Are we on the return to normality?

MattMattMattUK

OhWow said:

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%.

Interest rates were not "artificially low" any more than they could be "artificially high", the interest rate is set by the BoE, not a natural phenomenon. 

OhWow said:

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).

I doubt many people would care about a rise of 1% to 2% and it would not be painful, however any situation where interest rates rise 5-7% is going to be painful not just for individuals, but for the whole economy. 

OhWow

MattMattMattUK said:

OhWow said:

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%.

Interest rates were not "artificially low" any more than they could be "artificially high", the interest rate is set by the BoE, not a natural phenomenon. 

OhWow said:

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).

I doubt many people would care about a rise of 1% to 2% and it would not be painful, however any situation where interest rates rise 5-7% is going to be painful not just for individuals, but for the whole economy. 

It sounds like you have only bought in the last few years? From 2008, the rates dropped lower than I have ever seen. These low rates are not the norm.

Have a look at this chart and you will see "the whole economy" has lived with much higher interest rates, for decades.

https://www.propertyinvestmentproject.co.uk/property-statistics/uk-interest-rate-history-graph/

fewcloudy

We were (hopefully) all aware that the BOE interest rate was incredibly low. Really, unusually, historically, low. And for a long time.

The problem as I see it is that over at least the last 5 years or so, the BOE gave out a fairly consistent message that when rates DID start to rise (as they surely would) they would do so very slowly and very steadily.

IMO this had the desired effect of keeping mortgage markets smooth and gave a bit of reassurance/confidence to us all.

Unexpected events in recent times have blown that completely out of the water and caused the exact opposite situation that the BOE was trying to avoid, resulting in a short sharp shock and economic mayhem.

Even people clueless about mortgages have been sitting with sub 2% mortgage rates for many years; indeed many will have never known any different.  Huge numbers of mortgage holders now face a deteriorating economic situation, and many will suffer financial annihilation, repossession, etc.

wheldcj

True enough and whilst some will have been able to use the low rates as a springboard to overpay many have had the advantage of low rates eclipsed by spiralling house prices as they try to move up the ladder.   Or in my case having the joys of a young family and my wife taking a lower paid job on reduced hours to juggle that financial conundrum of childcare costing more than you earn😒

[Deleted User]

CSL0183 said:

[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. 

Unfortunately I think it's highly unlikely that house prices will fall significantly. People just won't sell, they will wait for the market to recover. There will be some forced selling due to the interest rates and people defaulting on their mortgages, but it's not going to make houses affordable in any meaningful sense of the word.

xzibit

I think we are on a return to some form of normality and it’s a good thing that interest rates are rising again. 

We fixed for 3 years at 1.86% in early 2020 but set our payments to match a 5% rate so we have been overpaying making the most of the cheap borrowing, it’s a shame that when we renew soon it’ll mean less overpayment but hopefully will mean a stronger economy in the long term. 

Obviously if you’ve maxed out your borrowing with a 1% mortgage you will be in trouble but with age comes wisdom and hopefully the mortgage company stressed tested you adequately. 

MattMattMattUK

OhWow said:

MattMattMattUK said:

OhWow said:

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%.

Interest rates were not "artificially low" any more than they could be "artificially high", the interest rate is set by the BoE, not a natural phenomenon. 

OhWow said:

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).

I doubt many people would care about a rise of 1% to 2% and it would not be painful, however any situation where interest rates rise 5-7% is going to be painful not just for individuals, but for the whole economy. 

It sounds like you have only bought in the last few years? From 2008, the rates dropped lower than I have ever seen. These low rates are not the norm.

It is irrelevant when I bought, norms can change, they have been <2% for 15 years, that means that they have become normal.

OhWow said:

Have a look at this chart and you will see "the whole economy" has lived with much higher interest rates, for decades.

https://www.propertyinvestmentproject.co.uk/property-statistics/uk-interest-rate-history-graph/

There have been higher interest rates in the past, however the difference now is that the debt loading is far higher, which means that the cost of servicing the debt will far exceed historic levels with much lower interest rates. If interest rates rise to 5% that will suck more than £240 billion out of the real economy just from mortgage interest, it will have a further impact with linked non-secured debt, corporate debt and the impact on government borrowing. The interest rate matters not if the repayments are affordable, but it matters hugely if it means that instead of spending money in the real economy all people do is pay extra money in debt interest, that is hugely damaging to the economy. 

