The future of interest rates? Can you afford it?

HAMISH_MCTAVISH

Being discussed here.....

https://forums.moneysavingexpert.com/discussion/4797182

HAMISH_MCTAVISH

Re-posted below for those that can't be bothered to click.....

So, since the crash I've been steadfastly predicting rates will stay ultra-low for years, despite the noise in the media and on these boards from time to time suggesting otherwise, and they have.

It's time though, for a bit of an update on that prediction.

The economic recovery is gathering pace, unemployment is falling, and lending availability is increasing.

So what does that mean in practical terms for mortgage borrowers?

Here's a little Q&A to explain....

Q: How much longer will base rates stay at 0.5%?

A: Until the economic recovery is locked in, unemployment has fallen significantly, and raising them will not damage the recovery.

On the current economic trajectory, which is already better than expected, the likeliest answer is another 18-24 months.

In the highly unlikely event economic recovery and house prices accelerate into boom conditions, then it could be sooner, but although this would be excellent news for everyone it's not a probable outcome.

Also be aware that if the recovery slows, it could be far longer, and it wouldn't be impossible to see another 5-7 years of rock bottom rates if the economic recovery tails off and house prices stagnate.

Q: When base rates start to rise, how fast will they go up?

A: In all probability, not very fast at all.

Central banks control inflation by using rate rises to destroy demand in the economy.

It's pretty far fetched to think that there would such a boom that too much money is chasing too few goods, such that significant demand destruction would become appropriate, any time in the next 5-7 years.

I'd be surprised if base rates were much north of 2% 5 years from now, and even that is only if everything goes well.

Q: You've talked about base rates, but what about mortgage rates?

A: As we all know, mortgage rates did not fall nearly as far as base rates. Indeed, rates for FTB-s have remained closer to 5% than the 0.5% so frequently mentioned in the media or online.

When mortgage rationing was introduced thanks to the credit crunch, banks no longer had to compete for customers through reducing their margins, but instead raised their margins to record high levels, and used credit scoring and deposit requirements to shrink the pool of creditworthy borrowers to match the much smaller pool of available funding.

As available funding for banks to lend increases, this process is slowly reversing, particularly at higher LTV-s.

Competition is slowly returning to the market, and margins are shrinking, as banks make a tentative step back towards a normally functioning competitive market as lending volumes increase.

Still a long way to go, and margins will certainly shrink further... so as sufficient lending returns to lock in the recovery and make base rate rises a possibility, that very same competition will reduce bank margins.

In reality therefore, the retail price of mortgages is unlikely to move up much at all, and certainly not as much as base rates do, for many years after base rates start to rise.

In other words....

- 10 years ago a FTB borrower would pay somewhere around 5%.

- Today an FTB borrower will pay somewhere around 5%.

- And 10 years from now, it is likely an FTB borrower will still be paying somewhere around 5%.

While base rates may move, chances are mortgage rates, particularly the currently more expensive high-LTV ones, won't move nearly as much.

Q: Martin Lewis has recently warned that borrowers should consider whether they'll be able to pay a mortgage if rates rose by 4% or 5%. Is he wrong?

Borrowers should always consider a wide range of scenarios, including absolutely catastrophic worst case scenarios, before embarking on the biggest purchase of their lives.

But they should also consider the probability of such an outcome.

In my opinion, the chances of base rates rising to 5% in this economic cycle are low.

And the chances of current bank margins of up to 5% above base holding steady if they do is virtually zero.

The previous Governor of the Bank of England has already admitted as much to the Treasury Select Committee. And the current BOE Governor is, if anything, even more Dovish than the previous one.

Q: So should I take a fixed or variable rate mortgage?

A: It depends on your individual circumstances and appetite for risk.

You can currently get a 25 year fix for under 5.5%. That tells you a lot about what banks think the prospect for high rates are in the future.

So if you really think rates could rocket back to 10% or higher, then I'd urge you to take such a long term fix and eliminate that risk entirely.

You can also get a 10 year fix for around 3.5%. When banks are offering that, they believe they'll make money on it. So again, it tells you a lot about where they think rates will be over the next decade.

But equally, a 10 year fix at those levels is now starting to make sense for some people.

It's not that much more expensive than a variable, and so it seems like pretty cheap insurance if you were stretching yourself to buy the best house you could, and really couldn't afford for rates to rise until you had a decade of wage inflation and career progression behind you.

So given that it is now likelier than not that base rates will rise a percent or two in the next 5 years, and the best trackers are not that much cheaper, a 10 year fix is starting to make sense now where it didn't 2 or 3 years ago.

