House prices and mortgage interest rates

edited 30 November -1 at 1:00AM in Mortgages & Endowments
16 replies 1.2K views
kirifruit87kirifruit87 Forumite
18 Posts
edited 30 November -1 at 1:00AM in Mortgages & Endowments
Hi all,

I have a mortgage which my partner and I purchased 2 years ago. The fixed interest rate deal at that time was appealing, it was 4.7% making it affordable and we knew what we were paying every month - which, in uncertain times was comforting.

Unfortunately, neither me or my partner know very much about the economy nor do we claim to be experts in our own mortgage.

We have come to the end of our fixed term and, because we are now in negative equity are moving to a variable rate of 4.75% - a little uncertain but fixed rate is much more than I had imagined it would be. Our home to value is 117%.

I know so little and I wonder if someone can explain whether there is correlation between house prices and interest rates? I.e. If house prices rise, will interest rates?
Can I expect the variable rate to change dramatically in the wrong direction?

We cannot remortgage as our home to value amount is so large.

Enter panic attack.

The advice of you savvy money experts would be gratefully received. Laymans terms preferred!

Thank you so much in advance, I feel incredibly stupid asking but I would rather know,
Kiri x
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Replies

  • ThrugelmirThrugelmir Forumite
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    Is your current mortgage on a capital repayment or interest only basis?
    It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong." — George Soros
  • Sorry, should have said, it's a repayment mortgage, so I pay both off. I have 28 years left
    :-)
  • ThrugelmirThrugelmir Forumite
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    In that case don't overly concern yourself with the fact that you are in negative equity. Over time the debt owed will reduce and normality will be restored.

    Being in negative equity gives you little choice but to remain with your current lender. Do you know the products they re willing to offer you?
    It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong." — George Soros
  • Hi thrugelmir,

    My concern is more with the interest rates and their correlation with house prices, do they rise with house prices or are they likely to remain the same or lower? Perhaps that's not something you can quantify or predict but often plays on my mind.

    There are a few options with my current lender but truthfully the variable rate is the lowest even the tracker is a little higher - we fall into a 'funny' bracket because our percentage of mortgage is 117%!!!

    Thanks so much for replying
    Ki
  • SG27SG27 Forumite
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    If house prices are rising fast and the economy is improving combined with general inflation elsewhere then the Bank of England 'should' raise interest rates. When any of these actually happen though is any ones guess.
  • ThrugelmirThrugelmir Forumite
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    Hi thrugelmir,

    My concern is more with the interest rates and their correlation with house prices, do they rise with house prices or are they likely to remain the same or lower? Perhaps that's not something you can quantify or predict but often plays on my mind.

    At the current time the future direction of interest rates is only one way , and that's up.

    So if you are at all concerned then fixing would be the best option.

    Rising interest rates will put downward pressure on house prices. Whether this causes prices to drop significantly who knows. The property market depends on confidence. As it's the actions of thousands of individual purchase and sale trades that move it up and down. People tend to move with the herd...........

    Then there's the unknown factor of how many people will struggle financially if rates were to rise sharply.

    Rather than worry too much. Focus on yourselves and your plans.

    If you can afford to do so, overpaying the mortgage is one way of both mitigating and improving the uncertainty that lies ahead.
    It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong." — George Soros
  • SG27 wrote: »
    If house prices are rising fast and the economy is improving combined with general inflation elsewhere then the Bank of England 'should' raise interest rates. When any of these actually happen though is any ones guess.

    If the house prices are rising fast, increasing the interest rate is not the only solution to slow it down. One of the things government could do is to remove its continuous injection of money into the mortgage market i.e. the help to buy scheme. Banks won't lend on easily, there will be less buyers in the market, more houses to sell and the house prices will come down slowly or at the very least would be stable.

    On the other hand, if the interest rates go up, the very first thing we witness would be a large number of mortgage defaults. A lot of people who have been artificially enabled by help to buy scheme, may find it hard to cope with the payments. As opposed to last financial crisis, government now directly owns sizable share in the banking industry. So, any defaulted mortgages will be a blow for the exchequer directly. Credit rating of the government could go down which would only increase the cost of borrowing on the public borrowing i.e. bond yield would go higher astronomically.

    Unless the government deliberately wants to crash the economy, I don't think BOE would increase the interest rate drastically in near future, not at least the next elections are over.
  • Hi folks,

    Thanks so much for the replies, these are actually reassuring. What I think I'm hearing is that it would cause more damage than good to hike the interest rates due to the governments input into the housing market so far.
    However, the natural plug to rising house prices would be to increase interest rates to make mortgages more, unappealing?

    I have heard that boe Aren't planning on raising the base rate for some time but that, I suppose, isn't law.

    What I'm really getting is, the only certainty is uncertainty!

    Thanks so much again
    Ki xox
  • SG27SG27 Forumite
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    Unless the government deliberately wants to crash the economy, I don't think BOE would increase the interest rate drastically in near future, not at least the next elections are over.


    If inflation is getting out of control it may not have a choice...
  • Hi Kirifruit,

    House price and interest rates are interconnected loosely, i.e. as the economy picks up you'd expect interest rates to rise and house prices to rise. However they are not directly connected to one another.

    House prices are driven by the relationship between supply and demand. Supply is driven by the construction of new homes and the flow of individuals moving property and demand is driven by these wishing to enter the property market and these wishing to move. At present house prices are low due to low demand rather than over supply.

    House prices are viewed as a 'real asset' which has intrinsic value as such you would expect house prices to go up year with inflation, all elses been equal, and more or less than inflation depending on supply and demand.

    Interest rates on the other hand are generally derived from the 'Bank of England' BOE base interest rates. The BOE tries to set interest rates to influence the supply of money in the banking sector to try and curb or promote growth. At present the BOE are keeping rates low to try and encourage borrowing/spending to bolster the economy.

    In summary interest rates will fluctuate with economic cycles throughout your lifetime, during boom times (possibly high interest rates) you would expect your house value to increase and in bust times (possibly low interest rates) you would expect your house value to stay relatively flat .
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