What will happen when interest rates rise?

wotsthat

midnight_child wrote: »

Indeed, but how many people are in this position?


I cant find any official estimates, but shelter claimed earlier this year that 3 million were struggling to pay housing costs (rent or mortgage). Though, they don't exactly clarify what they mean by "struggling".
http://www.theguardian.com/society/2015/jan/05/missing-rent-mortgage-payments-shelter-interest-rate-housing-costs

Shelter said millions feared missing their January rent or mortgage payment. It's August now - did you hear anything about these millions joining the arrears figures - I didn't.

Shelter releases aren't meant to be back-tested because they're ridiculous.

Anyone getting a mortgage since the GFC should cope with reasonable interest rate rises. There may be some older mortgages where people are struggling so if a small increase tips them over the edge who cares? They've had more than 6 years of historic lows rates so maybe it's time they were put out of their misery.

However, I think the crashers are going to be very very disappointed at the increase in numbers of distressed sellers.

Generali

wotsthat wrote: »

Shelter said millions feared missing their January rent or mortgage payment. It's August now - did you hear anything about these millions joining the arrears figures - I didn't.

Shelter releases aren't meant to be back-tested because they're ridiculous.

Anyone getting a mortgage since the GFC should cope with reasonable interest rate rises. There may be some older mortgages where people are struggling so if a small increase tips them over the edge who cares? They've had more than 6 years of historic lows rates so maybe it's time they were put out of their misery.

However, I think the crashers are going to be very very disappointed at the increase in numbers of distressed sellers.

When and how to raise rates was always going to be the problem. The trick is to raise them quickly enough to keep inflation, and inflationary expectations, at bay but slowly enough not to wreck the recovery.

Central banks are pretty consistently behind the curve when increasing and decreasing rates. If they are this time, the results could be quite interesting.

The assumption is that because individuals are laden with debt then smaller increases in interest rates will be required than in the past to subdue inflation so base rates are only likely to rise to perhaps 2-3% in this tightening 'cycle' (horrible word). If the Central Banks mess it up and are too slow too tighten then inflation may get out of control and force interest rates up higher than people expect. Central banks have shown that they are quite happy for a recession to occur to keep inflation under control in the past.

The flip side is that they increase rates too quickly and push the economy back into recession. Losing your job when up to your eyeballs in debt is bad news for you and for the lender.

Of course they might finesse it and tighten at just the right rate. That's going to be a tough trick to pull off but not necessarily impossible as we seem to know more than ever about money and its circulation. I would caution that we also don't know what we don't know IYSWIM.

I have long maintained that this is going to be the interesting bit. I have no idea how this is going to play out but I am going to find it utterly fascinating. I suspect that says more about me than the economic forces at play.:o The Taper Tantrum is just the start of things to come I think; we are living in a huge economic experiment and monetary policy has been rather like pouring a huge amount of fuel onto a stuttering fire. We will find out now whether that was rocket fuel or just some charcoal powder.

Mistermeaner

Individuals will think about their own debt and the impact on their monthly outs but far more telling will be the macro effects on economy as a whole - for a country so heavily dependent on imports we rely on a strong pound to keep things cheap..... theoretically increasing interest rates of the £ limitss supply and therefore should increase its value so even if your mortgage goes up by 50/month your spending power may increase the same so your new tv or trainers will be 50/cheaper.

However it's difficult to see this so people tend to react on what they see and could tighten the spending purse strings and this is where it all goes wrong as the economy as a whole all slows down - that's what we don't want.

We need people to keep spending despite their monthly outgoings apparently increasing.

Mistermeaner

Should also add we get the double whammy of people saving more as savings returns increase.

Interesting times ahead.

midnight_child

wotsthat wrote: »

Shelter said millions feared missing their January rent or mortgage payment. It's August now - did you hear anything about these millions joining the arrears figures - I didn't.

Shelter releases aren't meant to be back-tested because they're ridiculous.

Anyone getting a mortgage since the GFC should cope with reasonable interest rate rises. There may be some older mortgages where people are struggling so if a small increase tips them over the edge who cares? They've had more than 6 years of historic lows rates so maybe it's time they were put out of their misery.

