What are normal interest rates?

fewcloudy

A quote from a recent thread...

Lenders under regulatory guidance currently use 7% for assessing affordability on residential mortgages. In essence it's a form of stress testing. As the future is uncertain. Though the one certainty in the longer term is that rates will normalise. Over time the props that provide cheap money will be removed. Online calculators can only ever be a guide. Borrowers are naturally optimistic and tend to underestimate their total outgoings .

How do people define "longer term" and especially "normalise" in the context of interest rates? I've lived through the highest ever and now the lowest ever, but it cannot be as simple as just working out the average, or what rate was around the longest time can it? If so, "normal" must be reducing in value all the time...

I ask only because I've heard this said a fair bit since about 2008 at least, and as the years slip buy, 5 years, 10 years of low interest rates, I wonder at what stage you have to redefine "normal"? 15 years? 20? 50? Genuinely curious.

In the very near future, if not already, there will be buyers in their 20's and 30's who have never seen a BOE interest rate of over 1%. But lender regulations will stress test them to 7%?
When I was buying in 1993 at 7%, were they stress testing me to 14% or what?

fc

getmore4less

For the last 8 years normal for base has been under 1%

for borrowers only the best /lowest risk get anywhere near that aaproach 90%-95% LTV borrowing and you see rates much higher.

A significant difference to previous longer term rate is there is a desire to control inflation.


higher rate often correlates with higher inflation and bigger pay rises so short term pain long term gain as the debt gets inflated away

sevenhills

fewcloudy wrote: »

How do people define "longer term" and especially "normalise" in the context of interest rates? I've lived through the highest ever and now the lowest ever, but it cannot be as simple as just working out the average, or what rate was around the longest time can it? If so, "normal" must be reducing in value all the time...

It used to be 'normal' to get Mortgage Interest Relief.

A life time fixed mortgage rate is around 4%, so I guess the market thinks rates may go up, but not that much.

Thrugelmir

A base rate of somewhere between 3.5% to 5% would be considered "normal".

These aren't "normal" times either. Huge amounts of Central Bank intervention in the money markets with numerous schemes implemented. All of which will ultimately be unwound.

The Fed has around $10 trillion of debt sitting on it's balance sheet that very slowly over time is going to be sold back into the markets. The US are around 2 years ahead of the curve. As their banking sector first encountered problems in 2006.

The tide has turned. Not just BOE base rate that will determine the cost of borrowed money either.