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

Altior

Olistanding said:

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?

In my view, anyone who grew up with social media.

I am an 80's child. 

Altior

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. 

To demonstrate this, we’ve calculated what the equivalent mortgage rate would be now to match the actual mortgage repayment ratios recorded  in previous years. For example, repayments under the actual 14% rate in 1980 are equivalent to repayments at just 3% now.

I'm not at all sure this parameter is of much assistance.

What underlies the chart is that when rates go down, property prices go up. Because the proportion of income people can lay out on mortgage repayments remains relatively consistent. It's just in the latter years, the capital proportion of repayments is higher. Which is preferential to buyers. In 1980, a lot of it went on interest.

There will be a lag, but we should expect in a relatively 'free' market is that the cost of capital goes down, as interest goes up. There will of course be a lagging effect. 

Cheesy77

Altior said:

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. 

To demonstrate this, we’ve calculated what the equivalent mortgage rate would be now to match the actual mortgage repayment ratios recorded  in previous years. For example, repayments under the actual 14% rate in 1980 are equivalent to repayments at just 3% now.

I'm not at all sure this parameter is of much assistance.

What underlies the chart is that when rates go down, property prices go up. Because the proportion of income people can lay out on mortgage repayments remains relatively consistent. It's just in the latter years, the capital proportion of repayments is higher. Which is preferential to buyers. In 1980, a lot of it went on interest.

There will be a lag, but we should expect in a relatively 'free' market is that the cost of capital goes down, as interest goes up. There will of course be a lagging effect. 

I'm not sure I fully understand what you're saying, are you saying the chart is not accurate? 

For me the chart is based much more on people's income to loan ratio, plus the actual size of the loan. We all know house prices in the 1980/90s were a mere fraction of what they are now, and wages most certainly have 

Cheesy77

Should have said 'wages have not kept pace'

Altior

Cheesy77 said:

Altior said:

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. 

To demonstrate this, we’ve calculated what the equivalent mortgage rate would be now to match the actual mortgage repayment ratios recorded  in previous years. For example, repayments under the actual 14% rate in 1980 are equivalent to repayments at just 3% now.

I'm not at all sure this parameter is of much assistance.

What underlies the chart is that when rates go down, property prices go up. Because the proportion of income people can lay out on mortgage repayments remains relatively consistent. It's just in the latter years, the capital proportion of repayments is higher. Which is preferential to buyers. In 1980, a lot of it went on interest.

There will be a lag, but we should expect in a relatively 'free' market is that the cost of capital goes down, as interest goes up. There will of course be a lagging effect. 

I'm not sure I fully understand what you're saying, are you saying the chart is not accurate? 

For me the chart is based much more on people's income to loan ratio, plus the actual size of the loan. We all know house prices in the 1980/90s were a mere fraction of what they are now, and wages most certainly have 

I'm sure it's accurately calculated, but as we've seen so transparently over the last few years, data can be presented in a certain way to lend weight to a perspective, which may not be a realistic impression. 

It paints a picture that a few decades ago, accessing property was easy. That is certainly not representative. 

I very much doubt that people buying property before the 2000's thought it was amazingly affordable. It wasn't. Even in the 90's, when I started working full time and considering buying a property, interest rates were high and salaries were low. 

It's always been tough in my lifetime to get on the property ladder in the south of the country. Is it a little tougher now, certainly. In the 90s however we didn't have low rates, low deposits, HTB, new builds, discounted rates, long term mortgages, the internet or the knowledge that rates would fall to near nil, and asset prices would take off as a consequence. Negative equity and repossession was also a genuine threat, a term that we are very likely to become familiar with again, unfortunately.