But of course trackers can still stack up for many people, particularly if you're looking to minimise house buying costs, but able to cope if rates do rise.

In my opinion., the lowest trackers available today still make sense if you have the ability to cope if rates do rise unexpectedly, and I'm keeping mine, as I'm willing and able to take the risk of rates not rising for another couple of years or more and I think that when they do rise margins will decrease so borrowers will be in much the same place.

Q: And what of house prices? Will rising rates cause prices to crash?

No.

As base rates will likely only rise when unemployment is falling, the economy is growing, and therefore wages will be rising, not to mention bank margin shrinkage will more than likely compensate for any base rate rises meaning people don't actually pay much more, it's incredibly unlikely prices will fall.

I'm not aware of any house price crash in history caused by falling unemployment, increasing GDP, rising wages, and mortgage interest payments reverting from super-low to the long term average.

So if that's what you're counting on, probably best to think again....

ItsyBitsySpider

HAMISH_MCTAVISH wrote: »

Re-posted below for those that can't be bothered to click.....

So, since the crash I've been steadfastly predicting rates will stay ultra-low for years, despite the noise in the media and on these boards from time to time suggesting otherwise, and they have.

It's time though, for a bit of an update on that prediction.

The economic recovery is gathering pace, unemployment is falling, and lending availability is increasing.

So what does that mean in practical terms for mortgage borrowers?

Here's a little Q&A to explain....

Q: How much longer will base rates stay at 0.5%?

A: Until the economic recovery is locked in, unemployment has fallen significantly, and raising them will not damage the recovery.

On the current economic trajectory, which is already better than expected, the likeliest answer is another 18-24 months.

In the highly unlikely event economic recovery and house prices accelerate into boom conditions, then it could be sooner, but although this would be excellent news for everyone it's not a probable outcome.

Also be aware that if the recovery slows, it could be far longer, and it wouldn't be impossible to see another 5-7 years of rock bottom rates if the economic recovery tails off and house prices stagnate.

Q: When base rates start to rise, how fast will they go up?

A: In all probability, not very fast at all.

Central banks control inflation by using rate rises to destroy demand in the economy.

It's pretty far fetched to think that there would such a boom that too much money is chasing too few goods, such that significant demand destruction would become appropriate, any time in the next 5-7 years.

I'd be surprised if base rates were much north of 2% 5 years from now, and even that is only if everything goes well.

Q: You've talked about base rates, but what about mortgage rates?

A: As we all know, mortgage rates did not fall nearly as far as base rates. Indeed, rates for FTB-s have remained closer to 5% than the 0.5% so frequently mentioned in the media or online.

When mortgage rationing was introduced thanks to the credit crunch, banks no longer had to compete for customers through reducing their margins, but instead raised their margins to record high levels, and used credit scoring and deposit requirements to shrink the pool of creditworthy borrowers to match the much smaller pool of available funding.

As available funding for banks to lend increases, this process is slowly reversing, particularly at higher LTV-s.

Competition is slowly returning to the market, and margins are shrinking, as banks make a tentative step back towards a normally functioning competitive market as lending volumes increase.

Still a long way to go, and margins will certainly shrink further... so as sufficient lending returns to lock in the recovery and make base rate rises a possibility, that very same competition will reduce bank margins.

In reality therefore, the retail price of mortgages is unlikely to move up much at all, and certainly not as much as base rates do, for many years after base rates start to rise.

In other words....

- 10 years ago a FTB borrower would pay somewhere around 5%.

- Today an FTB borrower will pay somewhere around 5%.

- And 10 years from now, it is likely an FTB borrower will still be paying somewhere around 5%.

While base rates may move, chances are mortgage rates, particularly the currently more expensive high-LTV ones, won't move nearly as much.

Q: Martin Lewis has recently warned that borrowers should consider whether they'll be able to pay a mortgage if rates rose by 4% or 5%. Is he wrong?

Borrowers should always consider a wide range of scenarios, including absolutely catastrophic worst case scenarios, before embarking on the biggest purchase of their lives.

But they should also consider the probability of such an outcome.

In my opinion, the chances of base rates rising to 5% in this economic cycle are low.

And the chances of current bank margins of up to 5% above base holding steady if they do is virtually zero.

The previous Governor of the Bank of England has already admitted as much to the Treasury Select Committee. And the current BOE Governor is, if anything, even more Dovish than the previous one.

Q: So should I take a fixed or variable rate mortgage?

A: It depends on your individual circumstances and appetite for risk.