However, I think the crashers are going to be very very disappointed at the increase in numbers of distressed sellers.

I never said I agree with the author, or their figures presented, only that this was the most recent I could find. There is a big difference between "struggling" and "defaulted", and people you would imagine will prioritise rent/mortgage over other debts and continue to struggle until the issue is forced.


Generali's post I think hits the nail on the head when he refers to known unknowns and unknown unknowns.


For what its worth I am not expecting HPC.

Generali

midnight_child wrote: »

I never said I agree with the author, or their figures presented, only that this was the most recent I could find. There is a big difference between "struggling" and "defaulted", and people you would imagine will prioritise rent/mortgage over other debts and continue to struggle until the issue is forced.


Generali's post I think hits the nail on the head when he refers to known unknowns and unknown unknowns.


For what its worth I am not expecting HPC.

I'm not expecting a House Price Crash simply because they happen so rarely.

As we experienced in the GFC, what happens absent of forced sales is that people refuse to sell for 'less then their house is worth'. That no buyer is prepared to meet their asking price is neither here nor there.

midnight_child

Moving away from mortgages for a moment........


Someone in the mid 20s will have never experienced anything other than historically low interest rates (as an adult), so are likely to be less prepared for a rate rise. They are unlikely to be homeowners, but will be taking out car finance, loans to help pay for study (on top of SLC loans) and have credit card debt. This demographic tends not to have much in savings and stereotypically spends all of their income on iPhones, festivals, designer clothes, and nights out. This group is less experienced, and so more likely to be on lower pay grades, perhaps working for NMW on a zero hours contract.


I suspect this group (under 30's) to be particularly adversely affected by a rate rise.

Generali

midnight_child wrote: »

Moving away from mortgages for a moment........


Someone in the mid 20s will have never experienced anything other than historically low interest rates (as an adult), so are likely to be less prepared for a rate rise. They are unlikely to be homeowners, but will be taking out car finance, loans to help pay for study (on top of SLC loans) and have credit card debt. This demographic tends not to have much in savings and stereotypically spends all of their income on iPhones, festivals, designer clothes, and nights out. This group is less experienced, and so more likely to be on lower pay grades, perhaps working for NMW on a zero hours contract.


I suspect this group (under 30's) to be particularly adversely affected by a rate rise.

FWIW, the FT worked out that about 30% of traders working at investment banks only ever knew interest rates of ~0%.

It will be interesting to see what happens as rates rise. Obviously the bosses tend to be older and they will be setting the trading policies but a lot of young, inexperienced people with small trading limits added together could cause mayhem between them, potentially at least.

Time will tell.

missyrichards

midnight_child wrote: »

Someone in the mid 20s will have never experienced anything other than historically low interest rates (as an adult), so are likely to be less prepared for a rate rise.

I agree. I always remember my parents complaining about when the interest rates went up really high. I was speaking to someone I know who is early twenties and he was saying he got a good rate on his new mortgage but he didn't seem to realise that they could go much higher. It was strange to me but I suppose he has only known extremely low rates.

michaels

midnight_child wrote: »

Moving away from mortgages for a moment........


Someone in the mid 20s will have never experienced anything other than historically low interest rates (as an adult), so are likely to be less prepared for a rate rise. They are unlikely to be homeowners, but will be taking out car finance, loans to help pay for study (on top of SLC loans) and have credit card debt. This demographic tends not to have much in savings and stereotypically spends all of their income on iPhones, festivals, designer clothes, and nights out. This group is less experienced, and so more likely to be on lower pay grades, perhaps working for NMW on a zero hours contract.


I suspect this group (under 30's) to be particularly adversely affected by a rate rise.

Are personal loan/finance deal type interest rates generally fixed?

Aren't they also effectively 20% APR typically (perhaps not headline but after any cash discount is not given) so the cost of funds bares only a very small part of the cost of the finance.

For example Elephant car insurance may only charge an apr of about 10% for paying car insurance monthly but you also don't qualify for the £150 single payment discount (:eek:). I don't suppose if boe base goes up from 0.5% to 2% it will make much difference to what they charge of credit!