'The UK’s mortgage ticking time bomb' blog discussion

samizdat

Martin, I think you are missing an important point, which is that banks themselves are facing higher funding costs, and that the sort of margins over Base Rate that were charged in the decade or so leading up to the Lehman collapse reflected an era of unsustainably cheap funding. That was why we had a crisis!

There was a huge supply of mortgage finance, predicated on the idea of ever-increasing house prices, and borrowers who apparently could never default, even if they didn't even have a job at the time of application! Self-cert, liars loans, and a whole industry of brokers whose only job was to churn people through an ever-expanding bubble of debt.

Of course mortgages were cheap! Those times have gone forever, and we should all be thankful for that, because as we now know it was just unrealistic, and did not fairly reflect the true risks of lending against property.

fahmeeda52

Hi Friends

Me and my mrs thinking to go for the mortgage? We don't know any thing about mortgage. This is our 1st time plan to buy a house on mortgage.

We live in Easter London Beckton. We both are working in Asda. I am a manager & my Mrs is a Baker. Our annual income is around 40 to 45 k. Our age is in between 38 to 40.

Could you please guide us about how mortgage works, how to go for it, which is a best mortgage for us. And do you know any good mortgage broker or adviser?

We both really appreciate your help & guidance in this matter.

Thanks

Mozette

Not so much that People have re-jigged their finances around new lower rates and locked into other commitments. more that the low mortgage rates have helped to alleviate the increases in food and fuel and transport and so on; a lot of people have static pay or pay cuts, and the idea of "building up a war chest" is a lovely thought, but what with?
And houses still cost a ridiculous amount, but rent only goes one way. Damned if you do, damned if you don't.
Until the tory policy of making the poor poorer and the rich richer stops, much of an increase will be a disaster for a lot of people.

HAMISH_MCTAVISH

Timebomb defused...

Mr Carney and his MPC colleagues will not return to Mervyn King's policy of institutionalised, formal silence on the direction of interest rates.

I expect him to say on Wednesday that he expects interest rates to remain at their current low levels for some considerable time. And to repeat that as and when they do rise, they will not return to the levels we took for granted as normal in the boom years.

He will continue to signal his conviction that the price of money will remain historically cheap for years to come, because the massive indebtedness of the UK means any recovery would be snuffed out by interest rates that only six years ago we would have regarded as unexceptional.

Or as Robert Peston just put it....

"A one-eyed monkey could look at the Bank of England's new forecast for inflation and confidently predict that interest rates will remain low for some time.”

http://www.bbc.co.uk/news/business-26145697

shortchanged_2

But won't this massive indebtedness never go away if we continue to have a low interest rate economy, because all a low interest rate economy will do is encourage people to take on more debt? Is that the master plan?

HAMISH_MCTAVISH

shortchanged wrote: »

But won't this massive indebtedness never go away if we continue to have a low interest rate economy, because all a low interest rate economy will do is encourage people to take on more debt?

Correct.

Which then further limits the ability to raise rates.

Is that the master plan?

No... just economic reality.

Ultra-Low rates are in all probability here for the very long term.

shortchanged_2

Problem is Hamish is that people are going to start demanding higher wages before long as the economy recovers and then there will be the resultant inflationary pressures. What are the options then?

HAMISH_MCTAVISH

shortchanged wrote: »

people are going to start demanding higher wages before long as the economy recovers and then there will be the resultant inflationary pressures.

What are the options then?

To raise rates.

But with increasing wages, and an economic recovery putting more people back into work, rate rises are not a problem.

And while base rates will rise, they won't rise quickly or by very much.

As Ed Conway noted today....

The main message of today’s Inflation Report is that the Bank of England won’t be lifting interest rates anytime soon.

However, the supplementary message is that when rates do rise, it’ll happen very gradually.

And they won’t get high for a long, long time.

Indeed, while before the crisis a “normal” level for rates might have been 5%, the “new normal” is likely to be closer to 2.5%.

http://www.edmundconway.com/2014/02/what-todays-inflation-report-means-for-you-and-your-mortgage/

And don't forget, in addition to this, it's been made pretty clear by the BOE previously on a number of occasions that they expect mortgage margins above base rate to reduce when base rates finally do rise.

Or as Mervyn King put it to the Treasury Select Committee, when base rates rise "the spread between the bank rate and the rates banks charge would undoubtedly narrow".

So to recap, base rates staying low for a long time, and only rising gradually when they do rise, the new normal for rates likely to be 2.5%, and mortgage margins above base to shrink.

Not much of a ticking time bomb..... More like a damp squib.