You can currently get a 25 year fix for under 5.5%. That tells you a lot about what banks think the prospect for high rates are in the future.

So if you really think rates could rocket back to 10% or higher, then I'd urge you to take such a long term fix and eliminate that risk entirely.

You can also get a 10 year fix for around 3.5%. When banks are offering that, they believe they'll make money on it. So again, it tells you a lot about where they think rates will be over the next decade.

But equally, a 10 year fix at those levels is now starting to make sense for some people.

It's not that much more expensive than a variable, and so it seems like pretty cheap insurance if you were stretching yourself to buy the best house you could, and really couldn't afford for rates to rise until you had a decade of wage inflation and career progression behind you.

So given that it is now likelier than not that base rates will rise a percent or two in the next 5 years, and the best trackers are not that much cheaper, a 10 year fix is starting to make sense now where it didn't 2 or 3 years ago.

But of course trackers can still stack up for many people, particularly if you're looking to minimise house buying costs, but able to cope if rates do rise.

In my opinion., the lowest trackers available today still make sense if you have the ability to cope if rates do rise unexpectedly, and I'm keeping mine, as I'm willing and able to take the risk of rates not rising for another couple of years or more and I think that when they do rise margins will decrease so borrowers will be in much the same place.

Q: And what of house prices? Will rising rates cause prices to crash?

No.

As base rates will likely only rise when unemployment is falling, the economy is growing, and therefore wages will be rising, not to mention bank margin shrinkage will more than likely compensate for any base rate rises meaning people don't actually pay much more, it's incredibly unlikely prices will fall.

I'm not aware of any house price crash in history caused by falling unemployment, increasing GDP, rising wages, and mortgage interest payments reverting from super-low to the long term average.

So if that's what you're counting on, probably best to think again....

Pardon my ignorance, I am just a new member but whatever you are saying can be easily interpreted as financial advice. What are your credentials, would you like to reveal your identity?

HAMISH_MCTAVISH

ItsyBitsySpider wrote: »

Pardon my ignorance, I am just a new member but whatever you are saying can be easily interpreted as financial advice. What are your credentials, would you like to reveal your identity?

LOL

Nothing I post should be construed as financial advice.

It clearly states it is my prediction and opinion.

Nothing more or less.

Fortunately, these boards are for discussion of wider issues to do with house buying and mortgages, and are not limited to the paid for advice you'd get from an FA.

That diverse range of opinions, and ability to freely challenge others viewpoints, is exactly what makes these boards so helpful.

demontfort

Another boring Saturday night in eh Hamish. Haggis, neeps, tatties and deep fried mars bar all washed down with a bottle of Bucky. Go on Hamish live a little and celebrate the house price boom by turning up the gas fire another bar and burning up a little more of that precious North Sea gas! :rotfl::rotfl::rotfl::rotfl:

HAMISH_MCTAVISH

demontfort wrote: »

Go on Hamish live a little and celebrate the house price boom

As lovely as that sounds, I think I'll keep this thread on topic and post some supporting commentary from the former BOE governor, in testimony to the Treasury Select Committee.

"Along with the path of an increase in the bank rate -- which inevitably will come from where we are now back to more normal levels -- you would expect that to be accompanied by a process in which the spread between the bank rate and the rates banks charge would undoubtedly narrow."
~ Sir Mervyn King

fiesta04

HAMISH_MCTAVISH wrote: »

Being discussed here.....

https://forums.moneysavingexpert.com/discussion/4797182

Hardly what I class as being discussed, only 3 replies.:D

Why bother even starting another thread??:mad:

No reason to answer:cool:

F4

HAMISH_MCTAVISH

fiesta04 wrote: »

Hardly what I class as being discussed, only 3 replies.

Up to 16 now.... Plus 8 here.

And if you don't want to discuss, feel free not to.;)

Nelly321

Well said and an interesting read

Moby_Tide

ItsyBitsySpider wrote: »

Pardon my ignorance, I am just a new member but whatever you are saying can be easily interpreted as financial advice. What are your credentials, would you like to reveal your identity?

Hamish is Mark Carney he just doesn't like to talk about it

HAMISH_MCTAVISH

Moby_Tide wrote: »

Hamish is Mark Carney he just doesn't like to talk about it

Whilst I'd be absolutely delighted to have Mark Carney's pay packet, I'm afraid that I can't take credit for his wise forward guidance on rates.

But anyone wondering if UK housing is going to get cheaper or more expensive over the next 5 years, should probably note the extraordinarily high £250,000 per year housing allowance he negotiated for himself before taking on the role....;)