Are we on the return to normality?

BikingBud

As we come to the end of artificially suppressed interest rates are we seeing a return to historic normality?

fergie_

I can remember being fixed at 5% for a long time, but the short term rates look like they will be heading even higher. The question is how high for how long?

aylithuk

Yep I fixed for 4.4% back in 2017 but immediately started saving a fund for a 2 year fixed I was suddenly hit with a mortgage rate if 8% but mind you I didn’t think the escalation would happen this quickly. BOE should have started steadily increased the BR long before now! 

[Deleted User]

No. The problem now is that house prices are insane. So people have to borrow much more, and are much more vulnerable to interest rate rises.

People were already under as much financial pressure on mortgages as others were in the early 90s with 15% interest rates.

This isn't a return to normal, this is a disaster for many people with mortgages, and people who want one.

CSL0183

[Deleted User] said:

No. The problem now is that house prices are insane. So people have to borrow much more, and are much more vulnerable to interest rate rises.

People were already under as much financial pressure on mortgages as others were in the early 90s with 15% interest rates.

This isn't a return to normal, this is a disaster for many people with mortgages, and people who want one.

The upshot is, it slows down the housing market. Some would say a correction to spiralling housing costs. 

Mortgage affordability checks stress test these rates so everyone with mortgages currently should in theory be able to afford 8-9% rates as that’s what they’ve calculated for. 

If BR is 4/5/6 % though then the stress tests will likely make new mortgage applications unaffordable for many. 

Jonboy1889

[Deleted User] said:

No. The problem now is that house prices are insane. So people have to borrow much more, and are much more vulnerable to interest rate rises.

People were already under as much financial pressure on mortgages as others were in the early 90s with 15% interest rates.

This isn't a return to normal, this is a disaster for many people with mortgages, and people who want one.

I think a huge part of house prices being so high has been very low interest rates. Probably the biggest factor in fact- but it’s likely to cause a lot of pain :-(

propertyhunter

The issue is that when mortgage repayments become so high, people with a large debt will stop all unnecessary spending - so the economy suffers and it induces a recession, which helps bring inflation back down. I think 6% base rates could really make a lot of people struggle, and the economy falters as the knock on effects are felt on spending. I don't imagine 6% will be the new norm as we're more indebted now than ever before so interest rate changes have a larger effect on spending than before. We will likely get to 6% and possibly higher for the short term (2023-2024), with gradual falls thereafter to stoke demand to get us out of a (likely deep) recession lasting through to 2024. 

wheldcj

This time bomb has been waiting to happen for so long.  Sustained ultra low interest rates have pushed house prices up way above inflation for so long.

Interest rate rises are seen historically as the best method to stop inflation and boy as we know they are out of control 

If a government does nothing the combination of higher mortgage repayments and high bills will take expendable income out of society which  may reduce inflation but will likely cause many businesses to suffer and a probable serious recession.  Net result house price crash and many mortgage defaults 

Government intervene and it directly conflicts with BOE (one is trying to reduce money supply and the other is fueling it with tax reductions).   Terrible communication added in and you have a recipe for economic panic, falling currency etc.  Net result even higher mortgage rates and probable stubbornly higher inflation remaining for longer.  More uncertainty in business and ultimately the same result for homes and those with mortgage.

When this eventually settles down I personally don’t see either government or BOE returning to rates that are as low as the last 5-10 years but maybe the sort of levels we have today i.e 2 to 3%

MattMattMattUK

BikingBud said:

As we come to the end of artificially suppressed interest rates are we seeing a return to historic normality?

It depends what you class as normality, how long is the historic window etc. When people talk about the affordability of mortgage and that people paid 15% in the past they are ignoring that because mortgage borrowing is much larger and the general cost of living is higher 3.6% mortgage rate now is the equivalent of 15% from the 90s. 

My opinion is that we will end up with 6-8% rate for a few years, falling back to around 4% in 2025 and then probably settling around 2.5-3% for the latter part of the decade, I do not think we will see sub 2% again in my lifetime.

OhWow

When these artificially low interest rates started, one mortgage repayment calculator (BBC?) also showed a warning of what the repayments would be if interest rates rise to 10%.

A 1% rise from a 1% interest rate, was always going to be very painful, especially for those who have only bought in the last few years. At least others had a chance to make hay while the sun shined and were able to reduce the amount they borrowed (I hope).

sammyjammy

I think as well there is a lot of talk about I paid 18%, that wasn't normal either and all it does is freak people out and cause them to make rash decisions which causes more problems.  I've had a mortgage since 1999 and my rate was 7.25%, thats the highest I have ever paid.  I feel grateful that I just fixed for another five years and its my final fix!