What will happen when interest rates rise?

midnight_child

Ok, so the date for the first rate rise is now apparently Feb 2016. This thread is not about guessing when rates will increase, but discussing how any increases will affect the economy. Its a topic I've been thinking about recently as rates have never been this low before, so reversing may have unknown consequences. I am interested in what your views are.


To start things off:


1) Will we see a mass of defaults on loans/mortgages, from those who have been struggling with repayments for the past 7 years?


2) Will house prices stagnate/reduce due to it becoming increasingly difficult to afford mortgages?


3) Will higher savings rates cause and exodus from shares by those who had been chasing income from dividends?


4) Will increased rates be good/bad for foreign investment into the UK?

Cheers
MC

Generali

If interest rates rising cause pain in the real economy then rates will fall again from the POV of the BoE.

The Fed don't give a flying fox what happens to the UK housing market of course and when they increase rates then there could be implications for the UK housing market especially in London.

midnight_child

Generali wrote: »

If interest rates rising cause pain in the real economy then rates will fall again from the POV of the BoE.

This is logical, but I hear that whatever changes BoE (MPC) make takes up to 2 years to actually filter into the real economy.

CLAPTON

presumably we are talking about a rise of say 0.25% or even 0.5%
even this will only happen if the BoE is confident that it will have no adverse effect on the economy


so virtually no effect on mortgage holders
and no exit from shares

it may have an effect of house prices but as all mortgage offers already have rates rises factors in, any effect will be psychological rather than economic

midnight_child

Yes, I'm talking about relatively small rate rise of 0.25 or 0.5%. While the BoE may have confidence that no/minimal effects will occur, rates have never ever been this low, so there may be unexpected consequences given such a low starting base rate.


I disagree it will have no/minimal effect on mortgage holders. With mortgage rates at 2-3% it does not take much of an increase to cause a lot of damage (e.g. increase from 2% to 2.5%). I suspect there are a lot of zombie loans/mortgages out there that would otherwise have defaulted in the previous 7 years.
How would BoE know/quantify this risk?

CLAPTON

midnight_child wrote: »

Yes, I'm talking about relatively small rate rise of 0.25 or 0.5%. While the BoE may have confidence that no/minimal effects will occur, rates have never ever been this low, so there may be unexpected consequences given such a low starting base rate.


I disagree it will have no/minimal effect on mortgage holders. With mortgage rates at 2-3% it does not take much of an increase to cause a lot of damage (e.g. increase from 2% to 2.5%). I suspect there are a lot of zombie loans/mortgages out there that would otherwise have defaulted in the previous 7 years.
How would BoE know/quantify this risk?

why do you think that?
what sort of mortgages are you referring to?
why do you think there are a lot of people who have had mortgage for more than 7 years and will now default?

midnight_child

I was mainly referring to the more borderline residential mortgages, that were taken out in the mid 2000s. There were banks lending at 100 and even 125% LTV, and many of these will still be in negative equity (especially where I am). There will also be many mortgages taken out on an IO basis.
These could struggle to "lock in" a decent fixed rate and most likely on SVR that will presumably track any BoE increase.


One of the surprising things about this recession was the comparatively low levels of unemployment, which was put down to firms reducing hours and decreasing pay rather than laying off workers. Don't have any figures but there will be many, many people earning less when adjusting for inflation than when they took on their loan.


Another feature of this recession was the low level of repossessions, by historic standards. It may be that the banks are being much more lenient, or it may be that people are just managing to survive on their reduced income, due to lower mortgage interest with the artificially low base rate.


I may be way out but suspect there are a lot of households who are currently struggling, where a small rate rise would tip them over the edge.

michaels

midnight_child wrote: »

I disagree it will have no/minimal effect on mortgage holders. With mortgage rates at 2-3% it does not take much of an increase to cause a lot of damage (e.g. increase from 2% to 2.5%). I suspect there are a lot of zombie loans/mortgages out there that would otherwise have defaulted in the previous 7 years.
How would BoE know/quantify this risk?

What do we know about the impact on mortgage borrowers.
Some are on fixes
Any who have mortgaged or remortgaged recently will have affordability built into the offer.
Most on uncompetitive svrs (those of about 4.5%) will have remortgaged if their circumstances permit.

So vulnerable borrowers may either be on low (2.5%) or high 4-5% svrs.

The former will have a higher proportion increase in payments but will generally be paying less, those on higher svrs there may (Hamish thinks, I am less convinced) be less increase in the SVR than there is in the base rate mirroring what happened when the base rate fell.

Blacklight

Hmm, not sure if people with, say, a £150,000 mortgage could cope with a £18.41 a month 'HIKE' when it finally hits after seven years of pay rises and promotions...

That's taking into account the fact they've been paying it off for seven years too. Likely to have started at around £190k when interest rates went to 0.5%

wymondham

is the interest rate variable? I'd forgotten!


come December they will be saying interest rates might go up in 2017.... nobody seems to have the gumption to actually do it...

midnight_child

Blacklight wrote: »

Hmm, not sure if people with, say, a £150,000 mortgage could cope with a £18.41 a month 'HIKE' when it finally hits after seven years of pay rises and promotions...

That's taking into account the fact they've been paying it off for seven years too. Likely to have started at around £190k when interest rates went to 0.5%

I suspect there are a lot of people in a much more precarious position than you suggest, such as those on 100% LTV or IO mortgages from mid 2000s, but I take your point.


Looking at it another way this £18.41 is money that can no longer be money saved, or money spent in the local pub, corner shop, restaurant, take away, brothel, or whatever. Multiply this round all the households in the county and that's an awful lot of spending taken out of the consumer economy.
How badly would this hurt small businesses?