households is housing. And while interest rates remain low, housing costs can remain at their over-inflated high level. If you put up interest rates, it would tip a number of people over the unaffordable edge, forcing sales/repossessions. That (in theory) would bring property prices down as the market is flooded with "must-sell" properties rather than the current "would like to sell but not at a low price" offerings. And if property prices come down, the theory is that housing costs in general come down and people have more money to spend on other stuff, thus stimulating the economy.

I will leave it to you to decide a) which school of thought you subscribe to and b) when you think the BoE will switch from the former to the latter. Of course, other factors can (and probably) will come into play to change interest rates at any point.

Pretty much agree with this assessment but would add that the capitalisation of the banks is also an issue.
If rates rise then the numbers being offered for sale and or repossessions will increase. This will have an effect of pushing down property values quite markedly.

We must remember the type of mortgage products and the sums being lent against earnings ratio all the way through the boom years was in a significant number of cases very close to the actual paper value of the property at that time. In some cases Northern Crock in particular many were mortgages were for 110 or 120% of the properties value.

The banks have lent staggering sums against the notional property values and in a significant number of cases any equity they had against value has been eroded away. If rates are to rise then the knock on effects as described above will bring down values further, indebting the banks balance sheets even more possibly to a stage where some of these banks become insolvent. (although to a certain degree all banks are insolvent anyway).

In normal circumstances the rates we see today should make property values go to the moon but of course they are not. It therefore follows that they are barley keeping values above water, putting off the mother of all crashes.

On that basis despite high inflation (which anyone on this thread has barley mentioned yet) we will continue to have low rates for the foreseeable future.
It will probably take a Sterling crisis or something outside of the BOE influence (such as the systematic failure of foreign banks or a real default in The Eurozone) which will force them to reluctantly raise them.

Soc Gen in France are reportedly not to be doing to well given its exposure to Greek debt... Google is your friend..... :cool: