Bank of England increases base rate to 2.25% – what the rise means for your mortgage and savings

Filo25

MattMattMattUK said:

I am not worried about the rise to 2.25%, but I am worried that they will likely be somewhere between four and five percent by the end of next year. That is likely to suck £80-100 billion out of the economy, so more than the energy bill rise would have, it is going to be disastrous for the wider economy, let alone individual circumstances.

When interest rates were at 15% in the last things were very different, the average mortgage borrowing was 1.3 times average income and generally people were borrowing about two times their income when they started out, now the average mortgage borrowing 3.2 times average income an people have to borrow 4-5 times their income to initially get on the property ladder. The idea that we can have economic growth with huge amounts being sucked out by mortgage interest is farcical, 0.1% was too low, but equally anything over 3% will cripple the economy and extend the recession, as well as making a lot of people's lives harder for no benefit overall. 

Yes and there is going to be a certain amount of pot luck as to who needs to remortgage and who is on a fix for a while who is protected for a while.

Higher rates with the higher debt levels we have now will be extremely painful for some people

MattMattMattUK

Filo25 said:

MattMattMattUK said:

I am not worried about the rise to 2.25%, but I am worried that they will likely be somewhere between four and five percent by the end of next year. That is likely to suck £80-100 billion out of the economy, so more than the energy bill rise would have, it is going to be disastrous for the wider economy, let alone individual circumstances.

When interest rates were at 15% in the last things were very different, the average mortgage borrowing was 1.3 times average income and generally people were borrowing about two times their income when they started out, now the average mortgage borrowing 3.2 times average income an people have to borrow 4-5 times their income to initially get on the property ladder. The idea that we can have economic growth with huge amounts being sucked out by mortgage interest is farcical, 0.1% was too low, but equally anything over 3% will cripple the economy and extend the recession, as well as making a lot of people's lives harder for no benefit overall. 

Yes and there is going to be a certain amount of pot luck as to who needs to remortgage and who is on a fix for a while who is protected for a while.

Higher rates with the higher debt levels we have now will be extremely painful for some people

I am less worried about individual circumstances, even though for me it could end up costing me another £6-8k a year, however I am luckily in a position to afford that, or at least weather it for a few years if needed (I could live of savings for a couple of years in an total worst case scenario). However the huge amount of money it will suck out of he wider economy will both deepen and extend the recession as well as causing further damage to leisure and hospitality.

The vast majority of the inflationary pressure the UK is experiencing is external, which means interest rates rising will not curtail it. There is an element of using interest rates to prop up Sterling, but as the government demonstrated today it does not care about the value of Sterling as it quite happily knocked 2% off the value in one go. I accept there is not easy fix to the situation we are in, but the government seems to want to go out of it's way to make things worse, not better. 

Filo25

Interest rates are a blunt instrument, but what they are trying to do here is trying to slow the economy to stop the initial inflationary shock becoming embedded in the economy through retransmission and the good old wage-price spiral.

Today's budget announcements were extremely unhelpful though.

housebuyer143

Filo25 said:

Interest rates are a blunt instrument, but what they are trying to do here is trying to slow the economy to stop the initial inflationary shock becoming embedded in the economy through retransmission and the good old wage-price spiral.

Today's budget announcements were extremely unhelpful though.

Yeah, BoE tries to slow inflation, Truss announces the biggest tax cuts in 50 years which will only cause it to increase.
I tend to agree that base rate is going to go up more than anticipated now.

Cheesy77

MattMattMattUK said:

I am not worried about the rise to 2.25%, but I am worried that they will likely be somewhere between four and five percent by the end of next year. That is likely to suck £80-100 billion out of the economy, so more than the energy bill rise would have, it is going to be disastrous for the wider economy, let alone individual circumstances.

When interest rates were at 15% in the last things were very different, the average mortgage borrowing was 1.3 times average income and generally people were borrowing about two times their income when they started out, now the average mortgage borrowing 3.2 times average income an people have to borrow 4-5 times their income to initially get on the property ladder. The idea that we can have economic growth with huge amounts being sucked out by mortgage interest is farcical, 0.1% was too low, but equally anything over 3% will cripple the economy and extend the recession, as well as making a lot of people's lives harder for no benefit overall. 