I am lucky, I could still pay my mortgage if interest rates went north of 10%, but most cannot and many will have to cut back almost all non-essential spending even at 5%. Crippling the economy and saying that it is fine because interest rates were higher thirty or more years ago is idiotic. 

MattMattMattUK

xzibit said:

I think we are on a return to some form of normality and it’s a good thing that interest rates are rising again. 

We fixed for 3 years at 1.86% in early 2020 but set our payments to match a 5% rate so we have been overpaying making the most of the cheap borrowing, it’s a shame that when we renew soon it’ll mean less overpayment but hopefully will mean a stronger economy in the long term. 

Higher interest rates do not mean a stronger economy in the long term.

xzibit said:

Obviously if you’ve maxed out your borrowing with a 1% mortgage you will be in trouble but with age comes wisdom and hopefully the mortgage company stressed tested you adequately. 

Banks did not lend to anyone who would be maxed out at 1%, the stress test for affordability required people to be able to pay at 5%. What comes with age is a dramatically reduced mortgage, it is easy to be relaxed about something which will have little impact on yourself, even easier if you are happy to ignore the wider economic damage it will cause. 

ElwoodBlues

MattMattMattUK said:

OhWow said:

MattMattMattUK said:

OhWow said:

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%.

Interest rates were not "artificially low" any more than they could be "artificially high", the interest rate is set by the BoE, not a natural phenomenon. 

OhWow said:

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).

I doubt many people would care about a rise of 1% to 2% and it would not be painful, however any situation where interest rates rise 5-7% is going to be painful not just for individuals, but for the whole economy. 

It sounds like you have only bought in the last few years? From 2008, the rates dropped lower than I have ever seen. These low rates are not the norm.

It is irrelevant when I bought, norms can change, they have been <2% for 15 years, that means that they have become normal.

OhWow said:

Have a look at this chart and you will see "the whole economy" has lived with much higher interest rates, for decades.

https://www.propertyinvestmentproject.co.uk/property-statistics/uk-interest-rate-history-graph/

There have been higher interest rates in the past, however the difference now is that the debt loading is far higher, which means that the cost of servicing the debt will far exceed historic levels with much lower interest rates. If interest rates rise to 5% that will suck more than £240 billion out of the real economy just from mortgage interest, it will have a further impact with linked non-secured debt, corporate debt and the impact on government borrowing. The interest rate matters not if the repayments are affordable, but it matters hugely if it means that instead of spending money in the real economy all people do is pay extra money in debt interest, that is hugely damaging to the economy. 

I am lucky, I could still pay my mortgage if interest rates went north of 10%, but most cannot and many will have to cut back almost all non-essential spending even at 5%. Crippling the economy and saying that it is fine because interest rates were higher thirty or more years ago is idiotic. 

Where is that £240 billion going to go? Who benefits from this? Does it stay in the country or go abroad? Or just vanish into the ether (as it's mostly just made up money by a fractional reserve system anyway)?

xzibit

MattMattMattUK said:

xzibit said:

I think we are on a return to some form of normality and it’s a good thing that interest rates are rising again. 

We fixed for 3 years at 1.86% in early 2020 but set our payments to match a 5% rate so we have been overpaying making the most of the cheap borrowing, it’s a shame that when we renew soon it’ll mean less overpayment but hopefully will mean a stronger economy in the long term. 

Higher interest rates do not mean a stronger economy in the long term.

xzibit said:

Obviously if you’ve maxed out your borrowing with a 1% mortgage you will be in trouble but with age comes wisdom and hopefully the mortgage company stressed tested you adequately. 

Banks did not lend to anyone who would be maxed out at 1%, the stress test for affordability required people to be able to pay at 5%. What comes with age is a dramatically reduced mortgage, it is easy to be relaxed about something which will have little impact on yourself, even easier if you are happy to ignore the wider economic damage it will cause. 

Thanks Matt.