I agree, I've read a lot of comments (not on here) from people saying yeah but rates are still low historically. Quoting late 1980s-early 90s rates. But as you say, income to mortgage ratio has completely changed. Compare 10% rates on a £30k mortgage in 1985 or 10% on a £300k mortgage in 2022. 

I saw this chart on Twitter and thought it illustrated the point well. 

EnterUserName

It does make me wonder, if it reaches 4 - 5% will it then come crashing back down again "shortly" after. For those who barely survive 5%, they will be so scared that it would have served its purpose on reducing demand and taming inflation?

Unless the "mini-budget" somehow increases confidence. To my simple way of thinking it sort of looks like MPC and Truss are fighting each other

Altior

MattMattMattUK said:

I am not worried about the rise to 2.25%, but I am worried that they will likely be somewhere between four and five percent by the end of next year. That is likely to suck £80-100 billion out of the economy, so more than the energy bill rise would have, it is going to be disastrous for the wider economy, let alone individual circumstances.

When interest rates were at 15% in the last things were very different, the average mortgage borrowing was 1.3 times average income and generally people were borrowing about two times their income when they started out, now the average mortgage borrowing 3.2 times average income an people have to borrow 4-5 times their income to initially get on the property ladder. The idea that we can have economic growth with huge amounts being sucked out by mortgage interest is farcical, 0.1% was too low, but equally anything over 3% will cripple the economy and extend the recession, as well as making a lot of people's lives harder for no benefit overall. 

It is quite fortunate that applications were stress tested to 5%, until recently.

People who have overstretched themselves were due a haircut. I for one won't be crying any tears for the entitled generation. 

simon_or

Cheesy77 said:

MattMattMattUK said:

I am not worried about the rise to 2.25%, but I am worried that they will likely be somewhere between four and five percent by the end of next year. That is likely to suck £80-100 billion out of the economy, so more than the energy bill rise would have, it is going to be disastrous for the wider economy, let alone individual circumstances.

When interest rates were at 15% in the last things were very different, the average mortgage borrowing was 1.3 times average income and generally people were borrowing about two times their income when they started out, now the average mortgage borrowing 3.2 times average income an people have to borrow 4-5 times their income to initially get on the property ladder. The idea that we can have economic growth with huge amounts being sucked out by mortgage interest is farcical, 0.1% was too low, but equally anything over 3% will cripple the economy and extend the recession, as well as making a lot of people's lives harder for no benefit overall. 

I agree, I've read a lot of comments (not on here) from people saying yeah but rates are still low historically. Quoting late 1980s-early 90s rates. But as you say, income to mortgage ratio has completely changed. Compare 10% rates on a £30k mortgage in 1985 or 10% on a £300k mortgage in 2022. 

I saw this chart on Twitter and thought it illustrated the point well. 

This is spot on. As per the FT's research, based on affordability and a percentage of household income "repayments under the 14 per cent rate

of 1980 are equivalent to repayments today at a rate of 3 per cent."

They're simply not comparable like for like.

Olistanding

Altior said:

MattMattMattUK said:

I am not worried about the rise to 2.25%, but I am worried that they will likely be somewhere between four and five percent by the end of next year. That is likely to suck £80-100 billion out of the economy, so more than the energy bill rise would have, it is going to be disastrous for the wider economy, let alone individual circumstances.

When interest rates were at 15% in the last things were very different, the average mortgage borrowing was 1.3 times average income and generally people were borrowing about two times their income when they started out, now the average mortgage borrowing 3.2 times average income an people have to borrow 4-5 times their income to initially get on the property ladder. The idea that we can have economic growth with huge amounts being sucked out by mortgage interest is farcical, 0.1% was too low, but equally anything over 3% will cripple the economy and extend the recession, as well as making a lot of people's lives harder for no benefit overall. 

It is quite fortunate that applications were stress tested to 5%, until recently.

People who have overstretched themselves were due a haircut. I for one won't be crying any tears for the entitled generation. 

Who are the entitled generation? And what generation are you from?

jj_43

its a very interesting chart, as least currently employment remains high, so not quite 1990s yet.